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Why Cadillac Is Key to GM's Global Turnaround

By John Rosevear - Apr 11, 2013 at 1:00PM

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It has been apparent for a while that General Motors (NYSE: GM) is investing substantial money and effort in a serious attempt to revive and elevate Cadillac, its long-neglected luxury brand.

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It has been apparent for a while that General Motors (NYSE: GM) is investing substantial money and effort in a serious attempt to revive and elevate Cadillac, its long-neglected luxury brand.

Lately, that effort has gathered significant visible steam.

This isn't a project driven by romantic nostalgia for Detroit's glory days. Rather, it's a determined effort driven by a strong business case: For a global automaker, a strong luxury brand can be a significant driver of profits.

The elevation of Cadillac to (at least) peer status with the vaunted German luxury makers won't be a simple project – in fact, it's a daunting task. But it's essential to GM's drive to improve its profitability.

VW's example shows the potential of a strong luxury brand

One of CEO Dan Akerson's highest priorities is to close the profit gap that exists between GM and its two biggest global peers, Toyota (NYSE: TM) and Volkswagen (NASDAQOTH: VLKAY). In 2012, Volkswagen's operating profit (earnings before taxes, interest, and special items) was $15.8 billion, Toyota's $12.2 billion.

With $2.9 billion, GM trailed both of its global rivals – as well as smaller Ford (NYSE: F), which posted a $6.6 billion profit. Ford's profit was driven by the Blue Oval's exceptional efficiencies in North America, an enviable situation that GM is on track to approximate in a few years.

But much of the gap between VW and GM can be accounted for by Audi, VW's global luxury brand. Audi's strong designs, taut performance and handling, and well-trimmed interiors have put it on par with the other German luxury brands, allowing it to command comparable prices.

But the real secret to Audi's profitability is that the cars are underpinned by mechanical components that are shared with other VW brands, creating significant economies of scale – and significant profits per vehicle sold. Despite accounting for only a small fraction of VW's total global sales, Audi has in recent quarters accounted for nearly half of the German auto giant's profits.

That's a model worth emulating. And if any global automaker is in a position to emulate VW's model, it's GM with Cadillac, its storied – but in recent years, tattered – luxury brand.

GM hopes to make Cadillac a global player, particularly in China, where roughly three in every 10 luxury cars sold are Audis. Cadillac chief Bob Ferguson said recently that he expects to triple the brand's sales in China over the next three years.

But to achieve anything like Audi's status, in China and elsewhere, Cadillac will need toelevate its cars and its global brand cachet. The second goal may or may not prove elusive. But the first effort is well in progress.

A serious Cadillac product renaissance is already under way

At first glance, the third-generation Cadillac CTS sedan, which debuted at the New York Auto Show on March 26, looks like a serious competitor to German rivals such as the Audi A6 and Mercedes-Benz E-Class. It's longer, larger, and lighter than its generally well-regarded predecessor, with more sophisticated styling and an opulent interior.

It's a more upscale follow-on to the compact Cadillac ATS sedan, which debuted last year. The ATS was the first Cadillac to be received by critics as a genuine peer to the class-leading BMW (NASDAQOTH: BAMXF) 3-Series. A taut rear-wheel-drive sedan, the ATS features touches such as a sophisticated rear-suspension design and German-style attention to finish details such as body panel gaps, along with attractive – but distinctly American – styling and an exceptionally impressive interior.

Both of these cars, in their own ways, follow on from the direction established by the Cadillac Ciel, a concept car shown by GM in 2011 that was widely regarded as a statement of future direction for the brand.

The Ciel sought to capture the spirit of Cadillacs of old, when the brand's famous advertising tag line "The Standard of the World" was at least arguably deserved. The Ciel is brash, opulent, and beautifully finished, but also up-to-date: It's a hybrid.

Slow but serious progress toward a once-far-fetched goal: The revival of Cadillac

That's the balance that GM is seeking to recapture with Cadillac. The ATS was a good step in the right direction, and early signs suggest that the CTS could be another one. But the real test will come as Cadillac's product story continues to unfold. An all-new version of the Escalade SUV is due next year. How will GM reconcile the youthful bling of the outgoing model with its more upscale new direction? That remains to be seen.

The Escalade will be followed – if the rumor mill is to be believed – by a full-sized rear-wheel-drive Cadillac sedan, GM's all-out effort to challenge the world's best. Cars like the vaunted Mercedes-Benz S-Class and Audi's A8 represent the pinnacle of mainstream luxury offerings, rolling salons with price tags that can reach well into six figures. Few manufacturers have dared to enter that segment.

Can GM really build and sell a Cadillac that can credibly play on that lofty field? It's easy to be skeptical, but remember: GM was scoffed at when it said it would compete with BMW's 3-Series, perhaps the most polished single product in the entire auto business.

And yet, when it debuted last year, the ATS showed that GM could indeed match (if perhaps not yet beat) the Germans at their own game. With every new product, the idea of a Cadillac renaissance gets a little harder to laugh at. If GM's managers can stay focused, what once sounded like a far-fetched plan might well succeed.

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