Super Size Me!

My hunch, and probably Mercedes's too, is that as gas prices increase, most drivers will trade in their full-size SUVs for smaller, more fuel-efficient models. They won't opt for cars, and they certainly won't give up their trucks for a car that looks, as one wag noted, "like something from the world of Teletubbies."

Mercedes is smartly going where the market is headed. "We think that this fuel-efficient segment of the SUV category will have sales growth of at least 30%" over the coming year, Paul Taylor, chief economist for the National Automobile Dealers Association, wrote in a recent analysis. Meantime, sales of large SUVs are expected to stay flat or even decline.

Besides, Mercedes's decision doesn't prevent the company from launching its diminutive two-seaters in the States in a few years. By then, the company will have given itself enough time to build a separate dealer and service network that will not only sell a very different experience to the American consumer but can help create a valuable and enduring brand. The more expensive "formore" SUV, with a four-cylinder Mercedes-Benz engine and all-wheel drive, may well pave the way for the smaller Smart cars later on.

The delay also does something even more important for Mercedes: It gives the company time to figure out how to make money on Smart. The car may be fuel efficient, but it's a guzzler when it comes to profits. Even though Mercedes sold some 160,000 Smart minicars abroad last year, the division has yet to turn a profit. The company doesn't break out its Smart results, but the general consensus is that Mercedes is losing big money on these small cars. Analysts estimate that Mercedes invested $1 billion to launch the brand and has already racked up more than $2 billion in losses since the car's debut in 1998.

If strategy is the search for above-average returns, launching a money-losing minicar in the world's biggest auto market -- and one that cherishes bigness -- is not smart strategy at all. Mercedes got it right.