Outside the Airbus factory in Hamburg, Germany, the rain began to fall in sheets, hammering the roof so hard that the noise was drowning out a live performance by Grammy-winning singer Alicia Keys. Inside, Daimler officials were growing more nervous by the minute. 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 accompanied by music, lights and artificial fog. Stubborn Airbus personnel wanted to nix this for safety reasons even though hundreds of guests were waiting for the car's entrance. The emcee was told to stall as Daimler staff could only hope that the bad weather wouldn't turn the evening into a fiasco for CEO Dieter Zetsche.
"There was only one 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 three 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 six 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 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.
Yet just when it looked as though even the heavens were against Daimler, the storm clouds over the Airbus factory passed just as they did for Zetsche. 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." Since then sales and profits at the group's car business, which includes Smart, have steadily been on the rise.
Record-breaking year
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 sales of more than 200,000 vehicles, setting a new all-time high for the month while also breaking its own records for sales in a quarter and for the first nine months of a year. Thanks to strong demand for new models such as the E class, third-quarter operating earnings at Daimler's car business surged 26 percent to a record 2.7 billion euros.
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 billion euros 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," explained 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 UK, Europe's second-largest market after Germany, were finally able to offer a midsize SUV 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 upgraded 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," Church said. "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 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 ANE. "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, will it still reach Zetsche's original target of being the biggest premium carmaker in 2020? The brand is at a cyclical peak having launched the S class, C class and most recently the E-class sedan earlier 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 midsize 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 in their segment 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 150,000-euro-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."
Analysts at Evercore ISI meanwhile believe the good news has been fully priced into the company’s stock. "Daimler's turnaround of the Mercedes brand has been exceptional, but we feel that this is well understood and leaves little room for positive surprises or indeed unrecognized earnings momentum," the firm said in a note to investors last month.
Daimler is also vulnerable due to its high free float. Unlike Volkswagen Group or BMW Group, it has no anchor shareholder as its biggest investor, the Gulf state of Kuwait, controls only about 7 percent. This opens the group up to the possibility of external shareholder pressure or perhaps even a hostile bid. Moreover, Daimler still struggles with a sizeable staff. The Mercedes-Benz Cars division, which includes Smart, had 137,000 workers at the end of last year. By comparison, 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 second-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 5.3 billion euros 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 11 billion euros 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 are already putting some of the proposals into place. Here Zetsche can rely on the full support of his once-combative German trade unions, however.
"We believe it will help minimize the hierarchical management culture. 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 workforce," a Daimler labor official said.
Daimler's overarching success has helped reduce tensions with its German unions, which at one point made Zetsche a bargaining chip in a boardroom power struggle. The workforce is now led by Michael Brecht who comes from the Daimler Trucks division. Gone are the days when his predecessor, Erich Klemm, led his fellow employees out on the streets to protest the transfer of C-class production in Sindelfingen, Germany, to the automaker's U.S. plant in Alabama. "When the figures are good, creating a constructive atmosphere is no art form," the former non-executive director said.
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, by comparison, 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 four times as many as BMW's car-sharing joint venture, DriveNow.
The improvement at Mercedes has trickled down into all aspects of the business. The group said that offloading many of its German wholly owned Mercedes retail showrooms cost 400 million euros instead of the 500 million euros previously estimated as the value of those showrooms increased because of Daimler's revival. All of this success can be traced back to that stormy summer evening in 2013. The S class, the first car with the ability to steer and accelerate itself through a traffic jam, was the game-changing vehicle that Mercedes – and especially Zetsche -- needed.
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