Monday, February 09, 2004

Mercedes, Quality Dropping, Loses Market Share to BMW, Lexus

By Jeremy van Loon
Feb. 9 (Bloomberg) -- Dominik Wendel got fed up with his
Mercedes SLK 350 sports car. First, the convertible roof leaked.
Then it wouldn't open properly, sending him back to the garage at
least five times. The car also whistled on the autobahn.
``I was not very satisfied with the quality,'' said Wendel,
40, a lawyer with the Frankfurt-based firm Noerr Stiefenhofer
Lutz. Last year he bought a Lexus SC 430 from Toyota Motor Corp.
Mercedes has plunged in customer satisfaction surveys in
Germany and the U.S., partly because of technical flaws. The
world's largest luxury carmaker has lost sales to Bayerische
Motoren Werke AG and Toyota, and profit is falling. Tomorrow,
Mercedes's parent, DaimlerChrysler AG, probably will say fourth-
quarter net income more than halved to 634 million euros ($821
million), according to 14 analysts surveyed by Bloomberg.
Eckhard Cordes, who took over in October as chief executive
officer of Stuttgart, Germany-based Mercedes Car Group, has
pledged to reverse the slide. A 29-year DaimlerChrysler veteran,
Cordes, 54, says he plans to cut costs to counter the impact of
the U.S. dollar's 16 percent decline against the euro in the past
two years. Mercedes already negotiated 500 million euros in
savings with German workers in 2004. Cordes also says he'll make
sure cars produced now meet the company's quality standards.
``Each customer lost is very difficult to win back,'' says
Michael Schneider, a fund manager at Frankfurt-based Deka
Investment GmbH, which oversees about $144 billion in assets and
owns DaimlerChrysler shares. ``It will take time to improve their
image.''

Electronic Failures

DaimlerChrysler shares fell 4.7 percent last year, compared
with a 15 percent stock gain by Toyota, which is based in central
Japan's Aichi prefecture. They closed at 36.16 euros yesterday.
Mercedes-Benz, which makes the S-Class luxury sedan and the A-
Class compact hatchback, ranked 29th out of 37 brands in a June
reliability study of 3-year-old cars by Westlake Village,
California-based J.D. Power & Associates. It logged 327 defects
per 100 vehicles, worse than the U.S. industry average. Four years
earlier, Mercedes scored seventh out of 38 brands, with 308
defects per 100 vehicles.
At home, Mercedes-Benz had the most electronic failures of
all brands sold in Germany, Michelstadt, Germany-based automotive
consulting firm 3hm Automotive said in July. It was also last
among 33 brands in a March study gauging customer satisfaction by
the ADAC German Automobile Club. Car owners were most satisfied
with Toyota. Munich-based BMW ranked ninth.
Quality deteriorated at Mercedes, known for its star symbol,
as DaimlerChrysler focused on reorganizing Chrysler Group in the
U.S. and expanding in Asia with its unprofitable affiliate,
Mitsubishi Motors Corp., says Michael Raab, an analyst at Sal
Oppenheim in Frankfurt.

`Accountable'

Cordes, a bespectacled German who reports to DaimlerChrysler
CEO Juergen Schrempp, 60, has made improving Mercedes's quality
his priority.
``Only satisfied customers can keep alive the future of a
brand,'' Cordes told journalists in January at the North American
International Auto Show in Detroit. ``I will hold myself
accountable for this.''
Defects have been found in parts ranging from batteries to
emergency lights, which flashed when nothing was wrong, says
Johannes Reifenrath, a Mercedes spokesman. Sometimes customers
didn't understand how convertible roofs and other electronic
devices worked, making them suspect a malfunction, he says.
Cordes said in January that Mercedes is working to make sure
new cars meet its own standards even if it costs ``some money.''
The company also aims to correct defects on older models when
they're serviced so that the resale value isn't affected.

Falling Profits

Based on the internal audits, quality is rising by 10 percent
to 20 percent annually, Thomas Weber, a DaimlerChrysler management
board member responsible for research, said in November. Cordes
wasn't available for an interview ahead of the full-year results,
said Thomas Froehlich, a spokesman.
The challenges at Mercedes aren't just technical. Cordes also
needs to reduce costs to compete and to offset the falling dollar.
Mercedes sells some of its German-built cars in the U.S., and
revenue is reduced when dollars are converted into euros.
Net income per 1,000 DaimlerChrysler employees was 2.56
million euros ($3.32 million) in the third quarter, compared with
1.6 billion yen ($15.4 million) in the same period for Toyota,
according to Bloomberg data.

Schrempp's Successor?

