AMG was founded as a racing engine forge in 1967 under the name AMG Motorenbau und Entwicklungsgesellschaft mbH (AMG Engine Production and Development, Ltd.), by former Mercedes engineers Hans Werner Aufrecht and Erhard Melcher in Burgstall an der Murr, near Stuttgart. The letters "AMG" stand for Aufrecht, Melcher and Gro├časpach, Aufrecht's birthplace.

In 1976 most of Mercedes moved to Affalterbach, with the racing engine development remaining at the old location in Burgstall. At this time Erhard Melcher ceased to be a partner, but continued to be an employee at the Burgstall location.  In 1990, with Mercedes having become a high-profile purveyor of modified Mercedes cars, Daimler-Benz AG and AMG signed a contract of cooperation, allowing Mercedes to leverage Daimler-Benz's extensive dealer network and leading to commonly developed vehicles. On 1 January 1999 DaimlerChrysler, as it was called between 1998 and 2007, acquired 51 percent of AMG shares, and Mercedes was renamed to Mercedes-AMG GmbH. Racing engine development was divested and continues to exist in Burgstall under the name HWA (Aufrecht's initials). On 1 January 2005 Aufrecht sold his remaining shares to DaimlerChrysler, and since then it has been a wholly owned subsidiary.
Five Spoke Road Wheel 8JX16 Version 1 AMG started off by designing and testing racing engines. It expanded its business into building custom road cars based upon standard Mercedes cars. Mercedes initially produced a range of unofficial upgrade and accessories packages mainly for the Mercedes-Benz R/C107,[3] Mercedes-Benz W116, Mercedes-Benz W123, Mercedes-Benz W124, Mercedes-Benz W126 Mercedes-Benz R129 and Mercedes-Benz W201 models. During the early 80's and up until 1985,Mercedes offered a variety of engine performance packages, alloy wheels and styling products.

Typical AMG performance enhancements, which could all be custom ordered by the buyer, included increased engine displacements (5.2 liter, 5.4 liter), performance top ends which included port and polished heads/intake, lightened valvetrain and more aggressive cams. The DOHC 32V engine had also just been developed and was the pinnacle of Mercedes performance. Even a very rare Getrag 5-speed manual transmission could be ordered from AMG which Mercedes had not offered a manual transmission V8 since the early 70's.
The performance wheels offered during the same period were 15" or 16" ATS Mercedes Five Spoke Road Wheels, commonly referred to as Pentas. Penta was actually a UK based company that supplemented the high demand for this wheel at the time with only a very slight styling difference. The AMG wheels were often coupled with an AMG performance suspension package which included uprated/lowered springs and revalved shock absorbers.

Another popular cosmetic upgrade was the Mercedes body kits. These ranged from subtle front spoilers, to an aggressive Wide Body kits for the W126 coupes. Other options included Recaro seats, smaller diameter steering wheels, instrument clusters, chrome delete option (all brightworks color coded or painted satin black), refrigerators, shift knobs, hi-fi stereo systems, custom upholstery and enhanced interior wood packages

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