Material costs for the new ForTwo, which rolls out in Europe next April and in the United States in early 2008, are 12 percent lower than the original model introduced in 1998.
The new car also takes a fifth less time to build, at a plant in France, officials said at the model's unveiling.
DaimlerChrysler has sold 750,000 Smart ForTwo cars. Officials would not make a sales forecast for the new version.
Smart has lost money since the brand was launched in October 1998 but aims to be profitable in 2007 after it slashed costs and jobs and reduced its model lineup to just the two-seater.
Overall Smart brand sales fell 20.6 percent in the first 10 months of 2006 to 96,200 units.