Cadillac Holds Significant Long-Term Potential For GM
It has been a tough few weeks for General Motors ( GM ). The automaker has received a lot of negative publicity due to the mass vehicle recalls, which has dented its reputation. GM has recalled more than 3 million vehicles in the last two months and this has dragged the shares of the company down 10%. Amid this chaos, one positive development has been the slew of model introductions by its Cadillac brand. The automaker finally unveiled its much awaited electric plug in model, ELR. The hybrid electric, which has an electric range of 37 miles, will cost customers in excess of $80,990.
ELR sales aren't expected to surpass those of the Model S. Due to its high price and an uncertainty about the reception of the car, GM has currently limited its annual production to 5,000 units only. On the other hand, Tesla is aiming to sell 35,000 units of Model S in 2014. Earlier in March, Cadillac also unveiled its new models, including the Escalade and the ATS Coupe, at the Geneva Motor Show.
Reviving The Cadillac
Back in 1997, the Cadillac was the market leader in the luxury market, but its German counterparts have since taken over. In 2012, the automaker chalked out a plan to double the annual sales of the brand to 300,000 units within three years. In the same year, the Cadillac introduced the ATS which was designed specifically to take on entry level luxury cars such as the BMW 3 series, the Audi A4 and the Mercedes C-Class. In total, the automaker had planned to introduce 10 new or refreshed models within the three years starting from 2012.
Although luxury brands don't make the headlines in terms of the number of units sold, they are critical to an automaker's operations since they generally have greater margins and higher revenue realization per unit, compared to mainstream brands. In 2013, Cadillac's global sales stood at at 250,830 units, up 28% from those in 2012. In the U.S., its sales were up 22% to 182,543 units, helped by the introduction of the ATS and the XTS sedans.
Boosting Sales Internationally
GM also announced that the refreshed XTS will now be available in China. Last year, GM got the approval from the Chinese government to build the Cadillacs locally. This allowed the automaker to circumvent the country's high import tariffs of 25% and price its cars competitively. In 2013, the brand's sales jumped 66% to 50,005 units. The company even roped in Brad Pitt to do a commercial for its XTS sedan early last year. GM is targeting annual sales of 100,000 Cadillac vehicles in China by 2015.
Currently, three-fourth of the luxury automotive market is accounted by the German brands - BMW, Audi and Mercedes. In the long run, GM is targeting a market share of 10% in the Chinese luxury automotive market. The luxury automotive market in China is already huge, and could rise to 3 million units by 2020, according to McKinsey. That means GM is targeting annual sales of 300,000 units of the Cadillac brand by the end of the decade, an increase of 250,000 units from sales in 2013.
Since Cadillac enjoys most of its sales in North America and China, there is a scope to boost sales in Europe as well. The automaker displayed its ATS Coupe and Escalade at the Geneva Auto Show, earlier in March. Both these models will be available to the public in the second half of the year. In addition, Cadillac also displayed the ELR plug-in coupe, the SRX crossover and the Elmiraj concept car.
Assuming incremental ales of 400,000 units globally by 2020 (i.e. 250,000 from China and 150,000 units from the U.S.) and an average sticker price of $50,000, Cadillac alone could generate incremental annual revenues of $20 billion Assuming 11-12% operating margins for a luxury brand isn't unreasonable. Therefore, GM's operating income could get a boost of ~$2.2-2.4 billion solely from additional sales of the Cadillac. Surely, the Cadillac brand holds significant long-term potential and the recent sequence of events shouldn't be allowed to overshadow the opportunity that exists for GM.