Autos: Can Mercedes Be a Star Again?

(2 of 5)

Mercedes realized it had major problems with its E-Class series soon after the launch in 2002 and moved aggressively to fix them. More than 200 SWAT teams of engineers ripped the car apart to identify and overcome the flaws, which included design and production snafus in complex electronics systems. The firm this year recalled 1.3 million cars, including C-Class and SL-Class as well as E-Class models built between 2002 and '05, took back the lemons, switched engines in some models and started providing two-year full-service warranties to disgruntled owners. In the process, the brand has rebuilt its quality-control management and now says the autos it builds are the best and most reliable it has ever made. Such claims are partly borne out by the latest J.D. Power short-term reliability surveys.

Fixing the technical problems is just half the battle: Mercedes now has to win back customer loyalty. That's not so quickly fixed as a mechanical problem. In the first eight months of this year, the firm sold 52,000 fewer E-Class cars worldwide than last year, a drop of 28%. Sales of its other best-selling model, the C-Class, were also down. The financial outlook is dreadful: even without counting $1.3 billion in losses at its Smart small-car subsidiary, Mercedes managed only a tiny operating profit for the first half of the year after a loss in the first quarter.

And it's going to take a lot of patience and persuasion to bring longtime Mercedes fans like Gary Hurvitz back into the fold. Hurvitz, president of a financial firm in Rockville, Md., says reliability is a key issue--and he doesn't believe Mercedes is yet where it should be. "For every time I read of a DaimlerChrysler executive claiming that the problems are resolved, I see two more postings (online) by people whose cars break down within weeks of leaving the showroom," he says. He still owns a '94 Mercedes E320 wagon and a '98 E320 sedan, but last year, after taking a long hard look at the S-Class, he bought a Lexus instead. "European-car aficionados may look down at me when I pull up to them in my supposedly ever-so-boring-to-drive Lexus," Hurvitz says, "but I'll enjoy the last laugh when their transmission fails."

In many ways, Mercedes' troubles provide a window into Germany's own problems as the nation grapples with slow growth, high unemployment and a weakening role in a rapidly changing world. 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 consultant Schmidt.