China Provides GM Some Relief Over Cadillac

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August marked the second consecutive month in which sales of General Motors (NYSE:GM) luxury car brand Cadillac rose by more than 20 percent globally. In August, sales rose by 23.7% driven by a 93.4% sales increase in China, the world’s second biggest luxury car market and the biggest overall car market. Year-to-date sales in China are up 31%. The key reason behind Cadillac’s strong performance in the Chinese car market has been the popularity of its Premium midsize crossover SUV XT5 and compact sedan ATS-L. The latter is remarkable because the same vehicle is not really that popular in the U.S., where people criticize its tight back seat. The Chinese version of the vehicle, however, features a much longer wheel base creating more leg room in the back, which has made it popular with consumers there, especially as they prefer to sit in the back seat and be chauffeured around.

Awkward Positioning

Cadillac has been around for a long time in the U.S. luxury car market but its market positioning is such that it fails to attract many buyers. Traditionally, Cadillac’s audience has been car buyers looking for good looking premium vehicles at prices far below those of the German luxury car makers like BMW, Mercedes-Benz and Porsche. This was okay when Cadillac’s vehicle quality was far below those of the German competitors, but in recent years, not only has Cadillac improved vehicle quality and engineering, but also raised prices such that they are now approaching the same levels as BMW and Mercedes-Benz. This has alienated Cadillac’s core consumer base and led to a declining market share. Branding and image are notoriously sticky, but GM hopes that continuous improvement in product quality will eventually enable Cadillac to take away customers from the German car makers.

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China Relief

Fortunately for the company the brand is doing much better in China. General Motors estimates SUV sales to account for 7 million units in China by 2020, implying more than thrice the size of the segment at the end of 2015. The company expects similar growth in the luxury car market which is expected to comprise nearly 10% of the market by 2020, compared to slightly over 7% this year. [1] Additionally, the company also plans to build 95% of its Cadillac vehicles in China by 2018. [2]  One way to achieve these targets will be to increase the brand’s presence in crossover SUVs beyond the XT5, since the segment falls at the intersection of two booming segments. According to the company, models in this segment are in development and should launch in the next couple of years. This should help push the brand towards its goals.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for General Motors

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Notes:
  1. GM To Pump $12 billion In China, Hike Capacity 65%, Autonews, April 2014 []
  2. Cadillac to Build 95% Cars Locally by 2018 for China Push, Bloomberg, December 2014 []