For several years now, General Motors (NYSE:GM) has hinted -- loudly -- that it has grand ambitions for its frayed old luxury brand, Cadillac.
We've seen those ambitions move forward in fits and starts. On one hand, after decades of Cadillac products that might best be described as "lousy," the brand now features a couple of extremely good vehicles.
Cadillac's latest models, the ATS and CTS sedans, are superb products. They're well-built and fun to drive, and compare quite well with the best from the big three German luxury brands.
But on the other hand, Cadillac's U.S. sales are down 9.6% this year through October, and the brand's sales abroad don't yet amount to a whole lot.
This has led to many questions, most of which are variations on this one: Is this really going to work out well for GM?
Your humble Fool has been one of many voices asking these questions. But now I have a much better understanding of what GM plans for Cadillac, thanks to an extraordinary presentation last week by the brand's new president, former Audi executive Johan de Nysschen.
It was extraordinary because he laid out the whole business case for GM's massive investment in Cadillac, and gave a pretty clear picture of how the automaker will go about reviving its luxury brand.
Perhaps most extraordinary: It's a convincing plan. And it's convincing, in large part, because Cadillac will have to break a whole bunch of long-standing General Motors rules to pull it off.
Why GM is reviving Cadillac
Why is GM doing all this? Why is this giant automaker breaching all of its rules, saying flatly it will accept lower sales and thinner profits from its luxury brand in the near term?
In part, it's the obvious reason: A thriving global luxury brand can be an outsize contributor to the bottom line. As de Nysschen said in his presentation, "The global luxury market accounts for, depending on how you define the luxury market, 10% to 12% of the total auto business globally, but generates about half the profit."
Look at the example of de Nysschen's old employer: Luxury brands Audi and Porsche represented just 18% of the Volkswagen Group's total global sales volume last year -- but they contributed 65% of the automaker's profit.
GM sells roughly as many vehicles as Volkswagen Group and Toyota (NYSE: TM), which owns the Lexus luxury brand, but lags far behind both on total profits. Closing that gap is one of CEO Mary Barra's highest strategic priorities. If Cadillac can be turned into an Audi-like contributor to GM's bottom line, the company's profits (and presumably its share price) will take a big step upward.
That much has been clear for a while. But as de Nysschen explained last week, there's more to it than that.
It's also about GM's pickup trucks
GM is a giant company with major operations all over the world, but it's no secret that the General still derives the bulk of its profits from its home market -- particularly, the sale of pickup trucks and SUVs in the U.S.
But regulatory requirements for fuel economy are set to tighten significantly over the next several years. Meeting those requirements, while continuing to sell the capable full-sized vehicles that buyers demand, will require advanced technology. This involves not just more advanced drivetrains, but also lighter-weight -- and more costly -- materials.
One need look no further than Ford's (NYSE:F) all-new 2015 F-150 pickups, with their aluminum-alloy body panels, to see the near-term future of trucks. The lightweight aluminum panels have helped boost the new trucks' fuel economy. But as Ford executives acknowledge, those new trucks will have to become even more efficient over the next few years. Ford is known to be working on advanced new transmissions (with GM), as well as a hybrid drivetrain for its trucks.
Those won't be cheap, and they'll add to the cost of Ford's trucks, just as similar technologies will add to the cost of GM's. But GM executives don't think they'll be able to pass all those costs on to consumers.
That means GM's profit margins on pickups and SUVs, which are currently quite strong, will be squeezed.
GM needs Cadillac to help offset the costs of more fuel-efficient pickups
And that in turn means GM will have to find another way to boost its profits once those margins are squeezed. That's where Cadillac comes in.
This is also why GM is willing to give de Nysschen some time to get the brand on track. As he said, "We've probably got 10 years to move the needle. ... General Motors doesn't need Cadillac to fire today. It needs Cadillac to fire in the future."
De Nysschen clearly has the experience and wisdom to understand what needs to be done to make Cadillac a global luxury powerhouse. And after years of dithering with the old luxury brand, GM's current leaders have empowered him to do it. Can he deliver? We'll find out.