Posted Sunday, October 16, 2005; 11.57BST
But German business isn't waiting. People like Zetsche, 52, are part of a new generation of hard-nosed top German executives carrying out their own sweeping reforms, regardless of the political constellation in Berlin. Klaus Kleinfeld, who took over as chief executive of electronics giant Siemens in Munich at the beginning of this year, recently announced big cutbacks in three of the firm's troubled subsidiaries. At Volkswagen in Wolfsburg, Wolfgang Bernhard, a former Mercedes alumni who took charge of the automaker in May, staged a showdown last month with the company's unions: unless they agreed to massive cost reductions, he would build a new suv in Portugal rather than Germany. The unions chose to work for less rather than not work at all. The signs are that such corporate makeovers are helping to whip Germany back into shape. The latest data from the Paris-based Organization of Economic Cooperation and Development show that German productivity has risen by 3.6% in the past year and by twice that amount since 2002, far outpacing Britain, France, Italy and even the U.S.

In many ways, Mercedes' recent troubles provide a window into Germany's own problems. The prosperity of both company and country has been built on engineering excellence and high-quality manufacturing. Mercedes stumbled, as Germany is stumbling, because of external pressures. In today's fiercely competitive global marketplace, there's little margin for error, especially for high-cost producers. With auto manufacturers worldwide racing to produce ever better cars ever more cheaply, Mercedes slipped because it became too complacent about its technological prowess, took on too big a workload and rushed out new models before they were ready. "They partly got into this mess by resting on their laurels," says Peter Schmidt, a British-based auto consultant.

DaimlerChrysler has also paid the price for its mismanaged global ambition. Two successive chief executives, Edzard Reuter in the 1980s and Jürgen Schrempp in the '90s, aggressively pursued visions of international growth and diversification and financed them by tapping into the cash hoard Mercedes had built up over decades. In the process, the company, which once prided itself on its provincial roots in Baden-Württemberg, acquired a worldwide scale and presence in both cars and trucks. It also bought some absolute dogs, including a near bankrupt household appliance company (AEG), a teetering airplanemaker (Fokker) and a 37% stake in Japan's inept Mitsubishi Motors. Those and other investments drained management's attention and the company's account; Daimler's share of Mitsubishi's 2002-04 losses totaled more than $1 billion.

The company's biggest acquisition, the $36 billion purchase of Chrysler Corp. in 1998, remains deeply controversial. The market value of DaimlerChrysler, the combined firm, is about one-third less than when the merger was announced. "They frittered away their cash," says Helmut Becker, BMW's former chief economist who now works as an industry consultant. "If they hadn't, the quality problems wouldn't have come about."

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