Mercedes on the Mend

Beset by Poor Ratings, the Once-Arrogant Luxury Carmaker Embarks on a Self-Improvement Course
| By Paul A. Eisenstein | From Tom Berenger, July/Aug 2007

Racing between appointments, Chris Marie dashed into the parking lot, dodging raindrops as she fumbled for the keys to her Mercedes-Benz C230. Tossing her briefcase onto the passenger seat, she cranked the ignition and relaxed a bit as she heard the engine fire up, but try as she might, she couldn't shift out of park. With a sinking feeling in her stomach, she picked up her cell phone, called the dealer and was transferred to the service desk.

The problem didn't take long to diagnose. "Did you have anything in the cup holder?" the mechanic asked. When Marie, a 45-year-old Detroit saleswoman, said yes, and that a little bit of her coffee had splashed out when she hit a bump, she was told to sit tight and wait for the tow truck. As it turned out, the same problem visited thousands of other C-Class owners across the United States. Mercedes had only grudgingly added cup holders to its smallest sedan line—German drivers, after all, would never drink and drive on the demanding Autobahn. What the automaker's engineers had failed to consider was that the transmission control module was directly below the cup holder and if even a just little liquid spilled onto the poorly sealed system, it would short out.

Mercedes eventually fixed the problem, but it meant spending millions on warranty repairs. Worse, the cup holder incident was just one in a mounting series of problems that began to befall the carmaker in the late 1990s and that owners were reporting to the factory, listing in quality surveys and angrily passing on to friends and neighbors. "They were suffering from quality problems," says Neal Oddes, director of product research and analysis for influential J.D. Power and Associates, "across the board." The troubles didn't stop there, but cascaded into the twenty-first century.

The complaints—whether they concerned electrical problems, poorly finished instrument panels or squeaky brakes—were enough to send the longtime industry leader plummeting from the pinnacle of such closely followed quality studies as Power's Customer Satisfaction Index. At the same time, the influential Consumer Reports magazine began removing Mercedes products from its "Recommended Buy" list. Such a demotion did more than just wound the Teutonic pride of the century-old automaker. It threatened to dash Mercedes' hard-won reputation at the very moment it was facing an unprecedented assault on its long-held supremacy in the luxury market. Traditional competitors, like BMW and Audi, were well poised to take advantage of Mercedes' quality problems, as were newer Japanese competitors Acura, Infiniti and the new king of the quality charts, Toyota's Lexus division.

After an unprecedented effort to fix its quality problems that addresses the very basics of product development, and having jettisoned its Chrysler division, Mercedes-Benz is regaining momentum. But several new models still show some nagging issues, and problems at corporate headquarters threaten to distract the attention of top managers who should maintain a single-minded focus on Mercedes.

All Circuits Are Busy
"There's no question about it. We ran into a series of...significant issues," says Ernst Lieb, the affable German executive who moved into the CEO's office at Mercedes-Benz USA headquarters, in Montvale, New Jersey, last year. "We rushed into some technical developments," often without thinking through the consequences of seemingly minor matters—like placing a cup holder over an "un-hardened" electrical circuit.

Indeed, Jürgen Hubbert, the now-retired brand boss long known as "Dr. Mercedes," once confided that as much as 80 percent of Mercedes' most serious problems have involved electronic system failures or glitches. That's not entirely surprising, says Joe Phillippi, a longtime automotive analyst who now runs AutoTrends Consulting, a research firm. Silicon-based technology has become a critical battleground in the luxury car wars. Digital safety systems, such as Electronic Stability Control, onboard navigation, audiophile sound systems and the like can account for as much as a quarter of the price tag of a high-line vehicle like the newest Mercedes S-Class.

"When you put so much software, so many functions, into a vehicle, so much of it superfluous, invariably you're going to cause yourself some problems," Phillippi contends. And as if to underscore that point, Hubbert revealed that in its push to solve some of its high-tech problems, Mercedes disabled or removed hundreds of electronic features and functions from high-end products like the S-Class. Apparently, nobody noticed. And if they did, it was only because the vehicles started to work better.

That's not to say Mercedes is backing away from technology. Far from it. The new S-Class is a high-tech wonder, boasting an array of new electronic systems, such as Distronic Plus. This new "proximity control system" uses radar sensors to maintain a safe distance from vehicles ahead. Active Cruise Control isn't all that new, but Mercedes' system can bring the car to a complete stop, then start up again once traffic gets moving. But even as the new S-Class was being launched, Mercedes was revamping its mid-range E-Class, in the process replacing its troublesome drive-by-wire brake system with time-tested hydraulics.

