A Mercedes For Every Driveway?

The builder of big-ticket luxury cars is trying to revamp itself into a full-range auto maker

As he roars down twisting Italian country roads in a sleek new roadster, Helmut Werner is having the time of his life. "I have the best job in the world," grins the trim 59-year-old, speeding past Tuscan vineyards in an open-top Mercedes SLK.

As chief executive of Mercedes-Benz, Werner has a lot more fun than desk-bound CEOs. Test-driving, of course, is part of the job description. And he has a lot to be happy about. Three years into his tenure as Mercedes' chief, he has wiped away the huge losses of 1993, restored profit growth to this Daimler Benz unit, and boosted productivity dramatically.

More important for car buffs, he has brought excitement back to Mercedes, which had been sinking--slowly but perceptibly--under the weight of high production costs, out-of-control pricing, overengineering, and just plain stodginess. Consumers are begging for the right to buy the SLK, which sells for around $40,000 fully loaded, a bargain by Mercedes standards. The convertible, with a retracting steel roof that folds into the trunk, debuts this fall. But you'll have to take a number. The production run of 35,000 is already sold out until 1998. "Cars are emotional things," says Werner, "and this is the most emotional product in our current lineup."

BOOMER BOUND. But even this natural optimist knows he has a tough road ahead. The former tire salesman is racing to transform this builder of big-ticket luxury cars into a full-range auto maker with a product in every segment. So his grand makeover has only just begun.

Werner does not want Mercedes to enter the next century relying too heavily on big, ultraluxury models such as its famous S-Class sedan. That's a very profitable business when done right, but it has its limits. Growth in the overall market for luxury cars is slow, even when you throw in rising sales in emerging markets. And in the developed world, buyers' ages fall too often in the 50-plus category. If it stays exclusively with luxury, Mercedes could risk becoming like General Motors Corp.'s Cadillac Div., stuck with the defeating image of "the car your parents drive." Although Mercedes has recovered from the initial attacks by Toyota's Lexus in the U.S., Werner knows the Japanese are relentlessly pursuing the goal of more luxury in a car at a lower cost. And many baby boomers are now comfortable with the idea of buying a Japanese luxury car.

The SLK, which is aimed at affluent fortysomethings, is one part of Werner's breakout plan to reach younger buyers who have made cars such as BMW's Z3 hot sellers. But he's envisioning far bolder changes--changes no one would have thought possible at Mercedes just 10 years ago. Werner wants new customers who covet Mercedes quality but need cars that can be versatile leisure vehicles as well as family runabouts, that tackle rough terrain or city streets, and that offer the best in safety. So he's thinking small, as in small cars that will attract a whole new universe of buyers to the Mercedes brand and double car sales, to 1.2 million, within five years. Archrival BMW shot past Mercedes, to 1 million cars a year, by taking over Britain's ailing Rover Group Ltd. in 1994. Werner is doing it the hard way--by internal growth.

At the fall, 1997, Frankfurt Motor Show, Mercedes will unveil its new A-Class, the smallest car it has ever made, 11 feet long and priced at about $20,000 in Germany. In 1998, in a joint venture with Switzerland's SMH Swatch watchmaker, Mercedes will launch the $10,000 Smart microcar--just 7.5 feet long--for city travel, aiming to capture affluent Europeans who want an environmentally correct second car. Swatch CEO Nicholas G. Hayek brags that the "Swatchmobile" is designed for "two people and a crate of beer."

R&D DRIVE. Mercedes plans to make 200,000 units of each a year in Europe. Together with the M-Class four-wheel-drive being made in Alabama that will debut in 1997, the new models will turn Mercedes into a full-range carmaker of 1.2 million passenger vehicles a year. Says Werner: "We have to learn to make money from small runs of exclusive cars."

Over the next three years, Mercedes will splash out $16 billion in capital spending and research and development, a third for new car models alone. Even then, the model avalanche won't be over. According to local reports, Mercedes will churn out nearly 30 new models by 2008. Werner refuses to comment on the reports, but says: "We will make many more product lines."

Werner loves playing the game. A sports enthusiast who swims, skis, cycles, and plays tennis, he nearly ended up as a bean counter. The eldest of five sons of a successful bank director, he embarked on the arduous seven-year training of a German auditor. After the first stage, he recalls: "My professor told me to go get some real-life experience first." The resulting trainee job with tiremaker Uniroyal was a turning point. As soon as he hit the road as a salesman, he was in clover. Even now, he's never happier than when peddling the product.

Critics fear that the supercompetitive Werner could just end up doubling unit sales and cutting profits in half. They are quick to point out that it wasn't long ago that Mercedes could barely eke out profits on its core luxury franchise. How can it earn a decent margin on small cars when mass producers such as Fiat and Volkswagen often struggle? Internal documents suggest that Werner's brand extensions, such as the A-Class, will lower overall return on investment. All the same, they lay out daunting goals: By the end of the century, Mercedes' sales could soar 40%, to $67 billion, and net profits nearly triple, to $3.6 billion, with an unchanged workforce.

