Can Mercedes regain luster?

Old 03-13-2005, 08:15 PM
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Can Mercedes regain luster?

If new boss Cordes revives storied brand, he could be in line to be next Daimler CEO.

By Christine Tierney / The Detroit News

Once the most prestigious job in the global auto industry, heading Mercedes-Benz is now a turnaround job.

The Mercedes Car Group is in trouble after a long slide in vehicle quality and profitability. Sales are slumping. Production costs are too high, especially in its native Germany. The Smart minicar line is bleeding money, and its Maybach super limousine is achieving half of targeted sales.

In the fourth quarter of 2004, profits at DaimlerChrysler AG's Mercedes car division dwindled to $27 million -- compared with the Chrysler Group's earnings of $523 million -- after the carmaker set aside more than $600 million for vehicle repairs. According to Consumer Reports magazine, one of the most influential shopping guides, Mercedes' 2004 E-Class sedan was rated the least reliable car for that model year.

It may get worse: Some analysts predict Mercedes will sink into the red in the first quarter. Loss estimates run as high as $500 million, establishing the three-pointed star as the new problem child at DaimlerChrysler, which has lurched from one crisis to another since Daimler-Benz acquired Chrysler Corp. in 1998.

If Eckhard Cordes, who became head of Mercedes on Oct. 1, can pull the luxury carmaker out of its tailspin, he stands a good chance of succeeding his mentor, Juergen Schrempp, as CEO of DaimlerChrysler.

"I love challenges," Cordes said at the Geneva car show this month. "I'm born to fight."

Fixing Mercedes will be an uphill battle. The Stuttgart, Germany-based automaker still basks in the glory of being the world's oldest and largest luxury carmaker, even though the reliability of its vehicles has fallen below the industry average in U.S. and European surveys.

Schrempp tapped Cordes for the job after the abrupt ouster last year of Wolfgang Bernhard, Chrysler's former chief operating officer. Bernhard had been appointed to run Mercedes but ran afoul of Schrempp as well as senior Mercedes managers and union leaders after suggesting that the carmaker was due for a complete overhaul.

"What's happening now underlines that Bernhard was right," says Christian Breitsprecher, auto analyst for Deutsche Bank in Frankfurt. "Cordes is saying the same things -- just with nicer words."

Cordes, 54, began his 29-year career at DaimlerChrysler as an assistant Mercedes plant manager and eventually joined Schrempp's inner circle. As the CEO's loyal strategy chief, Cordes helped to negotiate the Chrysler merger and the ill-fated tie-up with Mitsubishi Motors Corp. two years later.

When harsh measures are needed, he doesn't shrink from carrying them out. In his last job as head of DaimlerChrysler's commercial vehicles division, Cordes restored the business to profit after restructuring its Portland, Ore.-based Freightliner unit.

After Mercedes' poor results were announced, the new boss rallied employees by issuing a memo outlining his plans to cope with brutal market conditions that would make 2005 an even tougher year for Mercedes.

A slow decline

While Chrysler and the truck division struggled in recent years, Mercedes' profits carried the company. Many of its talented managers and engineers were dispatched to Auburn Hills, Portland and even Tokyo to help out ailing sister brands.

DaimlerChrysler officials emphasize that despite the dismal fourth-quarter results, Mercedes' full-year $2.3 billion operating profit exceeded Chrysler's 2004 earnings of $1.9 billion.

"Mercedes still earned more than any other division," said DaimlerChrysler spokesman Hartmut Schick. "This is a difficult situation, but there isn't a crisis at Mercedes."

But Mercedes' performance has been deteriorating. Its sales grew as it expanded its lineup, but its profit margins were consistently thinner than those of archrival BMW AG.

The merger with Chrysler did not generate the promised savings. A noisy debate over which components Mercedes could share with Chrysler without alienating its customers' stymied cooperation.

The two carmakers still draw the line at sharing vehicle platforms, or underpinnings, but "there's a greater willingness to consider options," Chrysler CEO Dieter Zetsche said in an interview.

