Cadillac Is Doing Some Heavy Lifting at GM

For years, General Motors (NYSE: GM  ) allowed its luxury Cadillac brand to languish with uninspiring designs while new competitors emerged and won their own followings. Back in 1978, Cadillac sold around 350,000 cars, but the sales pace has declined dramatically since then. Last year, Cadillac sold just under 150,000 vehicles in the U.S., slightly fewer than it sold in 2011 and slightly more than it sold in 2010. That placed it fifth domestically, behind BMW, Mercedes, Toyota Motor's (NYSE: TM  ) Lexus brand, and Honda Motor's (NYSE: HMC  ) Acura.

Meanwhile, international sales have been almost nonexistent, leaving Cadillac's worldwide sales total around 200,000. By contrast, global luxury segment leaders BMW, Audi, and Mercedes each sold more than 1.3 million vehicles in 2012. However, GM is finally making an aggressive push to grow the Cadillac brand by entering new market segments while updating the designs of existing products. Additionally, GM is attacking the fast-growing luxury car market in China. These moves are already starting to pay off, and continued progress at Cadillac will be incredibly beneficial for GM's financial results.

The Cadillac plan
Last year, Cadillac introduced two new models in North America: the XTS full-size sedan (which replaced the outgoing DTS and STS models), and the ATS compact car, which is Cadillac's first entry in that segment in a decade. The introduction of these two new models has led to a 37.1% year-over-year increase in U.S. Cadillac sales in the first four months of 2013.

The Cadillac ATS, courtesy of GM

Cadillac achieved these sales increases despite declining sales of its other three products: the CTS midsize sedan (which is being cannibalized by ATS and XTS), the SRX crossover, and the Escalade full-size SUV. However, Cadillac unveiled a sleeker, redesigned CTS in March, which will go on sale later this year and could reinvigorate sales of that model. Furthermore, a new Escalade based on GM's updated truck architecture is expected to go into production in early 2014. Lastly, Cadillac introduced the plug-in hybrid ELR coupe earlier this year, which utilizes the Chevrolet Volt's technology and will compete with Tesla's (NASDAQ: TSLA  ) popular Model S sedan.

This expanded lineup should continue to boost Cadillac's sales in North America. However, GM also wants the brand to compete more effectively in China, and has set a goal of tripling sales in China to 100,000 by 2015. In order to avoid heavy tariffs on imported cars, Cadillac began producing the XTS sedan in China in February. GM is also expected to build the Cadillac ATS in China, beginning later this year or in 2014.

Will Cadillac succeed?
Cadillac's improved product lineup positions it well to overtake Acura for fourth place in the U.S. market by 2014 or 2015, and gives it a chance to challenge segment leaders BMW, Lexus, and Mercedes for the top spot shortly thereafter. Cadillac is finally shaking off its stodgy image with sportier new models, and car buyers seem to be recognizing the shift. That said, the three big German luxury car makers have the large European luxury market wrapped up, which leaves Cadillac and others competing for fourth place globally.

Still, if Cadillac can double its worldwide sales in the next three years to 400,000, that will already provide a big lift to GM's financial results. On GM's recent earnings call, management pointed specifically to the launch of the ATS and XTS sedans as the driver of a $100 million improvement in "mix" within North America. While GM has had success with a number of small cars launched under the Chevy nameplate recently, such as the Cruze, Sonic, and Spark, these tend to be low-margin products. By contrast, Cadillac's high margins mean that the brand can have an outsized impact on GM's profitability even though its global sales will always pale in comparison to Chevrolet's.

Foolish conclusion
GM has high hopes for the Cadillac brand, having invested a lot of money in bringing a variety of new and redesigned models to market. Cadillac's results in North America have shown immediate improvement, which provided a nice boost to GM's bottom line last quarter. If the company can replicate that success with upcoming product launches and by attacking growth markets like China, Cadillac could become a major profit driver for GM. Personally, I'm bullish on Cadillac's long-term prospects, but I'd like to hear what you think. Weigh in using the comment box below!

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