SUVs Key To GM’s Plans of Cadillac Revival
General Motors (NYSE:GM) has surprised industry watchers this year. Despite being significantly responsible for the auto industry’s worst ever year of car recalls, the U.S. based auto maker has managed to convince consumers to buy even more of its vehicles. The company sold a record 9.9 million vehicles in 2014, a 2% increase compared to sales in 2013, the company’s previous record year. [1] Sales increased by 12% in China, the world’s biggest auto market, and by 5.3% in the U.S. Sales of all GM brands increased in the U.S. last year, except for the company’s luxury brand, Cadillac, unit sales of which fell by 6% on a year-over-year basis. [1] That is extremely disappointing for the company since the U.S. comprises nearly two-thirds of global Cadillac sales.
A common theme that has emerged in the auto industry over the past few years is that it is extremely important for car companies to have a successful luxury brand. Global luxury brands are heavily influenced by the China and U.S. markets. Even though luxury brands only contribute in about 10%-11% of new car sales in any given year, they contribute nearly 20% to overall revenues, given their much higher unit prices, and about one-third of overall profits, given the higher margin on each unit sale. In order for GM to raise its profitability, it is imperative that it revives Cadillac sales in the U.S. and China. Below, we take a look at the company’s $12 Billion investment for the brand’s resurrection.
We have a $40 price estimate for General Motors, which is about 20% higher than the current market price.
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Bringing More SUVs to the U.S.
GM’s diagnosis of its weak position in the U.S. market is simple: the brand is under represented in the luxury SUV segment. Luxury SUVs was the fastest growing car segment among all car segments in the U.S. in the year 2014, having grown at 14.2% compared to 2013. [2] GM, which has long been known for making excellent full-size pick-up trucks and SUVs, has only one vehicle representing it in the segment: CRX. Recently, Cadillac president Johan de Nysschen told the media at the North American International Auto Show that the Cadillac brand would put a strong emphasis on the crossover SUV segment. [3] Compared to Cadillac’s solitary offering in the segment, BMW has five vehicles in the segment, while Audi has three.
Therefore, the company will invest $12 billion into eight new Cadillac models, which it plans to bring to the market by 2020. [3] Three of those vehicles are expected to be SUVs. The success of the new SUVs will be critical to the brand for two reasons: 1) SUVs tend to be higher priced and boast higher margins than passenger cars and 2) recent data suggests that a lot of people have been ditching the Cadillac luxury brand for non-luxury cars, which is bad for the company’s profitability. The booming SUV/crossover segment should allow the company to be able to reverse this trend.
Growing China Sales
General Motors, along with its joint venture partners, offers a wide range of vehicles and brands in China. GM’s offerings in China are comprised of the cars sold under Baojun, Buick, Cadillac, Chevrolet, Jiefang, Opel, and Wuling brands. In 2013, GM sold nearly 3.2 million vehicles in China, representing a sales growth of 11.2% from 2012. [4] The U.S. based automaker derives close to a third of its sales from China. Despite the solid performance in 2013, GM was overtaken by German car company Volkswagen as the market leader in new car sales in the country. Capitalizing on the growing preference for luxury cars in China, Volkswagen sold nearly 3.3 million cars in 2013, to grow its market share from 14.6% in 2012 to 14.9%. Meanwhile, GM’s share declined from 14.7% to 14.4%. [5] The loss of market share can be attributed to GM’s inability to identify market shifts such as the surging sales of SUV’s, crossovers, and the booming luxury car market. [6]
In October 2013, when GM’s position as market leader was merely under threat from Volkswagen, the company gave out details of a plan to invest $11 billion in China by 2016. Now, GM has announced plans of investing $12 billion in the country from 2014 to 2017 and build more plants as it fights to regain the market leader position. GM’s planned 65% expansion will put GM’s capacity close to 8 million vehicles a year, the largest vehicle manufacturing footprint in the region. The company plans to introduce 60 new or refreshed vehicles between 2014 and 2018, with special focus on expanding GM’s range of utility vehicles and luxury cars, including the Cadillac lineup. The company plans to launch 11 new SUV’s in China over the next 5 years. [7]
GM estimates SUV sales to account for 7 million units in China by 2020, more than thrice the current size of the segment. Similar growth is expected in luxury sales, which are expected to comprise nearly 10% of the market by 2020. [8] To this end, GM responded by starting the production of its full-sized sedan, Cadillac XTS, in Shanghai in 2013. The company also plans to build 95% of its Cadillac vehicles in China by 2018. [9] GM plans to keep adding one new locally produced Cadillac brand to its portfolio through 2016. The automaker sold 64,000 Cadillacs in China in the first eleven months of 2014, representing a 51% increase. It expects annual sales of the brand to reach 100,000 by 2015 and capture 10% of the luxury market by 2020. [6]
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- GM Delivers its Second Consecutive Year of Record Global Sales, General Motors, January 2015 [↩] [↩]
- Auto Sales, Wall Street Journal, January 2015 [↩]
- GM to Spend $12 Billion to Fund New Cadillac Models by 2020, Bloomberg, January 2015 [↩] [↩]
- GM Sells May Record 276,109 Vehicles In China, GM, June 2014 [↩]
- VW Passes GM For Auto Sales In China, Wall Street Journal, January 2014 [↩]
- GM Ramps Up China Strategy, Wall Street Journal, October 2013 [↩] [↩]
- GM To Pump $12 billion In China, Hike Capacity 65%, Autonews, April 2014 [↩]
- GM To Pump $12 billion In China, Hike Capacity 65%, Autonews, April 2014 [↩]
- Cadillac to Build 95% Cars Locally by 2018 for China Push, Bloomberg, December 2014 [↩]