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For the 2014 Cadillac CTS, This Number Is Critical

The all-new 2014 Cadillac CTS has impressed critics and intrigued luxury-car buyers. Photo credit: General Motors Co.

Early reviews have been nearly unanimous: The all-new 2014 Cadillac CTS is one of General Motors' (NYSE: GM  ) best cars ever.

Experts from blogs and car magazines -- even the dowdy Consumer Reports -- have praised the CTS's ride, handling, interior, and overall feeling of quality. They've measured acceleration, pondered fuel economy, and raised eyebrows at GM's ambitious pricing for its new luxury sedan.

The praise is excellent news for GM, which is making a huge effort to establish Cadillac as a true global peer of the great German luxury-car brands. The CTS appears to be moving that effort forward in a big way.

But there's one review in particular -- and one number generated by that reviewer -- that could prove more critical to the CTS's success than any other.

That number is "48%"
Why is that number so important? Because it's key to how competitive the CTS will be with its German rivals when it comes time to close deals with buyers.

Forty-eight percent is the residual value assigned to the 2014 CTS by a company called ALG. ALG's job is to predict used car prices. Specifically, it predicts what a new car will be worth after three years -- the typical length of a new car lease. That number, expressed as a percentage of the new vehicle's price, is the vehicle's "residual value".

Residual value is key to figuring out how much to charge for a lease. The higher the residual value, the lower the lease's monthly payments -- and the more competitive the automaker's lease offer.

The very good news for GM is that the 48% residual value that ALG has assigned to the 2014 CTS is a very competitive number. The average for the CTS's luxury vehicle peers is 46%, according to Automotive News, and that means that GM should be able to put together some very competitive leasing offers for its new sedan.

And that's a bigger deal than you might think, because it turns out that leasing is huge when it comes to luxury vehicles.

Why a strong residual value is so important to a luxury car's prospects
Leasing is important to all automakers, but it's especially important when it comes to luxury cars. Around 20% of all new vehicles sold in the U.S. are leased, but the percentage in the luxury market is much higher -- for some top brands, half or more of their sales are made with leases.

GM is positioning the 2014 CTS as a car that can go head-to-head with luxury rivals like BMW (NASDAQOTH: BAMXF  ) 5-Series and Mercedes-Benz's E-Class. Both are leased in large numbers, and both compete fiercely to offer the most attractive leases.

The strong residual value for the new CTS means that Cadillac will be able to jump right into the competitive fray with attractive lease offers -- offers that should help the CTS give GM's luxury ambitions a big boost right away.

The CTS's high residual is also a plum for GM in another way.

A sign of respect for GM's much-improved products
Residual values are to a large extent a function of a vehicle's quality. The better (and more long-lasting) a vehicle, the higher its resale value. When companies like ALG set residual values, one key to the analysis is the overall competitiveness of a new vehicle: How well does it stack up to rivals?

The high value put on the CTS suggests that the experts at ALG think it stacks up very well. They also clearly think it's a huge improvement on the last CTS, which had a residual value of just 41%.

Even that was good for GM by the standards of a few years ago, though. As recently as 2009, GM's overall average residual value was just 36.5%. That had improved to 44% by last year. But GM CEO Dan Akerson would like it to be even higher, up close to -- or better than -- the 51.5% posted by industry leader Honda (NYSE: HMC  ) .

Clearly, GM still has some distance to go to reach that mark. But the high value placed on the 2014 CTS is one more sign that GM's products are finally moving in the right direction.

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