Werner's ambitions don't surprise his friend and business associate Roger S. Penske, chairman of Detroit Diesel Corp., in which Daimler owns a 20% stake. "He is a risk-taker," says Penske. Yet some analysts think Werner may have overreached himself in projecting demand for his small cars. DRI/McGraw-Hill consultants in London forecast that sales of A-Class sales could peak at 125,000 units in 1999, far short of the 200,000 European production capacity, because of competition in the segment. And BMW rejected the idea of building a small two-seater sedan because "the possible uses of such a car are very limited," says a BMW source. "Instead of sticking to what they know in luxury markets," complains Thomas R. Holmes, a partner in Frankfurt private bank Schroder Munchmeyer Hengst (SMH), "[Mercedes] will be making something that everyone else makes."

Not so, retorts Werner. Still the dedicated salesman, he'll tell anyone willing to listen that the A-Class constitutes an entirely new market segment of premium or luxury small cars. It certainly looks different. The body is short but high, making it as roomy inside as an E-Class. The engine is placed so that it will dive below the car's floor toward the road in the event of a head-on collision, rather than being projected toward passengers as in conventional designs. Some outsiders agree with Werner. "It's not just a new small-car-market entry--it has a distinct character," says former Ford Motor Co. executive Karl E. Ludvigsen, now chairman of London consultancy Ludvigsen Associates.

The key question is whether Mercedes has the cost discipline to profit on small cars. Five or 10 years ago, they would probably have failed. But now, says Ludvigsen, "they have the tools to bring the program home on budget. That would not have been possible in the pre-Werner era."

In 1993, when Werner took over, Mercedes had slumped into an $800 million loss, the big-selling E-Class and C-Class models were eight and 10 years old, and production barely topped 500,000 cars. The company was bloated with six layers of managers between the board and the shop floor. Werner slimmed that to four, because hundreds of managers, according to studies by consultant McKinsey & Co., cost more than they contributed in revenues.

Plant managers were made responsible for containing their own expanding budgets. And once they had to answer for spending, they dropped their bad old macho habits of amassing the biggest budget possible. In one exercise, Werner had all his managers draft letters of resignation. The message: Your jobs depend on how much you help Mercedes' transformation.

The biggest challenge was to reinvent the corporate culture. Long dominated by engineers, the old Mercedes approach was to build the best possible car regardless of expense and then set the price by adding a profit margin to ballooning costs. Werner flipped that strategy, fixing a target sticker price and then building to that. Explains passenger-car division head Jurgen Hubbert: "We had to break the assumption that each new car had to be heavier, have even more technology--and be more expensive."

It had to come. By 1990, Mercedes confronted shocking evidence from Massachusetts Institute of Technology's International Motor Vehicle Program (IMVP) and studies by McKinsey that since 1985, a huge 35% productivity gap had opened up between it and Japanese producers such as Toyota.

BIG GAINS. Werner told his engineers to simplify manufacturing fast. As a result, productivity has risen 30% over the past two years, and $2.3 billion has been saved. The big gains come from major model changes that allow extensive redesign and cost purging.

As a result, Mercedes was able to price the C-Class in the U.S. at $29,900, or $700 less than the competing Lexus ES300. Five years earlier, the comparable Baby Benz 190 cost $9,800 more than the entry-level Lexus ES250.

Solving the problems in the U.S. was a critical test of the new Mercedes' skills. By 1993, Mercedes-Benz North America marketing chief Michael Jackson was urgently pressing his German bosses to revamp the Mercedes image in the U.S. "We needed to connect to the baby-boom generation," says Jackson, a former dealer himself. "We needed to get people to say Mercedes-Benz is the best car for me." That meant lowering the price to attract the 40-plus buyers. But it also meant catering to the quirks of the American market. In one episode, U.S. dealers pressed the puzzled Germans for cup holders. Now the E-Class sedan sports a nifty retractable one.

Mercedes also made a radical change in advertising, from the formal, reverential ads that stressed engineering to ones that used humor to reach out to boomers. Ad agency Lowe SMS now has spots featuring a Mercedes navigating through a herd of rhinos and another using Janis Joplin's '60s refrain, "Lord won't you buy me a Mercedes-Benz." Mercedes car sales in the U.S. are up 17% for the year.

Werner will have to keep on running hard. Japanese competitors are keeping the pressure on. Nissan Motor Co. and Toyota, makers of the Infiniti and Lexus, aim to make 30% to 50% savings on each model. Toyota, for instance, cut costs $1.2 billion last year, boosting profits nearly 14% despite a decline in sales. Says UBS Securities Tokyo-based auto analyst Peter Boardman: "The Germans are going after a moving target."

SOFTER DEMAND? Still, Werner's mix of new models and pricing is resulting in record first-half sales of 315,000 cars, up 7.2% from the same period of 1995, and booking $15 billion in revenues, a 12% rise. The second half will be tough, as demand in Western Europe softens. But Werner is promising profits up to 1995 levels.

Like other auto makers, Mercedes is rushing to spread manufacturing around the world. It urgently needs to tap into new markets for trucks and cars. And it must find both new and cheaper sources of supplies and new manufacturing sites, such as in China and India. Werner's ambitious goal is to raise the proportion of cars Mercedes makes outside Germany to 25% over the next 10 years, from just 5% now.

Small cars. Swatch cars. New sales techniques. Plants in China. The list of new ventures and efforts Mercedes must quickly master is long, especially for a company where redesigning a simple headlight once took months. Says Susan G. Jacobs, president of consultant Jacobs & Associates in Rutherford, N.J.: "It is a bigger mistake for Mercedes to make one change too little than one change too many." Changing too little is one thing Helmut Werner will never be guilty of.

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