"A Sense of Arrogance"?
Mercedes sells its products in virtually every market on the planet, but nowhere were the problems more severe than in North America, Lieb contends. Americans (and Canadians too) tend to drive longer distances, through more extreme weather conditions, and without the tender loving care that Mercedes products can expect in places like Germany. Lieb recalls that, when he was assigned to Canada a few years back, the company experienced a rash of generator failures, which he tried to explain to the folks back at the factory. They just didn't understand that on cold winter mornings, Canadians liked to start their cars up, with heaters blasting and seat heaters on high. Parts that worked in milder European climes couldn't hold up.

It took nearly a year for the message to register at corporate headquarters, in Stuttgart, but eventually Mercedes began installing more robust generators for the Canadian market. The scenario was all too typical, insiders lament. Consider the case of the tilt steering wheel. For decades, Mercedes resisted owner demands for an adjustable wheel, something that, by the late 1980s, was an industry norm in the luxury market. "Our engineers know the best position for the steering wheel," was the response offered up at one product preview after another. When then-Mercedes U.S. boss Erich Krampe finally unveiled a model that boasted a tilt wheel, he received a standing ovation from the normally reserved automotive press.

"There was a sense of arrogance. They believed too many of their own press clippings," says analyst Phillippi. But slowly, as problems mounted in the quality studies, those clippings went from reverent to irreverent to increasingly caustic. And competitors such as Lexus began driving the negative message home to consumers. Mercedes could no longer ignore the new reality.

In Stuttgart, it wasn't going to be easy to get the message across that Mercedes was no longer the benchmark, at least not when it came to quality. And if it were indeed slipping there, it would be only a matter of time until the carmaker lost its lead elsewhere. Turning things around wouldn't be easy, says Lieb, in hindsight. "A company that has been conditioned to believe in its German engineering for 120 years" had to completely rethink the way it operated. And as he approached retirement, Dr. Mercedes knew that his response to the crisis would not only determine the future of his beloved brand, but also his own legacy. Hubbert assembled a team of trusted lieutenants and began to ask some hard questions.

Sure, the automaker could take the tried-and-true method, increasing the number of assembly line inspections, hoping to catch problems, such as noisy brakes and hard-to-open trunk lids, before cars left the factory. But that would only deal with the most obvious defects, and software glitches and undersized electrical generators would likely still slip through the tightened safety net. That meant, quite literally, going back to the drawing boards.

Starting From Scratch
Mercedes designers and engineers were already busy. The last decade brought the most substantial new-product rollout in the history of the Schwabian marque. Hubbert recalls the long debate in the early 1980s over the addition of a "Baby Benz," the car that became today's C-Class. Back then, barely a half dozen models made up Mercedes' alphanumeric lineup. Now it's an alphabet soup, ranging from A-Class to V-Class van, with sedans, coupes and "coupe-like" sedans, sports cars, supercars and convertibles, as well as SUVs, vans and crossover vehicles.

On the downside, all those new models stretched manpower resources thin, even with the increasing use of CAD/CAM (computer-aided design/computer-aided manufacturing) technology for product development. "The flood of new products caused us a lot of problems," confides a longtime Mercedes executive who asked not to be identified by name. That assessment was confirmed in studies showing that owners of the newest vehicles typically reported the most problems, confirms J.D. Power's Oddes.

At the same time, starting from scratch, as it did in many cases, allowed Mercedes to deal with issues ranging from electronics to the placement of controls and displays, "and rectify them in all-new vehicles," adds Oddes. Since hitting quality bottom in 2002 and 2003, he notes, "We're seeing them take the information consumers provide and push that upstream, right into the design of new products."

The numbers tell a promising story. In Power's Initial Quality Study, or IQS, which measures what motorists experience during the first 90 days of ownership, Mercedes-Benz models scored 132 "problems per 100" in 2003. That score (often shorthanded to PP100) meant 132 defects and glitches for every 100 cars sold, which ranked the automaker well below brands like Lexus and its parent, Toyota, and not much better than some of Detroit's mainstream marques. Just a year later, however, Mercedes' PP100 count plunged to 106, which in IQS methodology is a jaw-dropping improvement. And things have continued to get better ever since.

