The Mini Mini: A Giant Killer?

First-half results from Mercedes and B.M.W. seem to suggest that the Bavarian luxury-car maker is falling under the sword of its rival in nearby Stuttgart.

While Mercedes' success at nearly doubling net income during the period is still fresh in investors' minds, B.M.W. announced falling profits during the first half of 2007.

But if the rumors are true, B.M.W. has a big idea for stepping up its war against Mercedes, and it comes in a small package.

B.M.W. is said to be developing a "supermini," a miniature version of its MINI model, for the European market.

Will it pay off?

Arguments for: B.M.W. so far lacks a direct competitor to Mercedes' "Smart" brand of city cars, the fuel-efficient midgets that represent a rapidly growing sector in the European car market.

Meanwhile, European Union regulators are pushing hard for auto manufacturers to reduce the average carbon emissions produced by their cars. A fuel-efficient new model would help B.M.W. offset the luxury gas-guzzlers that represent most of its income.

Arguments against: Though profits at Mercedes this year have been stellar, it's not the Smart unit that's raking in the cash. In fact, the diminutive model has lost billions of euros since launching in 1998, and posted a 32 percent decline in deliveries during this period alone.

And the "fun car" segment may be expanding, but it's also increasingly crowded. A new model from B.M.W. would have to compete in Europe with offerings from rivals like Toyota, Peugeot, Citroëaut;n, Volkswagen, Ford, and Fiat.

B.M.W.'s decision comes as Mercedes attempts to reverse its fortunes with Smart, gearing up to sell the little city car Stateside starting this winter.

Any chance of seeing a B.M.W. supermini face off with a Mercedes Smart car on American roads is still a far off prospect, to be sure. But the U.S. is B.M.W.'s biggest market, so optimally any new model would be geared to sell in America as well.

Sure, the U.S. is all of a sudden very keen on fuel efficiency, but American car culture has yet to take a shine to going super-small with our autos. It seems we'd prefer to keep our roomy kings of the road, but with ethanol in the gas tank.

by Liz Gunnison