Online Extra: Fixing Up an Old Mercedes

After turning around Chrysler, new DaimlerChrysler head Dieter Zetsche talks about returning the German brand to its past glory

Investors celebrated the unexpected news in July that Chrysler Group Chief Executive Dieter Zetsche would take charge of parent DaimlerChrysler (DCX ) on Jan. 1 by sending the German auto maker's stock price soaring 10%. Now it's time for Zetsche to earn that goodwill. Over the past five years, flagship brand Mercedes Benz has suffered dents to its quality, profit, and market share as luxury rivals BMW and Audi posted huge gains.

Zetsche, former chief of engineering at Mercedes, earned Germany Inc.'s top job by turning around ailing Chrysler over the past five years, revitalizing the brand with strong new models such as the 300 sedan. Zetsche insists that his priorities are "product, product, and more product." In an interview at DaimlerChrysler's Stuttgart headquarters, the 52-year-old executive discussed the challenges ahead for the world's fourth-largest auto maker with Senior European Correspondent Gail Edmondson. Edited excerpts of their conversation follow:

What changes need to be made to restore quality and profitability at Mercedes?

We have the opportunity to further enhance the productivity of plants by applying lean manufacturing. You start with engineering and go through sales and manufacturing. It's not a revolutionary path -- it's just doing your homework in improving all your processes.

If you do it well there are two impacts. One is reducing costs, and the other is improving quality because lean and clean processes do both.

BMW has surpassed Mercedes as No. 1 worldwide in the premium segment. Do you believe the sharp decline in sales of E Class and C Class is over or will it continue this year?

It is right that in 2005 BMW will most likely sell more cars than Mercedes. That is one yardstick. If you used a different measure, like revenues, you would see much different results.

As for the C-Class and the E-Class, both are well along in their lifecycles. And every model shows a decline at the end of its lifecycle. That's the case for the C and the E class.

Was former Mercedes chief designate Wolfgang Bernhard right in his assessment in May, 2004, that Mercedes needs serious restructuring?

I don't know what exactly Bernhard said. But what we can say is that Mercedes Benz is not a restructuring case. It's the most valuable brand in the industry, and our new models are getting rave reviews in the media. And we see positive results in all the external statistics.

There is more work to be done is the areas of productivity and efficiency. We create those good results with too many resources. We have to try to improve our performance there.

How far along are you fixing the quality problems at Mercedes? Is it true that warranties are costing you $3,000 a car on average?

That number is wrong. We don't publish warranty costs for vehicles. But I can say they are coming down in a nice way.

Many market experts say now the lesson of the merger between Daimler and Chrysler is that there are few synergies in combining a premium auto maker with a mass-market brand. Can you reap more benefits by getting Mercedes and Chrysler to collaborate more closely?

This merger was called "a marriage made in heaven," so expectations were relatively high. I do not think it's well advised to create new levels of expectation, but rather to deliver results, like the Chrysler 300 and its sibling, the Dodge Charger.

These cars would have been totally impossible to accomplish without Mercedes -- and I'm not referring to Mercedes components, but Mercedes knowhow. What was vital was the technological knowledge of Mercedes, even if the cars were developed entirely in Auburn Hills. We will get more out of this merger.

There are lots of opportunities to increase the technology base of Chrysler using Mercedes' input, and we can apply the lessons of lean manufacturing from Chrysler to Mercedes.

Chrysler's inventory is bulging, incentives are high, and the mix is deteriorating. Is there a risk that profit will decline at Chrysler in 2006?

This is obviously not the moment for a profit forecast. The market in the U.S. has slowed down somewhat. After all the employee pricing schemes, it's still to be seen where the market is going to find equilibrium. But Chrysler is relatively well prepared to respond with its product line and 10 launches going forward in 2006.

The most successful auto companies -- Toyota, BMW, and Honda -- are run by engineers. Comebacks at Chrysler and Nissan were also driven by engineers. And Mercedes in its best times was run by engineers. How important do you think it is to have an engineer running a car company?

As an engineer, I might be biased in answering that question. I'd say it definitely doesn't hurt.

Ford (F ) and GM (GM ) are run by finance guys and don't have engineering in their corporate culture. What does that mean for the company's strengths and weaknesses?

Put it this way: In the German media, everyone knows who the chief engineer is of every auto company. When the top management is profiled, they are always in the lineup. My perception is that's not true in the U.S.

It's definitely not my role to comment on personnel decisions of other companies. But when I came to Chrysler, I said my priorities were product, product, and product. The future will be won by strong products, not by the incentives of the weak.

What are the three most interesting technological innovations or breakthroughs likely to impact the next generation of cars in your opinion?

Without risking any patents in the works, I could say that I believe activities in safety will have high priority -- our vision is accident-free driving. In light of the growing discussion of limited energy resources, powertrain technology is another main area.

I believe that future innovation is not going to be limited to one type of powertrain. It will impact gas, diesel, and hybrid engines. Further down the road I'm convinced that fuel cells hold the most promise.

Mercedes has suffered for several years from a surfeit of electronics bugs and systems failures, especially in E Class, C Class, and M Class models. How did you conquer that problem?

First and most important you have to shift from a fire-fighting mindset where you are just fixing what's wrong to a prevention mindset where you are designing processes that make the system immune to variation.

Then you can produce cars in a way that guarantees quality rather than checking at the end of the line to see if there are any errors. That is our basic philosophy on quality. We have not reached our goal but we are well under way in changing our philosophy. The main change in our approach was to fix the cars upstream. It's much more work in the beginning, but it dramatically reduces the problems on the other end.

Lexus is determined to replicate its U.S. success in Europe. Is Mercedes vulnerable given its recent quality problems and Toyota's No. 1 ranking in reliability?

We see that Lexus has been successful in the U.S. and intends to replicate that in Europe. On the other hand, we have a long history at Mercedes where 99% of the time was a great success, with some brief periods where customers were not as satisfied.

Going forward I'm optimistic we will further enhance the experience of the customer in all regards. Everyone talks about Toyota dominating the global auto market. I see the opportunity for Mercedes and DaimlerChrysler to become more successful in the future.

Mercedes is known more for its classy and timeless look than for sporty lines. But increasingly, premium customers want sportier-looking cars. BMW and Audi have played this card well. Does Mercedes need a new look?

If by sporty you mean emotional, I don't disagree [about what customers want]. Mercedes has products like the SLK and CLS, which represent very emotional design.

Their styling has gotten tremendous praise as well. With the E Class, I think most customers are asking for a safe cruising kind of vehicle. Our objective is to fulfill this requirement as well. There is variety across the model line.

Is there anything you'd like to add about DaimlerChrysler as you take the wheel?

We will build the highest quality cars at the lowest cost possible. It's simple, but that's the basic focus this management will have.

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