Auto Majors Double Down On The U.S. Luxury Car Market

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The American luxury car market is heating up. With the European auto market in free fall, the onus to generate profits falls largely on the U.S. and China. The American car market has rebounded strongly after crashing in 2009. The luxury car market jumped 12% to 1.6 million units in 2012 and sales for 2013 are expected to be strong as well, as the initial data suggests. Luxury cars have fatter margins than mainstream cars and therefore it is not surprising to see every major automaker revamping its portfolio of more expensive cars.

In the last few years, American automakers have been troubled by bankruptcy proceedings and restructuring activities. Similarly, the Japanese auto companies' finances had been hit hard by events beyond their control. Now, as their operations have relatively stabilized, they can focus on resuscitating their luxury brands.

Who's Doing What?


Last year, General Motors ( GM ) laid out an ambitious plan to double the Cadillac sales within the next three years. Although its sales were flat in 2012 (~150,000 units), they began to pick up after the new ATS and the XTS were introduced. In fact, Cadillac's sales were up 32% in the first two months of 2013. The company also announced recently that the 2014 version of the CTS will be powered by a solid 420 horsepower V-6 engine. This news is already creating a buzz within the automobile community.

See full analysis for General Motors

Similarly, Ford Motors ( F ) is in the process of reinvigorating its Lincoln brand by introducing three new models in the next three years. Ford rolled out the refreshed MKZ sedan in January and even aired two ads during the Super Bowl last month. Sales in 2012 were down 4.1% to 82,150, so this year could be the beginning of a turnaround.

Honda Motors ( HMC ) is pumping in $1 billion to launch an array of refreshed models such as the RLX, the MDX sport wagon and the NSX super sports car. Besides model refreshments, marketing is going to play a key role in the automaker's quest to regain popularity with American customers. Japan's third largest automaker has penned a massive $200 million advertising deal with Boston-based Mullen to reinvigorate the Acura brand in the U.S.

The problem of a weak brand image is likely to stick with these brands for the time being. So don't expect any of these to displace the market leaders any time soon. But the marketing efforts combined with improved model offerings could help change that perception, albeit gradually.

Not So Easy

At the same time, the established biggies aren't taking it easy either. Mercedes, owned by Daimler AG (NYSE:DAI), is all set to foray into the sub $30,000 category with the launch of the new CLA this year. The CLA will help Mercedes compete against BMW's 1-series and 3-series and Audi's A3 and A4. Besides the CLA, Mercedes will also introduce the revamped E-Class this year.

Mercedes sold more than 270,000 cars in the U.S. in 2012, and the world's biggest economy accounts for a fifth of its sales. This year has again seen a strong start with sales up 16.7% through February.

BMW debuted its electric model called i3, which is made up of lighter carbon fiber instead of steel, at the Los Angeles auto show last year. It plans to introduce another model under the same series, called i8, in the first quarter of 2014.

It will be interesting to see how the American luxury car wars pan out over the next couple of years. As total automobile sales normalize after the crash witnessed in 2009, it is clear that the auto companies will find it hard to replicate >10% growth rates observed over the past couple of years, and so their focus will be on generating more profits per car rather than relying on volume gains.

We currently have a price estimate of $28 for General Motors's stock, which is in-line with the current market price.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: F , GM , HMC , TM , TSLA

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