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Why GM Won't Win the China Luxury Wars

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The market for luxury cars in China is one of the fastest-growing -- and most lucrative -- automotive markets in the world. China's wealth explosion has led to white-hot demand for Western luxury goods of all kinds, from Rolex watches to top-shelf champagne. Luxury cars are no exception.

With its long-established position as the top-selling automaker in China, General Motors (NYSE: GM  ) might seem to be in a great position to take a lead in this immensely profitable market. My Foolish colleague Daniel Miller recently made just that argument.

But I don't think so. As I see it, GM is going to have to make a massive effort if it wants to gain significant ground in China. That effort will cost billions of dollars, and take (at least) several years to bear fruit.

And even then, it might be hopeless, because the competition is already well-established.

Sure, GM can beat Toyota and Ford, but...
Daniel (rightly I think) dismissed potential challenges to GM from the likes of Toyota and Ford (NYSE: F  ) . While Toyota's Lexus brand is a well-established and credible luxury competitor in other parts of the world, lingering anti-Japanese sentiment from last year's China-Japan territorial clash continues to hurt Toyota's China efforts across the board.

In some ways, Ford is a more serious threat. While the Blue Oval, which got a very late start in China compared to its biggest global rivals, has nothing like GM's presence in the Middle Kingdom, it does have some top-notch products going for it -- and those products are proving to play well with Chinese consumers. Already, the Ford Focus is one of China's top sellers, and the Escape SUV -- called the Kuga in China – has been climbing the charts since its introduction a few months ago.

Ford is doing well in China by positioning its well-equipped mainstream models as premium offerings. But, true luxury cars are something else. While Ford is making a big effort to resuscitate its laggard luxury brand, Lincoln, that effort could take years to gather steam. Even then, it seems pitched more at the Japanese luxury brands rather than at the real global luxury heavyweights that dominate the market in China.

It's those heavyweights -- the big three German luxury carmakers -- that stand between GM and success in China's luxury-car market. And they represent a huge obstacle: All three are formidable competitors and, to put it simply, GM isn't yet in a position to confront them directly.

The German luxury leaders are another matter
Why will it be a challenge for GM to confront the Germans in China? For one thing, they already pretty much own the market: In 2012, BMW had a 23.6 percent share of China's luxury car market, Daimler's Mercedes-Benz brand had a 20.6 percent share, and Volkswagen's Audi brand had a whopping 29.6 percent share.

That's almost three-quarters of the market right there. As for GM's luxury brand, Cadillac? It's barely on the charts, selling just a few thousand vehicles in China every month.

So how can GM up its game? First and foremost, GM needs the product. The problem right now is pretty simple: Cadillac doesn't have very many cars that can go toe-to-toe with the best from its German rivals. In fact, at the moment, I'd argue that it has exactly one, the ATS compact sedan that debuted last year.

The ATS is a really good car, perhaps GM's best product of any kind at the moment. It isn't a significant part of GM's China offerings yet, and won't be until Shanghai GM starts making it locally late this year. At that point, it stands a pretty good chance of gaining some ground on BMW's 3-Series and Audi's A4, just as it is doing here in the U.S.

But GM is going to need a lot more than the ATS – which is really an entry-level luxury car -- if it's going to be a significant luxury player in China.

A Cadillac renaissance is coming, but slowly
Like most automakers, GM's future product plans are largely secret. But the company is widely believed to be working on a "flagship" Cadillac, previewed by 2011's Ciel concept car: a big, powerful, opulent luxury sedan that can go toe-to-toe with the Germans' best, the Mercedes S-Class, Audi A8, and BMW 7-Series, with no excuses.

That's the car that Cadillac needs to be in order to be taken seriously as a global luxury player. And it's not even a sure thing: It could cost a billion dollars or more to develop, a number that is said to have given GM's board some pause.

Why so expensive? Such a car requires the development of a major new rear-wheel-drive platform, said to be code-named "Omega," which could eventually serve as the basis for several high-end Cadillacs designed to confront the Germans head-on.

