When the AIACR shifted Grand Prix regulations from a weight formula to an engine capacity formula for 1938, Mercedes-Benz based its new car on the chassis of the outgoing W125 rather than designing from scratch. The frame used oval tubes of nickel-chrome molybdenum for stiffness, and the suspension was near-identical to the W125, retaining a De Dion tube at the rear with hydraulic dampers adjustable from the cockpit. The bodywork was aluminium left unpainted in the tradition of the Silver Arrows.
The new M154 engine was a 2,961 cc supercharged V12 producing between 425 and 474 horsepower, with each unit reportedly costing 89,700 reichsmarks in 1938. To compensate for the smaller displacement relative to the W125, a five-speed manual gearbox replaced the earlier car's four-speed unit. The engine was mounted slightly off-centre to achieve a low profile, and to save weight no onboard starter motor was fitted.
For 1939 the car received a new lower front bodywork section and a revised engine designated the M163, producing 476 bhp at 7,800 rpm in two-stage supercharged form. Because of the engine change, the 1939 specification is often incorrectly referred to as a separate Mercedes-Benz W163 model.
The W154 debuted at the non-championship Pau Grand Prix in April 1938. At the French Grand Prix at Reims, the opening round of the European Championship, Manfred von Brauchitsch won after Hermann Lang suffered pit-stop difficulties and Caracciola's engine began misfiring. At the German Grand Prix, a dramatic race saw Richard Seaman inherit the lead when von Brauchitsch's car caught fire during a pit stop after a mechanic spilled fuel; Seaman took victory, his only Grand Prix win.
At the Italian events, Mercedes dominated the non-championship Tripoli Grand Prix, finishing first, second, and third with Lang, von Brauchitsch, and Caracciola. At the Coppa Acerbo at Pescara, Tazio Nuvolari's Auto Union led before retiring with a broken differential, leaving Caracciola to win. Caracciola's consistent points accumulation secured the 1938 European Championship title.
With the revised bodywork and M163 engine, the W154 continued its dominance into 1939, again winning three of four European Championship rounds. The car's final championship appearances underlined Mercedes-Benz's supremacy in pre-war Grand Prix racing.
Three W154 chassis that survived the war were shipped to South America for two Formula Libre races in the 1951 Temporada Argentina series, the Buenos Aires Grand Prix I and II. Herrmann Lang, newcomer Karl Kling, and local favorite Juan Manuel Fangio drove the cars, but the ageing pre-war machinery could only manage second-place finishes behind the modern supercharged Ferrari 166 FL of José Froilán González. Mercedes discontinued the W154 programme after these outings.
One chassis, the car with which Lang had won the 1938 Coppa Ciano, was discovered in Czechoslovakia after the war and sold to American team owner Don Lee. The car ran at the Indianapolis 500 several times between 1947 and 1949 with various drivers, though engine problems and a subsequent engine swap prevented success. A further appearance in 1957 under new owner Edward Shreve with a Jaguar engine fitted also failed to qualify.
The W154 represents the high-water mark of the pre-war Mercedes-Benz Grand Prix programme. Together with the rival Auto Union Type D, it dominated the 1938 and 1939 seasons in a manner that left other manufacturers unable to compete. The car's technical innovations — including the five-speed gearbox, cockpit-adjustable dampers, and supercharged V12 — established principles that would influence the company's return to Grand Prix racing with the W196 in 1954. Richard Seaman's victory at the 1938 German Grand Prix remains the most celebrated individual result achieved with the car.