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'The turning point for Mercedes'

How Zetsche got his company back on top

November 7, 2016 @ 12:01 am

Christiaan Hetzner

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3 keys to Mercedes'rebound: Daimler CEO DieterZetsche's leadership, design chief Gorden Wagener's brand-unifyingstyling and the game-changing S class.
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Dieter Zetsche's marketplace revival of Mercedes-Benz was about to begin.

But, outside the Airbus factory in Hamburg, Germany, the rain began to fall in sheets, hammering the roof so hard that the noise threatened to drown out a live performance by Grammy-winning singer Alicia Keys.

Inside, Daimler officials were growing nervous. According to the plan for that May evening in 2013, the hangar door would open and the next-generation Mercedes-Benz S class would be driven inside amid music, lights and artificial fog.

Airbus personnel wanted to nix this for safety reasons even though hundreds of guests were waiting. The emcee was told to stall as Daimler staff could only hope the bad weather wouldn't turn the evening into a fiasco for CEO Zetsche.

"There was only 1 storm cloud over Hamburg at that time, and it was hanging directly over the Airbus plant," remembered a veteran Daimler manager who was there that night. "I downed 3 glasses of chardonnay when the rain started, knowing there was simply nothing we could do."

Once the world's undisputed champion among premium carmakers, Mercedes had already been outsold by BMW in 2005 and then, under Zetsche, by Audi 6 years later. Had the S class, the model that most symbolized Mercedes' claim to deliver "The best or nothing," failed to defend its leadership, the pressure on Zetsche -- well-known in the U.S. from his role as head of Chrysler Group from 2000 to 2006 -- would have been enormous.

Analysts disappointed with the stock's performance had already called on him to relinquish his dual role as Daimler CEO and head of the group's core passenger-car division. In addition, Zetsche emerged weakened rather than empowered after a contract extension only months earlier.

"Probably the 3 most important elements, I think, are design, product portfolio and gaining a better understanding of China."

Dieter Zetsche

Yet just when it looked as though even the heavens were against Daimler, the storm clouds over the Airbus factory passed -- just as they have for Zetsche. Since then, sales and profits at the group's car business, which includes Smart, have steadily been on the rise.

Asked when management knew the company's growth plan would work, a former Mercedes board member said it all started with the S-class launch: "That was the turning point for Mercedes."

Today, Zetsche has Mercedes poised to overtake BMW and reclaim the title of world's top-selling premium brand, achieving his target four years ahead of schedule and spoiling the centennial celebration of its archrival in Munich in the process.

In September, Mercedes reported global sales of more than 200,000 vehicles, setting a new all-time high for the month while also breaking its own sales records for a quarter and for the 1st 9 months of a year. Thanks to strong demand for new models such as the E class, 3rd-quarter operating earnings at Daimler's car business surged 26 percent to a record 2.7 billion euros ($2.98 billion).

Mercedes has stormed back because of an aggressive product offensive that includes lucrative models such as the S-class Cabriolet, the flagship's first convertible in over 40 years. By expanding into new niches and segments with other hot sellers such as the GLA compact crossover and saving $2.22 billion from cost cuts, Mercedes is on track to meet its 10 percent return on sales target.

When asked by Automotive News Europe to name key factors in Mercedes' turnaround, Zetsche said: "Probably the three most important elements, I think, are design, product portfolio and gaining a better understanding of China."

Although Mercedes still enjoyed a thriving business in Europe and the U.S., its costly missteps in China meant that it became a distant third in global premium car sales to BMW and Audi. In late 2012, Zetsche took action. First, he installed Hubertus Troska, a senior Daimler Trucks executive, as a new management board member responsible for China to create a reporting line that cut across all operations. He replaced the local sales chief and added hundreds of new sales points to close the gap with BMW and Audi.

Then Mercedes acquired majority control of its import distributor from Chinese partner Lei Shing Hong and merged it with a second, separate sales channel for locally built cars. "By bundling the two, we have one voice to our sales network and one strategy for the whole portfolio," said a senior Mercedes sales executive at the time.

Product offensive

As the sales network upgrade was taking place, Mercedes development chief Thomas Weber was following through on a massive product offensive. In 2010, Mercedes sold 24 models; come 2020, that number is expected to reach 40.

"If you looked at the product range, they basically didn't have any derivatives of anything, and now they have a precise sequence of new models that address a wide range of customer tastes," said a former non-executive director at the company. "The volume of products over the past two or three years has really been the key."

Major gaps in its portfolio were addressed. In 2014, the C class finally received a long-wheelbase version for chauffeur-driven customers in China. Dealers in the United Kingdom, Europe's second-largest market after Germany, were finally able to offer a compact crossover to customers in the GLC, whose predecessor had not been engineered for right-hand drive.

And while Zetsche scrapped poorly performing Maybach as a stand-alone brand in 2012, he resurrected it as the name for a line of ultraluxury S-class cars that have been immensely successful alongside two entirely new derivatives, including the cabrio version of Mercedes' most exclusive model line.

At the opposite end of the spectrum, Zetsche revamped the automaker's compact line, adding the GLA crossover to challenge the BMW X1 and Audi Q3 in a segment that has experienced constant global growth for years.

The E class has enjoyed strong demand but will be challenged by BMW.