That's not to say things are back where they should be. Owners of the new minivan-like R-Class reported a rash of problems in the 2006 IQS. And the latest study uncovered some other issues. Power redesigned the study last year to distinguish between actual defects and design snags, such as poorly placed switches or, yes, cup holders. Mercedes continued its climb on the quality side, so much so that the gap between its numbers and top-ranked Porsche was statistically insignificant. But on the design side, Oddes notes, there's still some room to go. That said, he hinted that we should expect to see still more improvement from Mercedes, in both categories, when the 2007 IQS is released, mid-year.

Merger of Equals
"This is a merger of equals," declared both Jürgen Schrempp and Bob Eaton, as they inked the deal that would make them—briefly—cochairmen of the new DaimlerChrysler AG, back in 1998. As that deal started to unravel, it became obvious that the German and American halves were anything but equal, and it was equally clear that both suffered as the result of that ill-conceived partnering.

"They both took their eye off the ball," contends analyst Phillippi.

"They stopped listening to the voice of the consumer," echoes Oddes, though he believes that Mercedes "is listening again."

The latest act in this decade-long play has just unfolded, and it may prove as much a distraction as the original tie-up. With Chrysler sales and market share plunging, and the U.S. side of the company racking up billions of dollars in losses, impatient German managers and shareholders decided to sever their transatlantic partnership. While CEO Dieter Zetsche, a longtime advocate for Chrysler—he spent about five years running the American operation—had indicated early this year that "all options are on the table," it was announced that Daimler would no longer be tied to Chrysler. Cerberus Capital Management LP, a private equity giant, would acquire the U.S. side of the company for $7.4 billion. The new owners will take on Chrysler's hefty pension and medical cost, but the newly renamed Daimler AG will absorb Chrysler's debt, leading analyst Phillippi to describe it as "a pretty expensive exit. In effect, they're paying [Cerberus] to take Chrysler off their hands."

Zetsche insists the breakup of this unhappy union will allow both of these companies to do what they do best. In the case of Daimler's Mercedes, that means concentrating on the luxury side with no mainstream distractions, but there's little doubt that the break up itself was a disruption and it will be months before the process is completed.

Challenges and Opportunities
"We have a lot of challenges," acknowledges Lieb, the head of MBUSA, but he asserts that "the potential and opportunities for our brand are more than many might think."

Though it is no longer the sales leader in the expansive U.S. luxury market, Mercedes has shown little direct, long-term impact from its quality problems. There's little doubt its reputation took a bit of a hit, but the tarnish seems to be coming off as the quality of its new models improves. Significantly, data from the tracking firm R.L. Polk show Mercedes-Benz had the highest loyalty rate in the market for 2006.

"We feel we have built significant momentum within the last year," says Zetsche, but the mustachioed executive is quick to recognize that the market won't always be so forgiving. If anything, the luxury world is becoming more competitive and demanding.

While reluctant to match the explosive growth of the Mercedes lineup, BMW is steadily ramping up its offerings, as are Audi and Nissan's Infiniti. Even the Korean carmaker Hyundai has high-end aspirations, as it demonstrated with the Concept Genesis at the New York Auto Show in April. A production version will debut next year, targeting the niche between Mercedes' E- and S-Class—but for a price starting at barely $30,000. Then there's U.S. market leader Lexus, which has just launched its most expensive product ever. With its unusual gasoline-electric hybrid power train, the $104,000 LS600h not only nudges into top-line Mercedes territory, but provides an intriguing alternative to the gas-guzzling German V-12.

Mercedes has looked into the abyss and seen what could happen if it fails to deliver on the luxury market's high level of expectations. It appears that the company is finally back on its game.

Paul A. Eisenstein, a Cigar Aficionado contributing editor, also publishes the Internet magazine


AMG Approaches 40

The road signs rush by so fast they flicker like an old-time movie, yet as I squeeze the throttle a little closer to the floor, the CL63 just hunkers down, like a racehorse warming to a full gallop. As the needle nudges past 150—180, 200, 250—I do some mental metric conversion and realize we're pushing 150 miles an hour, just as I spot my turnoff for the Munich Airport.

Wrapping up a run down the German Autobahn is always bittersweet, especially when you're driving a car like the new Mercedes-Benz CL coupe. But it's all the more saddening to hand back the keys when the badge on the back adds those three distinct letters: AMG. They're shorthand for Hans-Werner Aufrecht and Erhard Melcher, two longtime Mercedes employees who started their own high-performance motor sport and "tuning" business in the small town of Grossaspach, back in 1967.

