Mercedes Gets Back Up To Speed

A focus on quality and cost has the luxury maker humming again
by Gail Edmondson


DaimlerChrysler (DCX) Chief Executive Dieter Zetsche may be losing sleep over the woes of Daimler's U.S. unit, Chrysler Corp., but he's sure to be breathing easier about once-troubled Mercedes-Benz (DCX). On Oct. 25, when Chrysler reported a $1.5 billion loss for the third quarter, Mercedes posted a 127% jump in operating profit, to $1.2 billion. Sales are up 9.3% this year, and analysts expect the turnaround to stick. "The downward spiral," Zetsche says, "has changed direction."

Mercedes' improved fortunes couldn't have come soon enough. The prestigious automaker is finally emerging from the most painful stretch in its 127-year history: a three-year slump in which its once-hallowed reputation for quality and engineering took a beating even as rival BMW surpassed it in global sales. Mercedes' fall in recent years was so precipitous it helped spur the early departure of former CEO Jürgen Schrempp.

The troubles became apparent in 2003 when the world's No. 1 luxury brand landed near the bottom of J.D. Power's annual quality survey. Then, in 2004 and 2005, electronics snafus led to widespread recalls, further denting Mercedes' reputation and finances. And as Mercedes dragged its heels modernizing its manufacturing techniques, competitors made huge strides in improving the way they build cars. As a result, even today, "Mercedes is getting squeezed on all sides by very high-quality cars produced at half the price," says Jay Baron, head of manufacturing at the Center for Automotive Research in Ann Arbor, Mich.

Enter Zetsche as top dog. After running Chrysler from 2000 to 2005, he took over DaimlerChrysler 14 months ago. Zetsche quickly set about slashing some 9,300 jobs by offering workers buyouts. More important, to shake up Mercedes' hidebound culture he kicked off a radical restructuring, organizing the company around functional elements of the car--motors, chassis, and electronics systems--instead of by model lines.

Other automakers have already gone down this path, but for Mercedes the shift marks a big departure. Suddenly, model overlords, once free to design cars from the wheels up, are required to choose from a common basket of modules and components. Mercedes is aiming to reduce 226 door handle variants to 71, 99 cooling systems to 25, and 171 antenna designs to 53. The list goes on and on. And with each new model, thousands of different parts will be shared instead of being engineered from the ground up.

But Mercedes still has a long way to go. Its costs per vehicle are as much as $3,800 higher than for comparable BMWs, says Ferdinand Dudenhöffer, director of the German Center for Automotive Research at the University of Gelsenkirchen. Much of that difference could be made up by standardizing design and manufacturing and sharing more parts, but Mercedes is a good five years behind the likes of BMW and Toyota Motor Corp. (TM) in this arena. Zetsche also aims to boost the flexibility of Mercedes' factories, which today build just one model per line. By 2010 that should rise to two per line, making it easier to adjust output to meet demand. Still, rivals now produce up to six models on each line.

MILLIONS OF TEST-DRIVE MILES. Fortunately for Zetsche, Mercedes already has tackled some of its thorniest problems. To address the electronics debacles, engineers begin testing systems up to a year earlier than in the past, and long before the start of production. Today five research and development labs at Mercedes' Stuttgart headquarters root out many of the problems that have savaged its reputation.

Lab workers put each new model's electronics system through a battery of 10,000 tests that run 24 hours a day and take three weeks to complete. One favorite tactic: Simulate what happens when a driver hits buttons all over the dashboard willy-nilly at the same time. "

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