The governing body AIACR replaced the Grand Prix formula for 1938, moving from a weight limit to an engine capacity limit: 3,000 cc supercharged or 4,500 cc unsupercharged. Mercedes-Benz tested both options but committed to a supercharged 3,000 cc unit. Rather than design an entirely new car, engineers based the W154 largely on the W125 chassis, adapting it to carry the smaller M154 engine. For 1939 the car received revised bodywork with a lower front section, and the M154 engine was replaced by a new M163 unit; though the underlying chassis code remained W154, the 1939 car is sometimes erroneously called the W163 as a result.
The W154's spaceframe was constructed from oval nickel-chrome molybdenum tubes, closely following the W125 design, with a De Dion rear tube to keep the rear wheels parallel and hydraulic rear dampers adjustable from inside the cockpit.
The M154 engine was a 2,961 cc supercharged V12 with a bore and stroke of 67 mm × 70 mm, producing between 425 and 474 hp. Each engine reputedly cost 89,700 Reichsmarks in 1938. A 2-stage supercharged version tested in 1939 recorded 476 bhp at 7,800 rpm. To compensate for the significant reduction in displacement compared to the W125, Mercedes added a fifth gear to the transmission. The engine was mounted offset within the chassis so the transmission tunnel could run beside the driver's seat rather than beneath it. The car carried no starter motor; an external device was required to fire the engine.
The W154 debuted at the non-championship Pau Grand Prix in early April 1938. René Dreyfus in a Delahaye led and ultimately won as Caracciola suffered with an old leg injury and handed his car to Lang, whose car then developed a spark plug problem. The result was a harbinger of the season's difficulties at Pau but did not reflect the car's overall pace.
At the Tripoli Grand Prix, another non-championship race, the three Mercedes entries qualified first through third. Caracciola won by more than eight minutes over fourth-placed Raymond Sommer despite suffering engine problems.
In the European Championship proper, Mercedes were nearly unstoppable. Von Brauchitsch won the French Grand Prix at Reims after Lang experienced pit-stop difficulties. At the German Grand Prix, Richard Seaman inherited the lead when von Brauchitsch's car caught fire during a pit stop — a mechanic's spilled fuel ignited on the exhaust — and Seaman went on to take his only Grand Prix victory. Von Brauchitsch crashed on his out-lap from the pits. Caracciola then won the Swiss Grand Prix and the Italian Grand Prix to secure the European Championship.
Two non-championship Italian races produced contrasting fortunes. At the Coppa Ciano, von Brauchitsch crossed the line first but was disqualified for receiving outside assistance, promoting Lang to victory. At the Coppa Acerbo, Caracciola won after Nuvolari's Auto Union retired with a broken differential.
With revised bodywork and the uprated M163 engine, the W154 again won three of the four European Championship rounds in 1939.
Three W154s survived the war and were shipped to Argentina in early 1951 for two Formula Libre races in the Temporada series — the Buenos Aires Grand Prix (I) and (II). Hermann Lang, Karl Kling, and Juan Manuel Fangio drove, but the cars were now outdated; José Froilán González in a supercharged Ferrari 166 FL beat them, and Mercedes discontinued the W154 programme.
One W154, formerly a Don Lee car raced at Indianapolis after the war, changed hands several times. Duke Nalon qualified it for the 1947 Indianapolis 500 with the original Mercedes V12, but a piston failure retired the car after 119 laps. The car made its final Indianapolis appearance in 1957 under Edward Shreve's ownership, fitted with a Jaguar straight-six; it failed to qualify.
The W154's domination of late-1930s Grand Prix racing — winning the European Championship in 1938 and competing successfully into 1939 — confirmed Mercedes-Benz as the era's pre-eminent constructor. After the war, rather than revive the W154 or its planned W195 successor for the new Formula One regulations, Mercedes chose to wait and design the W196 for the 3,000 cc rules introduced in 1954.