Aufrecht and Melcher had a passion for performance, and a knack for getting the most out of any Mercedes they set to work on—skills they initially demonstrated on the racetrack, campaigning cars like the 300SEL 6.3 (the original name for the Mercedes CL) to victory on the grueling circuit at Spa, in France.

There's an old industry adage: "Win on Sunday, sell on Monday." Whether it works these days is questionable, but AMG certainly built up quite a reputation—and strong demand for its products. In the early years, AMGs emerged sporadically, with only a few models, and always painfully low in volume. So strong was demand that the rare used E55 could command more money than a new one.

Then, in 1999, Mercedes decided to acquire AMG, which had by then moved to another small Schwabian town, Affalterbach, under the sole control of Aufrecht. In the ensuing years, the German automaker has greatly expanded AMG's offerings, with high-performance versions of virtually every model in its lineup—in the process, boosting sales 40-fold. Employment has soared to 750, with another 350 contractors supporting the operation. But at least one thing remains the same, emphasizes the operation's chief executive, Volker Mornhingweg: its founding principle of "one man, one engine."

In the case of my CL63, a single technician had taken nearly half a day to carefully assemble the motor, entirely by hand, before signing it. Is there really any reason to take this approach? Mornhingweg insists that each component is carefully selected; the pistons, for example, are balanced and matched as a set. Turn the key and you hear the difference, a deep, resonant burble that all but promises a wild ride. Step on the gas, and you feel your neck snap, your back sinking deep into the coupe's well-padded leather seats.

AMG also beefed up the suspension, bolting on significantly larger brakes and improving body aerodynamics so the CL is up to all that power. Whether on the Autobahn or the winding roads that lead to the Austrian border, the coupe skated through the most demanding curves, delivering gobs of power as we launched out the other side.

With annual sales surging from 500 to more than 20,000 in little more than eight years, Mercedes has obviously struck a resonant chord. Today, it offers an AMG version of every vehicle in its lineup except the little A- and B-Class models—which are not sold in the United States, anyway. In some cases, there are several different AMG offerings, such as the CL63 and CL65.

The latter is the créme de la créme of the Mercedes fleet, with a 6.5-liter, 12-cylinder engine making a jaw-dropping 604 horsepower. It's more than just raw horsepower, though. The 12-banger is an elegant work of kinetic art, an initially limited-edition series of 40, clad in a Terminator-style liquid-metal paint and dubbed Alubeam.

As for the CL63, it features AMG's primary power plant, a specially developed 6.3-liter, normally aspirated V-8. Its introduction, a little more than a year ago, marked a surprising transformation for the brand-within-a-brand, since AMG had traditionally relied on slightly smaller, supercharged engines.

The absence of Autobahn speed limits notwithstanding, the United States makes up half the market for AMG products. And about a quarter of global production is earmarked for Southern California, where speeds on the notorious I-405 often average in the single digits.

As big as AMG has gotten, there's still room for growth, suggests Mornhingweg. You can now order a wide range of the division's performance and appearance accessories to upgrade Mercedes models. And for those looking to log some track time, there's a new, circuit-ready AMG Black Series. There'll be more limited-edition models, like the 40 Alubeam CL65s, Mornhingweg hints. AMG recently debuted in China, a market with "a lot of money," says the clearly impressed executive, and demand is growing in Russia and other emerging markets.

But as it gets ready to celebrate its 40th birthday, can Mercedes' high-performance subsidiary adapt to other challenges that threaten to reshape the global automotive market? New rules in Europe will force automakers to sharply reduce CO2 emissions—and similar steps seem likely for the United States as well. "In the near future, we will offer new technologies so our customers can save fuel—but without sacrificing the performance side," asserts Mornhingweg.

Exactly what's under development, he isn't saying, though he hints that performance- oriented hybrids are one possibility, and then there was the one-off diesel that AMG experimented with several years ago in Europe. The C-Class model was just as fast as the gasoline alternative and proved extremely popular. If diesel demand revives in the States, an updated "oil burner" could be added.

Barring some catastrophic crisis that chokes off fuel supplies or otherwise limits demand for high-performance products, the company started by Aufrecht and Melcher, in the little town of Grossaspach, will likely remain one of the auto industry's global success stories.