Mercedes Is Downsizing And That Includes The Sticker

Just three weeks after taking over as chief of Mercedes-Benz, Helmut Werner is unleashing a makeover of the flagship of Daimler Benz, Germany's largest industrial company. In a dramatic break with decades of tradition, Werner proclaimed that the producer of luxury autos will make lower-priced vehicles.

They will include a subcompact "city car" that goes head-to-head with such autos as the soon-to-be-launched Renault Twingo, which will cost a mere $10,000 or so. Werner also wants to go into minivans and four-wheel-drive recreational vehicles. "If they can do it, it will cause a revolution at Mercedes," says Daniel T. Jones, an auto specialist at the Cardiff Business School in Wales.

LOSING GROUND. Werner is responding to declining Mercedes sales and profits and a growing sense in the industry that Mercedes vehicles are overpriced and too narrowly targeted. In recent years, Mercedes has lost ground to such high-end Japanese introductions as Lexus and Infiniti. Also, it was passed in sales for the first time in 1992 by archrival BMW.

To pull off his revolution, Werner will have to do a sweeping overhaul of Mercedes' product development and manufacturing. He may be just the manager for the task. A 56-year-old finance specialist, Werner is credited with turning around Daimler's Freightliner truckmaking subsidiary and making it No. 1 in the U. S. market. Mercedes has already slashed 13,000 jobs from its 180,000 German payroll and eliminated several management levels, but Werner says that is not enough. "No one in the world is prepared to pay for German complacency on the cost front," he warns.

That's a thinly veiled signal to Germany's militant IG Metall labor union that something has to be done about high labor costs. In another break from tradition, Mercedes is making cars outside of Germany. It is already assembling cars in South Korea and Mexico, and it has earmarked $570 million for a Spanish minivan plant. Now, says Werner, a full-car production facility in a foreign market is being considered.

But that's just the start. In a move that will rock Mercedes' engineer-dominated culture to its foundations, Werner wants to do away with the company's comfy cost-plus approach of pricing its cars. In the future, sticker prices will be set by a mar-ket-driven target price. Engineers and plant bosses will have to meet that price. The first test will be the new 190 model "Baby Benz," set to arrive this summer. Werner has decided to price it at under $25,000 in Germany. That's about the same as its predecessor, though it's loaded with $5,000 worth of extras.

Werner says costs in Germany can be cut about 30%. Industry mavens rate cost-paring as the makeover's litmus test. "The really key issue is building to a price," says Michael Smith, manager of DRI Europe's London-based auto consultancy. "It's quite clear Mercedes will have to do that to compete."

However, Werner's new-product strategy has left some auto analysts gasping--and worried. "This could be suicidal," warns one London stockbroker. "Who wants a Mercedes Corolla instead of a dream car?" But fierce competition and last year's 30% drop in Mercedes' pretax profit to an estimated $1.4 billion don't leave Werner much choice.

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