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Mercedes' New C Earns an A

With the introduction of a new C-Class, Mercedes hopes its best-seller will be able to gain back market share from BMW and Audi

When DaimlerChrysler (DCX) Chief Executive Dieter Zetsche swung behind the wheel of a disguised new Mercedes C-Class in September for a panoramic test drive through the Alps, three years of effort to overhaul Mercedes' quality were on the line. As Zetsche climbed an Alpine summit in the car and descended into the valley below, it passed muster. "There were no minor failures," said Zetsche, who is also CEO of Mercedes-Benz. "I've never experienced [a failure-free drive] in a car at that stage of development."

Much is riding on the new C-Class, the third generation of Mercedes' entry-level sedan. Zetsche unveiled the car on Jan. 18 in Stuttgart, Germany. The C-Class is Mercedes' best-selling car, with sales of 300,000 cars in 2006, and the No. 2 engine of profitability behind the larger E-Class. The car, which is a 2008 model, is set to arrive in showrooms in Europe this April. It will arrive in U.S. showrooms by August. A high-performance AMG version will be out in early 2008, along with a baby SUV called the GLK. The base model will remain similarly priced to the 2007 model and will cost under €30,000.

At the car's debut, Zetsche said: "With this model we intend to raise the bar quite a bit higher in the compact premium car segment. And in every aspect, particularly when it comes to safety, comfort, and agility." Auto industry analysts gave the car high marks for its clean, sober, geometric design—echoing the new S-Class design—but said BMW's engine lineup remains a generation ahead in innovative new technology and fuel economy.

Regaining Momentum

Over the past few years, the elegant-but-staid C-Class, once the No. 1 seller in its class worldwide, has lost ground to sportier models from rivals BMW and Audi. The BMW 3 Series was first in 2006 in compact premium sedans, while Mercedes' C-Class sales were neck and neck with Audi's A4 for second. "Mercedes is a very strong brand. If they come out with a car that has an attractive price, design, and technology, they win [back] sales," says Ferdinand Dudenhoeffer, director of the Center for Automotive Research in Gelsenkirchen.

The new C-Class is slightly longer and wider, more powerful, and slightly more fuel-efficient than the 2006 model. Under Zetsche, who took over Mercedes on Sept. 1, 2005, the company has stopped trying to be sportier than its rivals and has focused on its historic strengths—quality and safety. "Zetsche's strategy is clear. Mercedes is striving to be the quality leader in the future," says Dudenhoeffer.

But the biggest change is the creation of two different faces for the new C-Class. One, for more conservative drivers, features the traditional star on the hood; the sportier version has the star embedded in the grille, much as it is with the SL500 and SLK. By splitting the C into two subniches, Mercedes is seeking to update its image without alienating longtime customers. "It's a brilliant move. You get two cars out of one," says Christoph Stuermer, analyst at Global Insight in Frankfurt. The racier version can also be equipped with a sportier handling option. As Zetsche put it: "Our objective is not to offer the sportiest vehicle but to have the best balance."

Zetsche's Innovations

To achieve that balance, Mercedes engineers developed a digital simulator, which mimics the handling of the car based on different technologies and road conditions. Using digital data, engineers can make the car body more rigid and simulate a sportier drive, for example. Using the simulator, Mercedes devised an innovative damper system to make the C-Class ride smoothly, despite this sportier performance.

At the unveiling in Stuttgart, Zetsche trumpeted technological innovations designed for the flagship luxury S-Class model line that are now standard or optional in the C-Class. One is the "Pre-Safe" system, which activates stability control and braking systems if the car starts to veer out of control. Another innovation is the intelligent light system, with five adaptations for different driving conditions. Flashing brake lights warn oncoming cars that the vehicle is braking sharply, and are meant to reduce accidents.

For drivers who might also be considering the zippy BMW 3 Series, however, Mercedes is offering sporty versions of the C-Class as an optional feature. An optional "advanced agility package" modifies the shock absorbers and transmission for more tactile handling at the touch of a button.

Vowed Thomas Weber, head of research and development at Mercedes: "We are now able to compete with the sportiest cars in this segment. We can be No. 1."

But the competition is set to become even more intense. Audi will launch the next generation of its popular A4 compact sedan later this year, together with a totally new A5 coupe based on the same platform that will compete with the C-Class coupe. "If Mercedes has really improved its quality, it could muscle its way back into corporate fleet sales," says Stuermer, adding that the C-Class station wagon model will also be vital to revving sales.

Edmondson is a senior correspondent in BusinessWeek's Frankfurt bureau.

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