The key word there, though, is "eventually." Analysts don't expect the first Omega-based Cadillac to appear much before 2015. And, even then, it could take a few years (or more) of careful marketing before the high-end Cadillacs are taken seriously as direct competitors to the Germans, in China, or anywhere else.

Cars like the ATS are laying good groundwork. The all-new mid-sized CTS, which is set to be revealed later this month, is said to share the ATS's basic framework. If it's as well-executed as the ATS (and that's still something of an "if" – this is General Motors, after all), it should be a solid competitor for the Mercedes E-Class, BMW 5-Series, and Audi A6.

The upshot: A long, slow, uncertain process
As the ATS and all-new CTS hit the Chinese market over the next couple of years, Cadillac's sales should pick up steam. But, without a credible entry at the top of the line, Cadillac is unlikely to be taken seriously as a peer of the Germans by tastemakers in China (or elsewhere). Without street cred, Cadillac won't be a major player in this market.

Even once those top-of-the-line cars appear (assuming that they do), Cadillac will face an uphill battle to reclaim its long-lost title as the "Standard of the World." Years of careful marketing may be required and, even then, GM may have to settle for third or fourth place.

Meanwhile, VW will be selling an awful lot of Audis, and making an awful lot of money, in China.

It's true that decades of mismanagement of General Motors led to a painful bankruptcy in 2009, but it emerged a leaner, stronger company. GM's turnaround, however, is still a work in progress. Investors around the world are wondering if GM has what it takes to reclaim its former glory. To help you sort fact from fiction, I've put together a premium research report telling you what you really need to know about GM and its turnaround. If you own or are thinking about owning GM, then you don't want to miss this report. This report was just updated -- click here now to get started.

Read/Post Comments (11) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 14, 2013, at 7:11 PM, aalter wrote:

    You failed to mention that Buick is one of the most popular cars in China. It may not be a luxury car here, but it is considered one there.

  • Report this Comment On March 14, 2013, at 8:11 PM, yaovk wrote:

    GM failing is due to poor leadership. How can a big company like GM is unprepared to compete among the best when you look at its obscene CEO pay and bonuses. The leadership is too obese to compete in the track.

  • Report this Comment On March 14, 2013, at 8:23 PM, TMFMarlowe wrote:

    @aalter, I didn't "fail" to mention anything. Buick -- here or in China -- isn't competing in the same league as BMW or Audi or Mercedes. It's just not. Buick's best-seller in China is a car called the Excelle, which starts at a little over $21k. That's not Audi territory. It will fall to Cadillac to battle the German marques.

    @yaovk: GM's CEO pay is among the lowest in the business, thanks to TARP restrictions imposed as a condition of the bailout. It's far from "obscene".

    John Rosevear

  • Report this Comment On March 14, 2013, at 8:26 PM, red92capri wrote:

    Unfortunately, you are looking it at from a U.S. perspective and not an Chinese perspective. One of the first road cars (around 1908-1910) was a Buick and it was "the car" of the Chinese Emperor. While BMW and Mercedes might be selling well, the Buick is a monster in China. Selling way more than it does in U.S. Since you are considering V.W. a luxury car (which it is not), then Buick would be considered a luxury car as well (considered premium brand here just short of luxury). So Cadillac does not need to sell well for G.M. to turn a tidy profit in China when Buick is already established for 100 years and already selling well. Since it was the Emperor's car it is already synonymous with wealth, power and luxury. I hope this clears up your misconception.

  • Report this Comment On March 14, 2013, at 10:21 PM, dwduke wrote:

    China will have to be the place for GM to sell more Cadillacs, because America is not that wealthy any more. GM though is not heading to DC with hat in hand again only because of sales in China. GM wants more cars made in China to ship here. GM can make huge profits off extremely cheap labor in China and even with shipping costs of cars made in China, cars will still be cheaper and the profit margin larger. Not good for America but good for GM.