The improved and expanded vehicle portfolio has earned praise from analysts such as Barclays Capital's Kristina Church: "It's being helped by some awesome product right now. It's the best in the market and makes some of BMW's models look a little old."

A key player in the brand's transformation has been design chief Gorden Wagener, who made Mercedes cars desirable again. Since he was appointed in 2008 as head of design at the age of just 39, Wagener abandoned the engineering-inspired styling of individual models under predecessor Peter Pfeiffer in favor of a unifying philosophy for the whole brand and a fresher look that appealed to younger customers.

Most striking was the transformation of its core compact model, the A class, which lost its drab, functional minivan looks in favor of a sleek and sporty hatchback shape that embodies Wagener's so-called Sensual Purity design language that is meant to reconcile emotion with intelligence.

"I spend a lot of time in our design dome," Zetsche told Automotive News Europe. "I'm convinced that with Gorden Wagener, we have probably the most talented and capable head of design."

Possible risks

The big question is whether Mercedes can remain on top or, if it slips, whether it will still reach Zetsche's original target of being the biggest premium carmaker in 2020. The brand is at a product-cycle peak, having launched the S class, C class and most recently the E-class sedan this year in short succession. The next high-volume models won't come until its family of compacts is renewed starting in 2018.

Meanwhile, the competition has awoken. Audi late last year introduced its new A4 compact premium car, providing competition in this volume-heavy segment. Meanwhile, BMW is gearing up to launch the new 5 series, which has historically been a more serious competitor for the E class than the larger 7 series has ever been to the S class. BMW also hopes to copy the success of the S-class Maybach by launching its own version of a $165,000-plus car.

"What happens to Mercedes' margins when the product cycle has peaked and may not be quite so supportive? We will certainly get more of an indication after the arrival of the new 5 series, a hugely important car and key profit driver for BMW, than we had from the 7 series," said Church, who added that she remains skeptical about the sustainability of Mercedes' turnaround. "The jury is still out. I'm still slightly wary."

Moreover, Daimler still struggles with a sizable staff. The Mercedes-Benz Cars division, which includes Smart, had 137,000 workers at the end of last year. The entire BMW Group, which includes three car brands, a motorcycle business and a financial services division, employed 122,000 people.

A big difference between the companies is Mercedes' higher level of manufacturing depth. BMW, for example, sources all of its transmissions from suppliers such as ZF Friedrichshafen while Mercedes builds them in-house. Zetsche told analysts during the 2nd-quarter results conference call in July that he saw the prospect of electric vehicles, where Mercedes will be last to market with its EQ subbrand, as "an opportunity to further reduce vertical integration.

"Due to its large number of German employees, Daimler has been forced to inject $5.83 billion to top up its domestic pension fund since December 2014. Even after effectively pawning its 3.1 percent stakes in Renault and Nissan to the plan's asset pool to save cash, Daimler is still nearly $12.1 billion short. Lastly, Zetsche has realized the group's bloated organizational structure is not nimble enough to compete with tech startups and has asked nearly 150 Daimler managers to come up with proposals to address this weakness.

Labor peace

The team involved in Daimler's Leadership 2020 initiative is already putting some of the proposals into place. Here, Zetsche can rely on the full support of his once-combative German trade unions.

"We believe it will help minimize the hierarchical management culture," a Daimler labor official said. "Case in point: In the past, something like this would be decided by the senior executives and then cascaded down without ever asking for any input from the work force."

Daimler was early to car-sharing with Car2Go and is being rewarded.

Zetsche has also proved more flexible and pragmatic than BMW in terms of partnerships. He teamed up with Nissan to develop a joint front-wheel-drive platform for compact cars together with the Japanese carmaker's Infiniti premium brand. BMW has largely continued with its stand-alone strategy.

Daimler is also being rewarded for its openness to a new business idea long before competitors. First launched in 2009 in the provincial German city of Ulm, the company's Car2Go car-sharing scheme has expanded across the globe. In October, Car2Go announced it had crossed the 2-million-customer mark -- almost 4 times as many as BMW's car-sharing joint venture, DriveNow.

All of this success can be traced to that stormy evening in 2013. The S class, the 1st car with the ability to steer and accelerate itself through a traffic jam, was the game-changing vehicle that Mercedes -- and especially Zetsche -- needed.

sears1234

As a long time Lexus customer, I never crossed shopping with Mercedes car/SUV before, the reason is very simple, reliability

I'm not that rich to afford sending my car to dealership frequently, and to see the car losing too much value when I sell them.

But I changed my mind and perception after I see what happened to my co-workers Mercedes cars/SUVs.

Their cars are basically has no any issue for a very long time, and I never hear any rattle sound in their cars. (this is the main reason I dump Lexus)

I decide to touch the water, and bought a 2012 Mercedes E class, this car feels so solid, and the suspension feels more comfort than my Lexus GX,
After owning it for three years, there is zero issue, just like Lexus, and there is no any rattle inside cabin.

I pull the trigger to buy another Mercedes in 2015, and so far I'm very happy my decision. I probably will stick with Mercedes brand for a long time.

JDR76

I like what MB is doing with new engines and technologies, and am impressed with most of their new interiors, but I find that their exterior styling direction just doesn't suit my taste. If / when that changes, I would consider looking at one.