Mercedes Can't Shift Into Cruise Control Yet

When Helmut Werner slipped into the driver's seat at Mercedes-Benz as chief executive in January, 1993, the company was in sore need of a major overhaul. Losses were piling up, its luxury autos were overpriced, and costs were 30% above such competing models as Toyota's Lexus. Werner unleashed a whirlwind of change at the century-old auto and truck maker--and looked forward to the payoff.

Although Mercedes is now back in the black, there'll be no shifting into cruise control. It has rebounded largely because of Werner's cost-cutting moves (table). But now, Mercedes--like all German manufacturers--faces higher hurdles to global competitiveness. Since Jan. 1, the mark has soared 12%, to about 71 cents--13% more than the 621/2 cents rate at which Werner says he would feel "very comfortable."

On top of that, the auto industry's Mar. 7 settlement with the IG Metall labor union will add more than 10% to Germany's wage bills by December of this year. Says John Lawson, European autos research director for DRI/McGraw-Hill in London: "Mercedes' emergency cost-reduction program seems to have worked. Now, the question is whether they have the stomach to attack costs continuously."

FIGHTING CHANCE. Werner doesn't intend to slow down now. Mercedes boosted productivity 30% over the last two years, he says, allowing the company to turn out 110,000 more cars per year with 36,000 fewer people. "We are only about halfway through the program," he says. "There's still lots of room for improvement." He wants to build on early gains: Revenues soared 10%, to more than $50 billion, in 1994, thanks to increases of 17% for cars and 14% for trucks. In contrast to its operating losses of $905 million in 1993, Mercedes was $1.4 billion in the black last year, Commerzbank figures.

Now, Werner aims to make cost-cutting a way of life. He is looking into adding more plants abroad to the ones already in the U.S. and France. Mercedes is also stepping up its reliance on lower-cost, outside suppliers. They now provide 55% of its components, and Werner wants to raise that to 60%. A joint program with suppliers, called Tandem, delivered $1.1 billion in savings last year and is scheduled to spring an additional $700 million this year.

Werner's moves have been so radical that he has a fighting chance. One of his first steps was to junk the old culture in which engineers dominated and marketers took a backseat. Mercedes traditionally priced models on a cost-plus basis. Since Werner took the top job, the new gospel is to set prices according to the competition--and then produce to that price.

The toughest test of the new policy is the U.S. market. Werner started by launching the C-Class compact in 1993 at about the same base price, ranging from $30,000 to $35,000, as prior versions. Then, he laid into existing lines, such as the popular E-Class of midrange cars. U.S. sticker prices for the 1994 model E320, for instance, were set at $42,500, 15% less than its predecessor 300E. And last fall, the revamped top-of-the-line S-Class 1995 models were priced 7% to 10% cheaper than 1994 models.

Dealers are delighted. Says James D. Evans, president at L.P. Evans Mercedes-Benz in Miami: "The restructuring of prices worked. In 1994, the S-Class was the slowest moving of the segments. Right now, it's the strongest."

CITY CARS. Werner is also bringing out new cars as part of his effort to keep prices competitive. Productivity on the new E-Class, scheduled for launch in Europe this summer, will be 20% to 30% higher than on the old model, enabling Werner to sell better-equipped cars at the old sticker price. And he's bringing out new lines of premium small cars, such as the micro-minicar and subcompact A-Class city car, both due in 1997.

Werner brags that he'll eventually sell 200,000 A-Class cars a year in Europe priced at $14,300 or less. That's a tall order. But if he can make profits on small cars without denting the marque's reputation for quality, he'll have Mercedes firmly in the fast lane.


-- Slashes German payroll by 13% to 148,000 in two years

-- Starts auto assembly in the U.S. and France

-- Forces managers to meet market-driven prices on new models

-- Launches new models to capture big productivity gains

-- Aims to increase annual production by 70%, to 1 million cars, by 2000


By John Templeman in Bonn, with David Woodruff in Detroit

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