Dieter Zetsche, 65, will be replaced by Ola Kaellenius, a 49-year-old Swede, as chief executive in a succession plan announced on Wednesday.
The moves come as Daimler and the German car industry grapple with the fallout from the diesel emissions cheating scandal.
It is also striving to adapt to the new era of electric and self-driving cars.
Mr Kaellenius, who often wears jeans and trainers and attends tech conferences, will be the first Daimler boss without a mechanical engineering background.
After studying finance and accounting at a Swiss university and international management at the Stockholm School of Economics, Mr Kaellenius joined Daimler in 1993.
He has introduced Silicon Valley management techniques at the carmaker, breaking down hierarchies and encouraging a more experimental approach to developing new products.
The Swede, who oversees Daimler's research and development division, has also worked in the company's British and American operations as well as the Stuttgart headquarters.
Daimler chairman Manfred Boschoff said Mr Kaellenius was a "recognised, internationally experienced and successful Daimler executive".
Mr Zetsche will step down as chief executive - a role he has held since 2006 - following the annual meeting in December 2019.
He will become chairman from 2021 after a mandatory two-year break, if his appointment is approved by shareholders.
Under Mr Zetsche's leadership Mercedes has launched a series of new models that helped the company overtake rivals BMW and Audi, a VW brand, to become the world's biggest luxury carmaker by sales in 2016.
Ingo Speich, a fund manager at Union Investment, said: "It is good that Daimler is providing clarity on the succession issue early on."
Shares in Daimler were down 1% at €54.19 in Frankfurt on Wednesday following the announcement, valuing the company at €60bn. However, the stock was just above €70 a year ago.
Last week it emerged that Daimler and rival German carmakers BMW and Volkswagen will face an EU inquiry for allegedly conspiring to restrict diesel emissions treatment systems.
BBC
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