A New Look for a Mercedes Classic

Mercedes has spent $1.75 billion spiffing up its E-Class sedan

Mercedes-Benz has big plans for cosseting well-heeled drivers everywhere. The Stuttgart-based luxury-car maker will launch more than a dozen new models in the next two years, including the Maybach, a limousine outfitted with everything the millionaire on the go needs, including a humidor and a flat-screen TV. All for only $260,000.

But before these dream mobiles hit the road, Mercedes has to deliver on profits for 2002. That's usually not a problem for this carmaker: Earnings rose 38%, to $2.6 billion in 2001, on sales of $42.5 billion. But Mercedes is part of DaimlerChrysler (DCX ) now; its mass-market sister company in Detroit lost $4.7 billion last year after taking huge restructuring charges and is struggling to break even in 2002. Excluding one-time items, DaimlerChrysler's operating profit slid 74%, to $1.2 billion, and the company has already slashed its 2002 target. Still, CEO Jürgen Schrempp pledged on Feb. 20 to more than double last year's earnings.

That means Mercedes needs another banner year. A lot is riding on just one car: the remodeled E-Class, in which it has invested $1.75 billion. A brand new version of the 50-year-old classic will hit showrooms in Germany in March and roll out in the U.S. six months later. With a starting price of $33,000 in Germany, the E-Class has been the best-selling sedan in its class for decades, beating out rivals such as BMW's glamorous 5 Series. It's also Mercedes' main breadwinner: The line drives about one-quarter of the marque's revenues and an even larger proportion of profits. "It's a very important model for us," says Mercedes-Benz chief Jürgen Hubbert.

Now it's time for an encore--a performance Mercedes cannot mess up. That may explain why designers played it a little safe with the new E-Class. Slightly larger and more stylish than its predecessor, the updated E-Class has provoked none of the criticism unleashed by the launch of BMW's radically redesigned 7 Series last year. The only obvious style change is the angling of the E-Class's signature "four-eyes" headlamps to create a sportier front. The pricing is also prudent: The base model costs just 3% more than its predecessor. "It's straight out of the Mercedes-Benz template," says Steve Saxty, auto specialist at New York-based consultancy FutureBrand Co.

Check out the interior, though, and you can see how Mercedes infused the car with the kind of cutting-edge technology seen up to now only in its pricier S-Class range. One set of sensors activates air cushions in the seats to prevent the car's occupants from sliding during turns. Another set regulates the pressure of airbags, taking into account a passenger's height and weight. An optional air suspension offers sportier handling without compromising comfort. Plus, some versions of the new E-Class are up to 10% more fuel-efficient than their predecessors because they are built using stronger but lightweight metal alloys. Germany's influential Auto Motor und Sport magazine gives it a thumbs-up: "The new model is safer, more comfortable, better quality, and more elegant. All the signs point to success."

They had better. After all, Mercedes' biggest markets, Germany and the U.S., have gone soft. Management is predicting a 3% drop in sales this year, against the backdrop of a 5% to 6% drop industrywide. Hubbert has warned that expenses associated with the E-Class launch, including sweetened incentives to move the last of the old models, will weigh on profits in the first half of 2002. Mercedes expects to sell between 180,000 and 200,000 E-Class cars this year, compared with 195,000 last year. But the auto maker has high hopes for 2003, targeting 300,000 in sales.

To get there, Mercedes will appeal to its loyal clientele. Two-thirds of E-Class drivers are repeat buyers. They include Germany's notoriously picky taxi drivers. The E-Class is the top choice of cabbies in Germany, accounting for half of the country's annual 18,000 taxi sales. Angelo Lo Castro is one satisfied customer. "After spending 10 to 12 hours in the car, I get out at night and I don't feel bushed," says the 40-year-old Frankfurt cabdriver. Those sensors may make the ride even smoother.

By Christine Tierney in Frankfurt

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