By Jorn Madslien BBC News Online business reporter at the Paris Motor Show

Mercedes' head Jurgen Hubbert says world markets are "difficult"

The world premiere of the Mercedes Sports Tourer models is the latest step in a lengthy process that has transformed the German car maker from a producer of selective luxury models, to one which competes in all market segments.

The new Grand and Compact Sports Tourers, which will go on sale during spring 2005, will plug yet more gaps in the Mercedes model line-up as they bring the car maker's offering to 18 car lines, up from just five in 1989.

The larger of the two will be known as the R-Class. This is essentially a people carrier with sports utility vehicle (SUV) traits.

Its large glass roof and car-like appearance makes it markedly different from the Mercedes M-Class SUV with which it is to share a platform.

The smaller Sports Tourer will be dubbed the B-Class and it will share a platform with the entry level Mercedes A-Class.

Mercedes hopes it will compete with medium sized people-carriers such as the Vauxhall Zafira or Volkswagen Touran, though it will be more expensive.

Difficult markets

Mercedes' rapid introduction of a slew of new cars has been both difficult and expensive.

But increasingly innovative competitors have left Mercedes with little choice but to respond.

"The worldwide markets are actually in a difficult situation and we have to fight with an increasing competition," acknowledged the head of Mercedes Cars, Jurgen Hubbert.

The fact that we, at some point in time, sold more cars than Mercedes is of course absolutely rewarding and stimulating for every employee whether in Germany or in the UK Helmut Panke BMW chairman

Much of that competition is home grown.

In Germany, arch rival BMW is snapping at Mercedes' heels, grabbing ever more of its market share.

And, judging by BMW's new cars on display at the Paris Motor Show, the pressure is only set to grow.

Last month, Mercedes registered an 11.9% decrease in sales when compared with August 2003. The fall came on top of a 21.3% fall in sales from 2002 to 2003.

"Part of the fall can be explained by the (small entry level) A-class changeover," according to Merrill Lynch automotive analyst Stephen Reitman.

Mini moves

The new A-class is shown at the Paris show for the first time. Mercedes has already received more than 50,000 orders for the car, said Mr Hubbert.

"However, [the A-class replacement] does not fully explain why sales of the E-class (executive model), a key profit driver, slipped by 26%."

Mercedes management must fight off domestic rivals

For Mercedes, losing market share in its key home market is bad enough, but the even scarier fact is that the decay does not stop there.

During the first six months of 2004, BMW's sales, including the Mini, rose above the one million mark, overtaking Mercedes for the first time yet.

"The fact that we, at some point in time, sold more cars than Mercedes is of course absolutely rewarding and stimulating for every employee whether in Germany or in the UK," said BMW's chairman Helmut Panke.

"We all look at that and we are happy."

Troubled affiliate

The weak performance of some of Mercedes' key models has hit the DaimlerChrysler subsidiary's bottom line hard.

Mercedes Cars recently reported an 18% fall in operating profits to about 700m euros, significantly contributing to the difficulties of its German-American parent.

The group's Japanese affiliate Mitsubishi has also encountered severe difficulties after running up mountains of bad debts in the US, where it had been trying to gain market share by offering car credit to young drivers.

Earlier this year, DaimlerChrysler's board of directors rejected a recommendation by its chief executive Jurgen Schrempp to inject fresh cash into ailing Mitsubishi, in which it holds a minority stake, leaving its Japanese shareholders to pick up the pieces.

Losing money

Making matters worse are the even-more severe problems endured by its loss-making American counterpart Chrysler.

Last year, the Detroit-based company lost almost $500 on every car it sold.

That same year, DaimlerChrysler - which was created in 1998 when Daimler-Benz merged with Chrysler - reported pre-tax profits of just a little less than 600m euros.

But despite all this, there are signs that DaimlerChrysler is beginning to get it all together.

Mercedes hopes the new Sports Tourer can help it regain market share

The next couple of years should bring rewards for DaimlerChrysler shareholders as Mercedes Cars' investment in new models bring in the business.

Chrysler is also set for a rebound as it pushes ahead with efforts to improve its image in Europe.

Its 300C Touring estate car, which was launched in Paris, is part of that effort, and returns are set to rise as the car helps the American arm of the group build on success stories, such as those of its Jeeps and its Voyager people-carriers in the European markets.