By Madeline Chambers
FRANKFURT, Nov 13 (Reuters) - Emperors, kings and popes have ridden in them for decades, the world's most glamorous movie stars drive them and Hitler adored his open-topped model, but Mercedes-Benz has work to do to keep the shine on its prestigious three-pointed star.
Quality problems, growing competition in the luxury segment and a merger that has left it subsidising other parts of the DaimlerChrysler group threaten to tarnish the image of Mercedes-Benz, maker of the world's first patented motor car.
As the company's earnings driver and most precious asset -- Mercedes accounts for 75 percent of DaimlerChrysler's value -- managers want to insulate it from headaches elsewhere, most notably at the U.S. Chrysler arm, struggling to return to long-term profits, and at Japanese partner Mitsubishi Motors.
In Mercedes' home town of Stuttgart this month's fifth anniversary of the merger of German industrial jewel Daimler-Benz with Chrysler will be low key. No media events are planned to draw attention to the deal, hailed at the time by executives as a "merger made in heaven".
"The main impact of the merger has been negative for Mercedes in as far as they have had to divert a lot of talent to Chrysler and Mitsubishi and that has stretched them," said a senior British-based auto consultant.
Dozens of German managers and engineers have been dispatched to the U.S. and Japan while cash generated by Mercedes is going to bail out loss-making operations.
Although Mercedes insists it has not lost out, company-wide belt-tightening has also sparked questions about cheap parts.
"When you hear things like Mercedes is buying leather from Bulgaria, it is an indication that they are compromising," said Ian Louden, a senior consultant at Futurebrand in London.
Such perceptions are poison for Mercedes whose cars trade on their reputation for being well-engineered, stylish and technologically advanced.
The authoritative British-based JD Power and Associates Vehicle Dependability Study, which measures long-term vehicle quality, showed Mercedes sliding to joint 26th place this year, not only below rivals BMW and Toyota's Lexus but way below average.
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"We are working like hell to resolve these points," Mercedes head Juergen Hubbert said in September, adding that the quality headaches had not affected sales so far.
Some experts blame an obsession with ever more sophisticated electronic gadgetry while others say the issue predates the merger and goes back to the German recession a decade ago.
"In the early 1990s, Mercedes started to design to cost, trying to copy Toyota, but didn't control suppliers and their quality on a weekly basis, sometimes leading to poor quality of parts," said Philipp Rosengarten, a senior analyst at Global Insight.
"Previously, Mercedes-Benz had designed a quality product and put a price on it, creating an excellent reputation."
Analysts say it is hard to measure the impact on profits, but Mercedes operating margins have slipped behind BMW's.
While accounting methods explain some of the gap, there are other telling signs. Interbrand says Mercedes is the world's 10th most valuable brand at $21.37 billion. BMW is worth only 75 percent of that but has gained about $2 billion in the last three years while Mercedes has more or less stood still.
Since ditching its loss-making British Rover arm in 2000, BMW has stolen a march on Mercedes. It has tripled its model range since the early 1990s and its stock has outperformed Daimler's.
BMW plans to sell 1.4 million cars in five years, up from 1.05 million last year while analysts expect Mercedes, which last year sold 1.2 million cars, to sell about 1.7 million.
There is no denying which firm is in the ascendant, but most experts say the brand's pedigree will save Mercedes in the long run, barring major strategic errors.
After all, Mercedes bounced back after the potentially catastrophic A-class launch, torpedoed in 1997 by the "elk test" when a Swedish journalist flipped the small car, prompting an adjustment and relaunch a few months later.
While Mercedes may be missing a trick by not immediately producing a rival to BMW's X3 compact sports utility vehicle, it is moving into niches and will build several models from its A-Class and M-Class platforms, a strategy most experts support.
"Overall, I think Mercedes is positioned well -- the growth areas are crossovers and niches which is what they are doing," said Al Bedwell of JD Power. He forecasts 10 to 15 percent growth in the luxury segment over five years.
Compared with Audi, Jaguar and even Toyota's Lexus, Mercedes still has the upper hand.
"Compare it with the pretender, Lexus, which was developed by Toyota to compete directly with Mercedes -- it has never lived up to its promise because Lexus does not have the heritage," said Futurebrand's Louden.