"Difficulties always bring a greater willingness to accept change," he said. "There are many parts that don't mean anything to the customer" that Mercedes and Chrysler could share to generate economies of scale.

Mercedes' biggest problem, however, is the gradual erosion of its once-sterling quality. In recent years, customers have complained about twitchy electronics, shoddy materials and even engine breakdowns. Other luxury carmakers, such as BMW, also saw their quality ratings slip after packing vehicles with sophisticated electronic gadgetry.

But Mercedes suffered more than its rivals. In J.D. Power and Associates' 2004 Vehicle Dependability Study, which surveyed consumers after three years of ownership, Mercedes tied with Mitsubishi in 28th place. Mercedes customers reported twice as many problems as owners of Toyota Motor Corp.'s Lexus vehicles. In J.D. Power's first such survey in 1990, Mercedes was ranked No. 1.

"It was a slow erosion over a few years, but now Mercedes is suddenly falling down," said Juergen Pieper, auto analyst at Metzler Bank. He expects a first-quarter loss of as much as $520 million.

DaimlerChrysler executives say they have sharply reduced the number of defects in Mercedes vehicles in the past year. "The cars coming off the assembly line now are OK," said Cordes, seated in a small office behind Mercedes' dazzling display at the Geneva show where he unveiled the new B-Class mid-size wagon and the restyled CLK cars.

Cordes' goal is to increase Mercedes' operating profit by $4 billion by 2007, to bolster its profit margins to 7 percent from 3.3 percent last year. He plans to meet the targets by boosting revenue and driving down purchasing costs.

Mercedes does not envision major layoffs in Germany after having struck a deal last year with unions to save $650 million annually by hiring new workers at lower wages and taking other cost-cutting measures.

Analysts are skeptical about the profit objectives, and they worry that driving down components' prices might undermine the carmaker's effort to restore top-notch quality.

"We see real obstacles to cutting costs without damaging the brand," says Jochen Gehrke of Kepler Equities.

But Cordes says Mercedes can lower costs and improve quality at the same time by simplifying production processes and eliminating gadgets such as window-closing functions in the electronic keycards.

In addition to the hefty cost of boosting quality, Mercedes is grappling with a strong euro that has eroded the value of revenues generated in the United States, rising raw materials prices, and sluggish demand for cars in Germany. New rivals are crowding into the market. In the U.S. luxury car market, Mercedes slipped to fourth place last year, behind Lexus, BMW and General Motors' Cadillac nameplate.

Not so smart?

In the first two months of the year, sales of Mercedes-brand vehicles tumbled 14 percent worldwide, in part because the automaker delayed some deliveries in Europe to replace faulty high-pressure diesel pumps. Mercedes expects weak sales again in March.

Its quirky Smart-brand business is losing around $600 million a year -- for a total of $3 billion since 1998 -- because the two-model lineup doesn't generate enough revenue to cover production costs.

Mercedes is studying how to cut the losses and will announce its plans next month. Many investors want DaimlerChrysler to scrap the Smart business, as it pulled out of the Mitsubishi deal last year. But Cordes rules out the possibility. "Closing down Smart makes no sense."

The company is considering bringing the pint-sized ForTwo two-seater to the United States. But it is rethinking the ForFour car, developed with Mitsubishi, and may scrap a new ForMore compact sport utility vehicle. Such measures could lead to charges that would lower earnings in 2005.

Mercedes' super-luxury, $300,000-plus Maybach, has fallen short of expectations. Mercedes says the car makes money, but last year it sold only 500 Maybach sedans after targeting sales of 1,000.

Mercedes has also postponed the U.S. introduction of the B-Class wagon because sales would not be profitable at current exchange rates.

Mercedes officials are banking on a stronger second half after the launches of the new M-Class sport utility vehicle and a large R-Class wagon. The vehicles will be assembled at Mercedes' Tuscaloosa, Ala., plant. Headed by a former Toyota executive, the factory has refined its production system to build the new models.

With the M-Class hitting dealer showrooms next month, U.S. customers and dealers will have a preview of whether Mercedes is getting back on track.

"There are lots of challenges," Cordes said. "But I'm convinced that we will be able to turn the business around."

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