The Mercedes M154 was built in response to the new formula for 1938 which specified a maximum capacity of 3,0000 cc for super-charged engines and 4,500 cc for normally aspired cars with a sliding minimum weight scale. The engine for the new car was a 60° V-12 with 48 valves, twin Roots superchargers and no less than nine oil pumps!. The engine used a special fuel mixture which contained methyl alcohol, nitrobenzene, acetone, and sulfuric either. The car consumed about a liter of fuel for every kilometer (2.8 mpg) traveled. The W154 carried more than 400 liters (88 gal) of fuel in two tanks, one in the tail and the other between the driver's seat and the engine. Some of the fuel was actually used to cool the pistons. The stroke was shortened to allow for maximum piston area while boost was increased to 2.2 atmospheres.

The new chassis was a couple of inches shorter than the W125 but the offset of the engine and transmission at an angle to the car's longitudinal axis brought the propeller shaft alongside the driver. This resulted in lowering of the driver seat which when coupled with the lower body shape gave the new car a pronounced low-slung appearance. The Mercedes would win six out of the eight major races in 1938 with Auto Union taking the remaining two. Rudolf Caracciola was crowned European Champion for the third and last time.