Mercedes Car Group's 2004 operating profit probably fell by a
third to 2.04 billion euros, according to the Bloomberg survey of
14 analysts. Earnings have been hurt by Mercedes's Smart microcar
unit, whose losses reached about 500 million euros last year,
according to Fredrik Westin, an analyst at Dusseldorf, Germany-
based WestLB.
Mercedes's German workers agreed in July to help the company
save 500 million euros annually beginning in 2006 by working
longer hours and accepting lower wage increases. To pare costs
further, Cordes will have to negotiate lower prices from
suppliers, says Adam Jonas, an analyst at Morgan Stanley in
London.
If Cordes succeeds in improving sales growth at Mercedes, he
may become the lead candidate to replace Schrempp after the CEO
retires in 2008, Jonas and Westin say. Dieter Zetsche, who runs
Chrysler, also may be a contender for the job.
``Mercedes is essential to the image of the German car
industry and is an icon for the luxury-car industry,'' Jonas says.
``If Cordes wants to take on a greater leadership role, he'll need
to get Mercedes' profit on an upward trajectory.''

Test-Driving Trucks

Cordes got the job after another candidate, Wolfgang
Bernhard, clashed with DaimlerChrysler's board over the changes
needed at Mercedes and refused to back Schrempp's plan to bail out
Mitsubishi Motors, people familiar with the matter said. Cordes
replaced Juergen Hubbert, who retires this year from
DaimlerChrysler.
Until September 2004, Cordes, who holds a doctorate in
business from the University of Hamburg, was head of
DaimlerChrysler's truck division, where he eliminated 16,000 jobs
to stop losses. He even earned a driver's license for commercial
vehicles in order to test-drive the trucks himself, according to
Marc Binder, a DaimlerChrysler spokesman.
The challenge at Mercedes may be more daunting. The truck
division, based in DaimlerChrysler's Stuttgart headquarters, was
helped by a global surge in demand. No such boom is expected in
luxury cars and the competition is tougher, WestLB's Westin says.

BMW's X3 SUV

Mercedes, founded in a 1924 alliance between Gottlieb Daimler
and Karl Benz, chose the star as its symbol from the beginning.
The durability of the cars made Mercedes the world's most valuable
auto brand from 1999 to 2003, according to New York-based
Interbrand Corp., a brand consulting firm, and BusinessWeek
magazine. Brand value is the net present value of the earnings
that a brand is expected to generate and secure in the future.
Toyota, the world's biggest carmaker by market value, last
year overtook Mercedes in that ranking.
Last week, Toyota said profit in the quarter ended in
December rose 3.5 percent as demand gained for models such as the
Corolla compact car and as costs fell. Toyota President Fujio Cho,
who says he aims to surpass General Motors Corp. as the largest
carmaker by unit sales, raised his forecast for full-year vehicle
sales.
Meanwhile, BMW is closing the gap with Mercedes for the title
of the biggest maker of luxury cars. Sales of the BMW brand rose
10 percent to 1.02 million vehicles, boosted by new models
including the all-new X3 sport utility vehicle and the 1-Series
compact car. Mercedes-Benz brand sales fell 3.1 percent to 1.06
million units.
For the first time ever, BMW outsold Mercedes when including
the two carmakers' other brands.

New M-Class

BMW sold 1.21 million units, including its Mini and Rolls-
Royce vehicles. Sales at Mercedes, with its Smart microcar and
Maybach brands, fell 0.8 percent to 1.2 million units last year.
Mercedes sales in the U.S. rose 1.3 percent, slower than the
market's advance of 1.4 percent and BMW's 8 percent growth.
Even Mercedes's Chrysler unit, which DaimlerChrysler bought
in 1998, has gained momentum. The Auburn Hills, Michigan-based
division is expected to report a 2004 operating profit of 1.43
billion euros, following a loss a year earlier.
That's changing the balance within DaimlerChrysler, which
also owns 32.9 percent of European Aeronautic, Defense & Space
Co., the parent of planemaker Airbus SAS. Mercedes probably
accounted for a third of DaimlerChrysler's operating profit last
year, down from more than half in 2003.

New Models

In an effort to win back customers, Mercedes this year will
introduce a new S-Class sedan, the company's flagship model; a new
M-Class sport-utility vehicle and the all-new R-Class, a cross
between a station wagon and an SUV.
Another new Mercedes model, the CLS 350, is aimed at BMW's
630i. Both are six-cylinder coupes that went on sale in 2004. The
Mercedes model has a 3.5-liter engine that can accelerate from 0
to 100 kilometers (62 miles) per hour in 6.6 seconds. The BMW's 3-
liter engine is slower at 6.9 seconds.
Some long-time Mercedes customers still have confidence in
the brand. Gregorios Sachinidis, a taxi driver in the Greek city
of Thessaloniki, and his 1976 Mercedes-Benz 240D hold the record
for the most miles logged by a Mercedes passenger model, with 2.8
million miles. He donated his car to the company's museum in
Stuttgart in return for a new C200 model.
``Mercedes cars are expensive to buy, but they last a long
time,'' Sachinidis says. ``I'm very satisfied with my new model
and expect it to last longer than my previous car, of course.''

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