The Cadillac ATS has won critical praise -- but the cars have been piling up at dealerships. GM announced last month that it will cut production of the compact luxury sedan. Source: General Motors Company.

The revival of General Motors' (NYSE:GM) luxury Cadillac brand was one of the big stories in the auto business last year. The old brand's U.S. sales rose 21.9% last year thanks to strong new models that drew big praise from critics. 

But this year has been a very different story. Through November, Cadillac's U.S. sales are down 5.9% -- even as other luxury brands have set new sales records.

What's the deal? Cadillac's latest models, the ATS and CTS sedans, are still great products. But they're priced a lot higher than Cadillac's longtime customers are used to seeing, and the data suggests those high prices are hurting sales. 

Better Cadillacs come with higher prices
How big are the increases? The ATS was a new model when it was introduced, but the CTS is in its third generation. Base versions of the CTS sedan, which was all-new for the 2014 model year, are priced about $6,000 higher than the 2013 models they replaced. In premium trim lines, the difference is over $15,000.

Is the new CTS better than the old one? You bet: It won Motor Trend's Car of the Year award last year, and it has been cleaning up in comparison tests against the German luxury stalwarts. 

The new-for-2014 Cadillac CTS sedan has won very high praise from critics. But high prices have kept sales from soaring: U.S. sales of the CTS are down 2.3% this year. Source: General Motors Company.

And to be fair, the new CTS is priced right in line with the cars that GM sees as its key competitors: the Mercedes-Benz E Class, the BMW 5-Series, and Audi's A6. 

But Cadillac's customers aren't used to paying those kinds of prices, and some are shopping elsewhere. Meanwhile, BMW and Mercedes buyers aren't (yet) flocking to Cadillac's showrooms to make up the difference. 

In other words, Cadillac is losing its old customers -- but isn't yet winning enough new ones to make up the difference. So, why isn't Cadillac trimming its prices?

Not long ago, a price cut would have been GM's response. But these days, Cadillac is under new management -- and its new president, longtime Audi executive Johan de Nysschen, ordered something different: a big cut in production at the factory that makes the two sedans.

Why GM moved to cut Cadillac production...
GM drew some negative commentary last month when news broke of its decision to cut production at its Lansing Grand River plant, where the ATS and CTS are made, to one shift from two. 

It was jarring to hear GM announce layoffs during an economic expansion, when rivals like Ford have been adding shifts and hinting at capacity constraints, but it was a necessary move -- and part of de Nysschen's grand plan to turn Cadillac into a true global luxury brand.

The reason: high inventories of CTS and (especially) ATS sedans at U.S. Cadillac dealers. As of Nov. 1, GM's U.S. dealers had 151 days' worth of ATS's and 113 days' worth of CTS's on hand, according to Automotive News data. That's far above the 60 days' worth generally considered optimal.

New Cadillac president Johan de Nysschen showed off the high-performance ATS-V in Los Angeles last month. Source: General Motors Company.

Why are high inventories a problem? Because of the strong urge to discount prices in order to clear out stock. "Stack them high and move the metal and sell them fast is not the right [approach] for the premium business," de Nysschen insisted in a presentation to analysts at a Barclays event last month. 

...instead of cutting prices
So, why are price cuts bad for Cadillac? While de Nysschen did approve some incentives to clear out those high inventories of 2014 models, he doesn't want to reduce prices long-term.

De Nyscchen argues that discounted prices don't just undermine profits on the initial sale of a new car. They also undermine residual values -- the expected value of a nice three-year-old used car, for example -- which are used to determine leasing costs. Lower residual values mean less-competitive leasing deals on new models. That's a killer in the luxury market, where leasing can account for half or more of sales. 

The solution: Cadillac will make (and sell) fewer cars, at least for now. That will cost the brand in terms of overall sales numbers and profits in the short term, but it should improve average transaction prices, residual values, the image of the brand, and -- in time -- overall profitability.  

A long-term plan to keep Cadillac supplies tight
De Nysschen's long-term target is for Cadillac dealers to have just 30 days' worth of supply on hand. That's much lower than most dealers manage now, but he says moving to limit dealers' inventories will reduce incentives (increasing average transaction prices) and reduce the amount of "working capital" dealers have tied up at any given moment. Both will help improve dealers' profit margins.

It sounds simple, and it makes a lot of sense. But the fact that Cadillac is able to take that approach is a sea change for General Motors. For decades, GM was focused on market share as the defining metric of success. De Nysschen has convinced his boss, GM president Dan Ammann, that accepting a near-term decline in U.S. sales for Cadillac is the right long-term move for the brand.

In his presentation at Barclays, de Nysschen recognized the need to convince Wall Street as well. "I ask you to leave me alone for the quarterly result," he told the audience of analysts. "If we work to optimize the quarterly results, we will continue to do precisely the wrong thing for Cadillac. We need to now invest in rebuilding this brand."

For individual GM investors, the message is clear: Cadillac's U.S. sales will be lower for a while. It's all part of the plan.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.