A well-equipped sport/utility vehicle with a high-tech 4-wheel-drive system, side air bags and lots of other goodies in the mid-$30,000 range -- from Mercedes?

Journalists and competitors heard that and shook their heads in disbelief as Mercedes-Benz AG executives unveiled the All Activity Vehicle (AAV) concept during January at the North American International Auto Show in Detroit.

If introduced today at that price, the AAV would be competitive with comparably equipped luxury versions of Ford Explorer and Jeep Grand Cherokee -- and it would embarrass the new $50,000 Lexus sport-ute. If it's actually offered with such a sticker in the fall of 1997 when it debuts, the AAV may redefine Mercedes in the marketplace.

And that's exactly what the company is trying to do: become a cost-competitive global manufacturer. Mercedes is completing a new U.S. plant (its first major facility outside Germany), created a new product-development and manufacturing strategy, and even started a new company to make the vehicle. Juergen Hubbert, managing director in charge of Mercedes' passenger car unit, says he expects the effort to chop costs by 30% compared to development and manufacture in Germany.

Mercedes officials insist they don't intend to offer a stripper in that price range, either. It will have a sophisticated electronically controlled all-wheel-drive system, not rear-wheel-drive only, and it will be based on an all-new platform, not an old truck frame they've hauled off the shelf from somewhere.

Furthermore, it will feature a full retinue of safety features, including standard antilock brakes and side air bags. "The All-Activity Vehicle is designed to become the new value standard among sport/utility vehicles," boasts the press kit.

Could Mercedes really put pricing pressure on anybody besides the currency-impaired Japanese? "Just wait and see," says a confident Andreas Renschler, the tall young maverick responsible for making the vehicle -- and the price -- a reality.

Mr. Renschler headed up the feasibility study for the vehicle in 1992 and now is president and CEO of Mercedes-Benz U.S. International Inc. (MBUSI), an independent company formed in May 1993 to design, develop, manufacture and market the AAV throughout the world.

Based in Vance (Tuscaloosa County), Alabama, the company will build the vehicle at a new $300-million plant. Some 65,000 vehicles will be produced annually, half for the U.S., the rest exported. V-6 and V-8-equipped models with 5-speed automatic transmissions will be built for the U.S. market, while versions with 4-cyl. gasoline engines, 5-cyl. diesel engines and 5-speed manuals will be built for Europe and other markets outside North America.

Construction of the plant began in 1994 and now is more than 75% complete. About 400 "team members" currently are working on the project. Slightly more than half are based in Alabama, with the remainder working in development activities at Mercedes headquarters in Stuttgart. Vehicle production starts sometime in 1997. MBUSI says 1,500 people should be working at the plant by the end of the decade.

Tall, thin, and more comfortable in casual clothes than a suit, Mr. Renschler is the antithesis of the stiff, German executive stereotype. Only 37 years old, and with Mercedes only six years, he's standing a lot of notions about traditional Mercedes engineering on their heads.

The engine and transmission, for instance, will be produced by Mercedes in German , but 65% of the rest of the vehicle's components will be made by 60 North American companies that will supply large modules such as built-up instrument panels, seats and other components. (Mercedes used about 1,000 key suppliers for its recently introduced E-Class sedans). Eight suppliers, so far, plan to locate facilities in Alabama.

Like Japanese automakers and BMW AG, Mr. Renschler rejects the notion that a vehicle's quality or desirability is dependent on where it is built and engineered. He is adamant about the new company's "melting pot" philosophy of incorporating the best technologies and experience from American, German, Japanese and other cultures.

MBUSI's head of production, for instance, comes from Toyota. The purchasing chief hails from Nissan Motor Mfg. Corp. in Smyrna, TN, and worked at General Motors Corp. before that.

American engineers currently are doing development work in Germany, and German engineers are working in the U.S., a spokeswoman says.

Key to the AAV's product-development strategy is the concept of "function groups," Mr. Renschler says. Similar to Big Three platform teams -- but smaller in size and scope -- the function groups are crossfunctional teams that include representatives from purchasing, engineering, marketing, manufacturing and other key areas, and focus on hitting specific cost, weight, quality, and scheduling targets. The AAV is broken into 15 such groups, with each representing a major component system such as drivetrain, cockpit, seats, and axle systems.

The first job of the function group is to pick a supplier, which then adds a representative to the group.

The function-group concept started at Mercedes in the late 1980s, but has evolved with every new platform -- from the revised S-class, to the C-class introduced in 1993 and now the new E-class cars. Both the C- and E-class models were introduced in the U.S. at the same price as their predecessors. (However, critics say re to do g dealer an cost-cutting wizardry.)

In all MBUSI can be termed a very risky yet extremely interesting experiment. If successful, it should p r o v i d e Mercedes an excellent blueprint for other vehicle manufacturing efforts outside Germany, incorporating local workers, suppliers and engineering talent.

However, it's not hard to find skeptics. While Mr. Renschler thinks simultaneously developing a vehicle, factory, production system, and supplier network is the fastest, most efficient and cost-effective approach to such a program, others call it a "prescription for disaster."

Certainly there are enough examples. When GM tried to implement a new Toyota-like production system at its Lordstown, OH, factory at the same time it introduced a completely new version of its Cavalier subcompact, it turned into a $1 billion mishap for the automaker. Executives later admitted they tried to take on too much at one time.

And there are rumors that cultural rifts between U.S. and German staffers at BMW's carefully conceived U.S. plant are causing problems there, too.

Mr. Renschler counters by saying all startups have problems, but reminds that some do go on to become great successes. "Look at Saturn Corp.," he says.