How Long Can Mercedes Work Its Magic?

Its performance has been as smooth as the ride in a stately, $73,000 S-Class sedan. Mercedes-Benz, DaimlerChrysler's (DCX ) luxury division, expects to rack up higher sales and profits this year, one of the rare winners in a struggling industry. In the first three quarters of 2001, profits and revenues both rose 11%, and its margins were an enviable 6.5%. But with the rest of the beleaguered DaimlerChrysler group either in the red or perilously close to zero, Mercedes chief Jurgen Hubbert, 61, faces tremendous pressure to keep up the performance. "He's pedaling awfully hard to carry the rest of the group through these hard times," says John Lawson, car analyst at Schroder Salomon Smith Barney in London.

It's going to be uphill for a few months, at least. Sales in Europe and the U.S., where Mercedes-Benz generates more than 90% of its sales, are expected to fall next year. Weakening demand in the U.S. is bound to hurt. Although Mercedes sells only about a fourth of its cars in North America, they tend to be expensive models loaded with options. Analysts expect profit to dip about 5% next year.

Mercedes-Benz is at a difficult juncture in its product cycle. It recently rolled out the stunning $84,500 SL roadster-cum-coupe with a retractable aluminum roof. But demand for its high-margin, $49,000 E-Class sedan, which accounts for nearly a quarter of Mercedes-brand sales, is dropping off ahead of the launch of the new E-Class in March. The new model can be counted on to rev up earnings later next year, especially in Germany, where car-mad customers leap at novelty. But Chief Financial Officer Manfred Gentz says he doesn't expect Mercedes' margins to grow in coming months. "The SL has big margins, but low volumes compared with the E-Class," he says.

To Hubbert's credit, the lull ahead of the E-Class launch will not be as damaging as it would have been a decade ago. In the 12 years he has headed Mercedes, the brand has nearly doubled unit sales to 1.05 million cars last year.

That has been achieved by a sometimes risky expansion in the model lineup. The range today includes the popular $37,000-plus M-Class, an affordable $40,000 SLK roadster, the sporty $43,000-plus CLK coupes and convertibles, the A-class compact, which starts at $15,050, and a luxury sport utility vehicle. Mercedes is rolling out a new CLK coupe and a face-lifted top-of-the-line S-Class sedan next year, both of which should help stimulate demand.

Hubbert will need all his skills to keep Mercedes sales strong, especially in the recession-wracked U.S. By producing stellar profits, Hubbert is turning out to be Jurgen Schrempp's most valuable player. The question is, how long can he keep saving the company?

By Christine Tierney in Stuttgart

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