ATS Represents Cadillac's Make or Break Moment

By Tom Gibbs - July 21, 2012 | Tickers: BAMXY, DDAIF.PK, F, GM, TM, VLKAY | 0 Comments

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The automotive industry has been quite a mixed bag thus far in 2012.  Strong sales gains in the United States market have accelerated volume to a 14.1 million seasonally adjusted annualized rate in the first half of the year, which topped average analyst estimates of 13.8 million.  The positive news coming from the U.S., however, have been severely downplayed due to continued troubles that all automakers are experiencing in the weak European market as well as the worry of a further volume slow down in China. 

On the forefront of all of these news headlines is General Motors (NYSE: GM), which has been enjoying the highest of highs in China and the lowest of lows in Europe since its bankruptcy emergence in 2009.  With projected losses coming from Europe for the foreseeable future, it is now make or break time for the world’s largest automaker in other key vehicle markets.

Three Important Letters

General Motors’ Cadillac luxury division has plans of unveiling its new entry-level ATS sedan to the world during the July 27^th airing of the London 2012 Summer Olympics opening ceremonies.  Taking on an aggressive “Cadillac ATS vs. The World” theme, the small luxury auto will be taken to iconic locales around the world including Morocco’s Atlas Mountains, Monaco’s Grand Prix course, and China’s Guoliang Tunnel Road. 

Cadillac is definitely anteing up big for the launch, and company officials mentioned that the marketing budget for the new ATS campaign was about on par with its ~$300 million CTS launch campaign two years ago (source: Kantar Media).  This is by no means chump change, and it shows the importance of the car to Cadillac’s performance throughout the mid-2010s.

With a starting price just under $34,000, the ATS is Cadillac’s direct challenge to BMW’s (NASDAQOTH: BAMXY) 3-Series and Mercedes’ C-Class sedans, and is potentially General Motors’ best shot at further entrenching itself in the lucrative luxury vehicle market.  Cadillac, which has been wildly popular in the Chinese market over the past several years, has more or less stagnated in the rebounding United States market as of late.  The division is between models in the large sedan category with the phasing out of the DTS, and is in dire need of a design reboot of its core CTS and Escalade models.  Overall Cadillac volume is down nearly 18% in the first half of 2012, with troubling drops in volume for its three most important models:

United States Sales Volume, H1 2012 vs. H1 2011

• CTS: -5.6%
• Escalade: -9.3%
• SRX: -2.9%

The continued floundering of the Cadillac badge has put a large strain on some of General Motors’ most impressive U.S.-based gains over the past six months.  Sales within GM’s core Chevrolet brand, especially among newly released models, have been rather impressive.  The Chevrolet Malibu’s volume is up more than 15% for the first half of the year (thanks to a 32.3% increase in June alongside the new model introduction) and the new compact Chevy Sonic has already sold more than 42,000 units, which is more than double the volume of the car’s predecessor (Chevy Aveo) in the first half of 2011. 

Several key factors make the success of the Cadillac ATS all the more important to General Motors:

• Market Strength: The luxury vehicle segment has held up extremely well in all markets around the world.  Even German-based luxury automakers including BMW, Mercedes, and Audi (NASDAQOTH: VLKAY) have eked out small single digit gains in Europe in the first half of 2012 while non-luxury auto sales continue to get crushed.

• Market Size: The smaller side of the luxury vehicle spectrum has grown substantially over the past several years.  Affluent auto shoppers are also obviously concerned about fuel economy, and some of the hottest luxury vehicles are smaller entrants including the BMW 3-Series, the Mercedes C-Class, the Infiniti G, and the Audi A3 and A4.  Volume for the 3-Series and the C-Class in the United States in the first half of 2012 is a whole 34% greater than the volume for the entire Cadillac portfolio over the same time period.  Smaller cars in the luxury segment now account for over 60% of the market niche. 

• Market Demographic: One thing that General Motors has never really enjoyed, but is quickly gaining, is a young consumer demographic.  Younger consumers (sub-45 years old) are the key buyers of smaller luxury autos, and the ATS is GM’s best opportunity in attracting more of these valuable shoppers, who have a better opportunity to purchase several more vehicles over their driving lifetime than their older counterparts. 

• Market Economics:  The doubling of its sales in the compact vehicle segment with its introduction of the Chevy Sonic this year is a huge performance improvement for General Motors, but in terms of the automaker’s bottom line it is the sale of vehicles with more options and more room for additional upcharge that is crucial.  With continued losses in the European market, GM desperately needs an infusion of higher margin sales.

Progress Made, But Much More to Go

Despite the recent stagnation in Cadillac sales, the division has made important performance improvements over its recent operating history.  In terms of quality, for instance, it is positive to note that Cadillac is well beyond its Cimarron days in the early 1980s (the 1982 Cadillac Cimarron was named one of the fifty worst cars of all time in a 2007 Time article).  Cadillac recently took an impressive third place finish in J.D. Power and Associates’ 2012 U.S. Vehicle Dependability Study, which measures the number of problems experienced during the past twelve months by original owners on three-year-old (2009 model) vehicles.  Only Toyota’s (NYSE: TM) Lexus luxury brand and Porsche ranked higher in the study in terms of the fewest problems per 100 vehicles.   

Similarly, with the revamping of the Cadillac CTS and SRX models, the auto division is now selling to a younger demographic than it was throughout its past.  The average age for Cadillac drivers in the first half of 2012 was 58 years old, which was nine years older than BMW’s core demographic but a year younger than average Mercedes drivers (source: CNW Market Research).  This represents a meaningful improvement compared to the mid-1990s when the average age of Cadillac drivers was closer to the mid-60s (same study), and the sporty ATS can continue the un-“geezerizing” trend of the Cadillac badge over the next several years.

Making a big splash into the swiftly growing small luxury vehicle segment is no easy task.  Popular entrants including the BMW 3-Series have been niche mainstays for decades, and other German alternatives including the hot Audi brand have quickly taken share that GM’s Cadillac and Ford’s (NYSE: F) Lincoln brand have given up over the past ten years.  The recent announcement of the bold ATS marketing campaign shows that General Motors understands the importance of the positioning of the upcoming vehicle.  With a growing love for the Olympic games – the 2008 Beijing Summer and 2010 Vancouver Winter opening ceremonies attracted 69.9 million and 67.5 million American viewers, respectively – there is no doubt that many eyes will be on Cadillac as it showcases its most important product launch in years. 

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