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."
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.
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.