  • Report this Comment On March 14, 2013, at 11:43 PM, wholeotherpov wrote:

    @aalter; Buick is considered a luxury car to the economic class in China that can't afford even an entry level Buick. For a successful business person there, showing up in a Buick would be a business fail, parked among all the German marques. Same for Cadillac by the way. @ red92capri; I think the misconception is yours. Mr. Buick, the wealthy toilet manufacturer, put the first cars bearing his name on the road in 1904. China's emperor had one because it was a gift to him. With record sales in China last year, GM's profits were pitiful compared to Ford in China. They lowered the sales prices every month in 2012 to compete, and volume is falling now as well. I don't know what your price or "luxury" points are but my Jetta and my son's A6 are in two different leagues in my opinion. IMHO GM hasn't learned it's lessons. I think its setting itself up to be its biggest competitor in China. I think it's manufacturing partnerships with 2 Chinese brands will turn out to be a trap of their own making in the future.It's Buick price points can't go down and Chevrolet' can't go up. They are stuck in their segment. Only another brand can possibly do that and I personally don't think that Cadillac can climb that hill any faster than Hyundai, or as profitably.

  • Report this Comment On March 15, 2013, at 1:11 PM, TMFMarlowe wrote:

    @wholeotherpov said "For a successful business person there, showing up in a Buick would be a business fail, parked among all the German marques. Same for Cadillac by the way."

    And I say: Yes, exactly. And that is what GM/Cadillac need to change if they want more than the token share of that market they have now. And it is going to take years of careful work -- and some seriously good new products -- before there's a chance of that change happening.

    Thanks for reading, all.

    John Rosevear

  • Report this Comment On March 15, 2013, at 3:35 PM, CluckChicken wrote:

    "Cadillac doesn't have very many cars that can go toe-to-toe with the best from its German rivals. In fact, at the moment, I'd argue that it has exactly one, the ATS compact sedan that debuted last year."

    That isn't what the leading auto mags say or even what many of the german car exces say. The 2nd generation CTS is still a very high quality car.

    That said that isn't why Cadillac will not take much of the market in China. The Chinese like rather bland designed cars, especially in the luxury market. The Cadillac design style stands out compared to those of BMW, Audi and MB, it doesn't look like a smoothed out Passat with a fancy grill. I would suspect that if Lexus was a US brand the LS series would be at the top of the market there.

    You can have a great car but if people hate the styling they are not going to buy it.

  • Report this Comment On March 16, 2013, at 8:17 AM, TMFMarlowe wrote:

    @CluckChicken: I'm a CTS-V owner, so I do pay pretty close attention to new Cadillacs. The current CTS was indeed a great car when it came out in 2008, but that was a while ago and BMW and Audi have upped the game since. That's why GM is launching an all-new CTS shortly (it'll be shown in NY on 3/27 or thereabouts, at US dealers this fall, probably not in China until 2014).

    As for the styling, I've heard that bit about Chinese preferences too (I might even have written about it here), and I've also heard that the ATS was styled with a Chinese audience in mind to some extent.

    I think they did a good job with the ATS -- they managed to soften the "Art & Science" quite a bit while keeping it looking like a Cadillac. The look has come a LONG way since the 2003 CTS. I expect the new CTS to look very similar to the ATS, just bigger.

    Thanks for reading.

    John Rosevear

  • Report this Comment On March 16, 2013, at 9:57 AM, Jason87467 wrote:

    Another anti-GM story. GM can and will beat the German's and are in a great position to do so. The ATS Cadillac is a good example of what they can do.

  • Report this Comment On March 18, 2013, at 9:29 AM, TMFMarlowe wrote:

    @Jason87467, if you think this is an "anti-GM story", you didn't read past the headline.

    The ATS is indeed a good example of what they can do, but they have to do a lot more of it, and they need to do it even better than the ATS. The ATS is about equal to the 3-Series, but GM won't beat the Germans by merely matching them. Not in China.

    John Rosevear

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