Can Mercedes Be a Star Again?

With its trademark three-pronged star and celebrated German engineering, Mercedes-Benz has been the brand of choice for generations of celebrities, both actual and aspiring, from the late Pope John Paul II to Scarlett Johansson. It's a brand mystique most competitors can only dream about, and it has turned Mercedes, part of the DaimlerChrysler conglomerate, into an industry colossus with annual sales of more than 1 million cars and revenues exceeding $60 billion.

But these days the Mercedes star has dimmed. Just ask Lyn Murphy, an IT consultant in Newnan, Ga. She is shopping for a new car to replace her BMW and is sorely tempted by the mid-range Mercedes E-Class model. "If I'm going to spend $40,000 on a car, I want you to know what I'm driving," she says bluntly. Yet Murphy, 42, has a nagging worry: she has been reading and hearing about all sorts of reliability problems afflicting recent Mercedes models, from engine failure to unsightly brake dust. "All my life I wanted to have a Merc, and unfortunately, now that I can finally afford one, they're in the tank," she says. At a Mercedes dealer in Atlanta, the sales staff even joked about reliability, she says, noting that Mercedes still beats Kia cars in reliability tables. She gripes, "They should instead be saying, 'This is what we are doing to correct the problems.'"

They're working on it, Ms. Murphy. Mercedes is in the middle of a massive overhaul designed not only to fix the car problems and restore the luster but also to reinvent the company, no less. High-quality cars are a must, given the pounding Mercedes is taking from the likes of Lexus. The company is introducing a new S-Class (starting price for the flagship S500L version: around $115,00), which hits U.S. streets in January, joining two new R-Class models and a new M-Class SUV. At the same time, Mercedes has to revamp its manufacturing--no easy chore in high-cost Germany, a country whose problems in many ways reflect those of its signature car company. The task will fall to new DaimlerChrysler CEO Dieter Zetsche, 52, who has already worked miracles in overhauling the once disastrous Chrysler division. "In the land of the blind, the one-eyed man is king," says Peter Schmidt, a British-based auto-industry consultant. "Zetsche is a brilliant choice, but it will be very arduous to get Mercedes back to where it was."

Mercedes has slid dramatically in consumer rankings over the past two years, especially in the U.S., its biggest foreign market, which accounts for 20% of sales. Four models show up in Consumer Reports' list of the worst used cars. And in J.D. Power's influential study of long-term vehicle dependability, which measures problems encountered by owners of three-year-old cars, Mercedes scored far below the industry average in the 2005 survey; Mercedes owners reported more than twice as many problems per 100 cars as top-ranked Lexus. "Mercedes' fall from grace has been especially severe," says Chance Parker, J.D. Power's executive director of product and research analysis.