BMW Still No. 1

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Tallying the scores through the end of November, it looks like BMW will defend its title as the world’s No. 1 premium automaker against Mercedes for another year running. For the first 11 months of 2006, BMW Group (including Rolls Royce and Mini) sold 1,244,775 million cars, while Mercedes (including Maybach and Smart) sold 1,147,600.

DaimlerChrysler CEO Dieter Zetsche, has been hard at work over the last 15 months, overhauling everything at Mercedes, from design and development to manufacturing and sales. He’s determined to boost quality and service and restore Mercedes’ lost luster. The new C-Class sedan which will launch in early 2007 will be a major test of Zetsche’s impact at Mercedes.

But car companies are notoriously slow to turn around once they’ve been mismanaged. So it would be surprising to see a dramatic reversal of fortunes following the July 2005 departure of ex-CEO Juergen Schrempp. Schrempp spent a decade making disastrous acquisitions, coddling labor and letting costs balloon while presiding over a calamitous erosion in quality — the worst in Mercedes’ entire 127-year history. Zetsche has cut 8,000 manufacturing jobs and 6,000 administrative workers, flattening the management and modernizing production. The results have already started to restore Mercedes’ profits, following a loss in 2005. Zetsche has promised Mercedes operating margin will hit the 7% targeted for 2007. An even bigger worry for Zetsche is Chrysler. With bulging inventories and a weak US market, it will be hard to staunch losses. Some analysts already are warning of a fourth quarter hit of $2 billion. It was massive losses at Chrysler in 2001-2002 that distracted management and contributed to neglect at Mercedes. Now, only four years since the last Chrysler calamity, Mercedes’ managers are again jetting to Auburn Hills to put out fires.

The wild card in the battle of the German luxury automakers is the new driver at BMW. Chief executive Norbert Reithofer, who took office on Sept. 1, will be seeking to build on the Bavarians’ global momentum. But the two BMW crossovers under development aren’t due out until 2008-09 and a weak US dollar is crimping profits.

With Zetsche at the helm of Mercedes, the race will grow tighter going forward. But Reithofer has a brilliant track record as head of production, combining lean manufacturing and Japanese-like continual improvement with benchmark flexibility for a premium automaker — giving BMW a big cost advantage over Mercedes. Zetsche will have to deliver a near-flawless execution at Mercedes to overtake BMW.

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