Mercedes posted a 127% jump in operating profit, to $1.2 billion. Sales are up 9.3% this year, and analysts expect the turnaround to stick. "The downward spiral," Zetsche says, "has changed direction."
Mercedes' improved fortunes couldn't have come soon enough. The prestigious automaker is finally emerging from the most painful stretch in its 127-year history: a three-year slump in which its once-hallowed reputation for quality and engineering took a beating even as rival BMW surpassed it in global sales. Mercedes' fall in recent years was so precipitous it helped spur the early departure of former CEO Jürgen Schrempp.

The troubles became apparent in 2003 when the world's No. 1 luxury brand landed near the bottom of J.D. Power's annual quality survey. Then, in 2004 and 2005, electronics snafus led to widespread recalls, further denting Mercedes' reputation and finances. And as Mercedes dragged its heels modernizing its manufacturing techniques, competitors made huge strides in improving the way they build cars. As a result, even today, "Mercedes is getting squeezed on all sides by very high-quality cars produced at half the price," says Jay Baron, head of manufacturing at the Center for Automotive Research in Ann Arbor, Mich.