Autos: Can Mercedes Be a Star Again?

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Zetsche isn't waiting until January, when he officially takes control of DaimlerChrysler, which last year had total sales of $192 billion. He has parked himself in the top job at Mercedes, replacing Eckhard Cordes, a Schrempp confidant who had been in the post only a year. Zetsche says he plans to stay on as head of Mercedes even when he takes over the whole works. He is quick to caution against comparisons between Mercedes in 2005 and Chrysler in '02, but it didn't take long for Zetsche to strike. Mercedes just announced 8,500 job cuts in Germany. That's about 9% of the work force--by German standards a huge layoff. The company's hands were tied by a previous deal with unions that guaranteed jobs until 2011, but Zetsche is circumventing that through voluntary buyouts. They will cost the firm more than $1 billion, or a whopping $135,000 a person. Zetsche doesn't mince words about his top priority: "Our most important task right now is to ensure that our excellent products can be made with less input," he says. As for the damage to Mercedes' reputation, he likens the brand to "a kind of savings account" from which the company has had to make a few withdrawals. "We have to strongly start to re-fund it," he says.

His timing is good, because Mercedes is in the midst of a product offensive, including the launch of its new top-of-the-range S-Class series and a restyled version of its popular M-Class SUV. Even before Zetsche's arrival, Mercedes was putting in place a restructuring program introduced by Cordes that aims to boost the company's return on sales to 7%--it's now close to zero--and Zetsche is widely expected to accelerate those measures.

He will have to wrestle with the big issues that are plaguing the whole of German industry, not just its automakers: unit labor costs that are among the highest in the world, productivity that's been overtaken by many rivals and worries about losing its technological edge. In a blunt letter to Mercedes employees announcing the layoffs, Zetsche wrote that "our costs in all parts of the value chain are significantly higher than those of the best competitors" and that the company was dragging around too much production capacity. Becker, the former BMW economist, contends in a book published last month that the glory years of the German auto industry are history and that as much as 25% of the 800,000 auto-manufacturing jobs in the nation will be cut over the next 10 years as suppliers increasingly shift production abroad. The book, titled Crash Course, has attracted wide attention in Germany, with some reviewers calling it overly bleak. Retorts Becker: "They call it bleak because Germans prefer to hear fairy tales rather than the reality."

At Mercedes headquarters in Stuttgart, the question of what went wrong has been pored over in great detail. Senior managers are eager to move on, to talk about the future rather than to air their dirty linen in public. After several rounds of mutual recriminations in the German press over responsibility for the faulty electronics, management has struck an agreement with key suppliers such as Bosch not to blame each other. In their self-critical moments, executives say they ramped up production of the E-Class too quickly. before it was ready, and that they were overstretched by the introduction of a welter of new models.