Mercedes-Benz to overtake BMW as largest premium carmaker

By Edward Taylor and Ilona Wissenbach

STUTTGART, Germany (Reuters) - Mercedes-Benz is expected to reach its goal of becoming the largest premium carmaker four years early - a feat achieved, ironically, only after it stopped chasing market share and focused on making stylish high-tech cars loved by consumers.

Introducing an elegant, sporty design and establishing itself as a pioneer in new technologies like autonomous driving has helped revive the Mercedes brand which analysts say will help keep the Stuttgart-based carmaker ahead of the pack.

The achievement is a coup for Daimler Chief Executive Dieter Zetsche, who struggled to revive the company following a messy divorce from mass market brand Chrysler in 2007. Less than four years ago Zetsche faced restive shareholders, worried that the automaker was lagging behind rivals BMW and Volkswagen AG's Audi brand.

"We had some deficits, cost and quality problems. Design was not top-notch. And with Chrysler we were no longer a pure premium carmaker," Zetsche told Reuters in an interview held late in 2016 in his office at Daimler's headquarters in Stuttgart, Germany.

On Sunday, Daimler said it had sold 2.08 million Mercedes-Benz branded passenger cars in 2016, a lead that BMW, which has held the premium sales crown since 2005 and is due to release annual sales figures on Monday, is not expected to beat.

Including sales of the Smart brand, Daimler sold 2.23 million passenger cars last year, the company said.

Zetsche has presided over a renaissance in the design and technology of Mercedes vehicles, refocused the company on technological superiority instead of short-term sales goals, and adapted the entrepreneurial mindset of Silicon Valley to the traditionally risk averse culture of Stuttgart.

Daimler is also preparing for a new era when the auto industry's business model moves beyond manufacturing and selling cars, to lure customers interested in pay-per-minute transport solutions provided by autonomous cars.

Zetsche set the goal of making Mercedes the best-selling luxury carmaker by 2020 at the company's 125th anniversary in 2011, a year when even Audi sales overtook those of Mercedes, pushing it into third place.

"Since then we worked hard and today we are leading or among the leaders when it comes to innovation, quality, design and security," Zetsche said.

Daimler traditionalists were shocked by the volume target, fearing that selling too many vehicles may dilute the exclusivity of their cars and reduce the appeal of the Mercedes brand in the long run.

But consumer electronics companies like Apple had already proven that the pull of their brand did not suffer with increased volume sales so long as they offered the best customer experience.

Audi was gaining traction with customers thanks to cool designs, so Zetsche appointed a young designer, Gorden Wagener to head up Mercedes design. He introduced an elegant and sporty style to spruce up Stuttgart's Teutonic limousines. Mercedes cars were also equipped with state-of-the-art digital display technology, luring smartphone savvy customers.

It was a change for Mercedes where engineers always believed they were producing the best cars in the world, but measured quality mainly using technical or engineering criteria, a strategy which often led to powerful cars with expensive and complex technical innovations.

Today, Mercedes-Benz follows its motto "the best or nothing" by thinking about whether customers would notice or benefit from a new technological innovation, and by benchmarking the brand against competitors, Zetsche said.

The company's renaissance began in earnest in May 2013 with the launch of a new flagship S-class. To burnish its credentials as a technology leader, Mercedes developed a prototype version which drove around 100 kilometres (62 miles) autonomously the same year.

Rather than designing a limousine which appealed mainly to rear seat passengers, the new S-Class featured large digital display screens on the dashboard, a deliberate attempt to appeal to a younger, driver-focused audience.

The same youthful design approach was used for the new C-Class and E-class designs, which are now the company's volume sellers.

Mercedes also revived the Maybach brand, a marque targeting the ultra-luxury sector which the company had stopped making after the prior bespoke design failed to gain traction, leading the car to sell only 200 times in its final year of production.

Since Maybach's latest revival in February 2015, Daimler has sold 15,000 cars.

"The rewards we are reaping today are the logical consequence of careful preparation," Zetsche said.

(Editing by Georgina Prodhan and Alexandra Hudson)