Commentary: Mercedes' Head-on Collision with a Quality Survey

There must be a lot of long faces at the headquarters of the Mercedes Car Group in Stuttgart. On July 8, the world's most esteemed luxury auto maker suffered the humiliation of seeing its ranking in the annual J.D. Power & Associates Inc. survey of car dependability plunge to No. 26 from No. 16 last year, eight slots below the industry average, trailing Chrysler, Ford, and Plymouth. Ouch! In 1990, Mercedes-Benz (DCX ) proudly ranked No. 1. "Once it was the nameplate of envy. It may be losing some of that shine," says Brian Walters, J.D. Power's research director. Problems cited by consumers in the 962-page report included handling, braking, shocks and struts, electronic window controls, and inaccurate fuel gauges.

Sounds more like problems you would expect in a Chrysler, Mercedes' troubled sister brand. But Chrysler and even Dodge outperformed Mercedes in the survey. Quality problems at Daimler raise questions about the impact of the 1998 merger between Mercedes parent Daimler-Benz and Chrysler Corp. on the Mercedes nameplate. Since then, DaimlerChrysler (DCX ) Chief Executive Jürgen E. Schrempp has sent some of the company's best executives to Detroit to fix Chrysler. Is Mercedes paying the price?

Mercedes' famed engineering prowess is hardly kaput. The problems cited in the survey affect three specific models from the year 2000. One of them, the midsize E-Class sedan -- Mercedes' big money-maker -- already has been replaced by a newer version that is winning raves from critics. And the M-Class sport-utility vehicle received an extensive overhaul in September, 2001, including the replacement of 1,100 parts.

Still, consumers' perception of declining quality over time is chiseling away at Mercedes' stellar reputation. Even though Mercedes moved quickly to address the problems, the idea that every vehicle it makes will have superb quality -- once the moniker's hallmark -- is no longer a given. Another bout of quality problems could raise far more serious doubts among car buyers.

The Germans' weak spot was exposed in the 1990s, after Toyota (TM ) Motor Corp. and Nissan (NSANY ) Motor Co. stormed the U.S. market with lower-cost luxury models. To compete, Mercedes' engineers had to overhaul how they built cars. Instead of letting design determine the cost, engineers had to design cars to meet a target price. "The problem is they weren't good at that," says Philipp Rosengarten, senior analyst at Global Insight in Frankfurt. "The old E-Class was the first Mercedes model designed to cost, and it completely failed." The M-Class targeted in the survey was a victim of cost cuts and accelerated development to meet the challenge of Japanese SUVs. Its interior paint chipped, its wood paneling was defective, and its instrument panel was subpar. "When you come out with an interior that is not a Mercedes, it raises serious questions about what they were willing to do to cut costs," says Paul A. Eisenstein, publisher of Such quality problems may slam Mercedes resale values, which have long been among the highest in the industry. "Clearly, luxury brands live and die by their [resale] value," says Stephen T. Odell, director and senior managing executive at Mazda Motor Corp.

Mercedes officials insist that the quality problems highlighted in the J.D. Power survey are history, and that cost-cutting does not affect quality at Mercedes. In a similar J.D. Power survey in Europe, for instance, the E-Class maligned by U.S. consumers took No. 1 in the luxury class, in part because Japanese rivals are still scarce, but also because Europeans have different expectations. Of course, customer surveys are subjective and not the final arbiter of quality. But the message is clear: Savvy competition is raising the bar for everyone.

Mercedes' European stronghold won't remain secure forever. Toyota is ratcheting up its marketing efforts for Lexus, and its Yaris subcompact stole a top spot in a recent quality ranking by the German agency that certifies autos as roadworthy. Mercedes, of course, still makes world-class cars. But from here on out, it will be a lot tougher to stay ahead of the pack.

By Gail Edmondson

With Chirsitine Tierney in Detroit.

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