When Jürgen Hubbert, head of Mercedes-Benz, offered a sneak preview of the new cars coming from the luxury arm of DaimlerChrysler, he had more on his mind than the aggressive looks of the SLK cabriolet or the interior of the C-Class.
The recent demonstration took place just a fortnight after BMW, its arch-rival, surpassed the monthly sales of the Mercedes group for the first time in six years. Munich-based BMW had already stolen a march on Mercedes, turning in higher profit margins for the past four years.
Hubbert wants to turn this around. The models shown to investors in Stuttgart - which included the replacement A-Class and a sport utility/estate crossover - should lead to a big sales increase in 2005, he said. By 2006 Mercedes should have caught up with BMW's 7-8 per cent profit margins, assuming the dollar recovers against the euro.
Mercedes wants to increase its operating profit margin from an estimated 6.5 per cent this year to 7-8 per cent in three years: equivalent to about €800m a year.
But BMW is not standing still. It is in the process of relaunching its entire range and filling niches it had ignored, with new vehicles such as the 1-Series small car, 6-Series coupé and X3 small off-roader.
Mercedes' name for quality, meanwhile, is under threat from a sharp increase in customer complaints. Many of its engineers have been exiled to Michigan to help Chrysler, the lossmaking US division.
"The margin gap is fairly extreme," said Xavier Gunner, auto analyst at Goldman Sachs. "You can see that Mercedes had its eye off the ball by looking at some of the quality issues."
It's hard to measure the impact of poor quality on profits. But incidents such as Jeremy Clarkson, presenter of the BBC's Top Gear show, describing his Mercedes as "crap" cannot inspire sales. In the influential JD Power study of three-year US reliability, Mercedes came 27th out of 37, behind brands such as Oldsmobile.
The Stuttgart demonstration overcame some of the negative sentiment. Analysts at Deutsche Bank, Daimler's biggest shareholder, said the new cars showed that management was "very serious about becoming the industry benchmark in quality again".
Mercedes has been lagging behind BMW for two main reasons. Its push downmarket was a financial disaster; and at the opposite end, the M-Class sports utility vehicle missed sales and profits targets, while BMW's X5 proved a hit.
The move into the mass market with the creation of the A-Class small car and the Smart brand got off to a bad start when the cars had to be re-engineered to stop them toppling over when they cornered sharply. This pushed up the already high cost of entering a segment - led by the Volkswagen Golf - in which profit margins are much tighter than the luxury business.
Smart remains lossmaking and most analysts believe the A-Class is only just profitable, diluting the overall Mercedes profit margin. "The A-Class has been a disaster," said Steve Cheetham, auto analyst at Sanford C Bernstein.
BMW's Mini brand has already proven far more successful than Smart, and the company will launch its first BMW-branded small car, the 1-Series, next year; Hubbert hopes his rival's entry into less profitable small cars will dilute its profitability.
But, unlike Mercedes, BMW has chosen to share much of the parts - and engineering costs - with its big brother, the 3-Series, giving it immediate economies of scale.
The new A-Class, due towards the end of next year, should overcome the problems of the first generation, lowering costs and providing more variants from the same engineering. Smart has more models coming out, which could dilute margins even further by increasing sales, but it is sharing engineering with Mitsubishi, Daimler's Japanese affiliate, in order to reduce costs.
Even if all this works for Mercedes, it's unlikely to catch up with BMW quickly. BMW is still spending too much, but since ditching the lossmaking Rover Group it has been focused on the luxury business. Mercedes still has the distraction of nursing Chrysler out of intensive care.