Bloomberg News, April 23, 2012
As General Motors Co. (GM) executives celebrated the opening of a special pavilion in Beijing to woo luxury customers away from Audi, a subtle message about the brand stood on display: a scale model of Cadillac’s U.S. presidential limousine.
GM is betting Cadillac’s 110-year heritage, including its role as the president’s car, can help sell the brand in China, where sales are a 10th of market leader Volkswagen AG (VOW)’s Audi and German luxury brands dominate the premium segment.
The U.S. automaker, a year after reclaiming global sales leadership, is preparing a renewed Cadillac push in China with plans to introduce new products, increase local production and expand sales outlets as it aims to boost sales in the country at least fivefold to match U.S. deliveries by 2020. Narrowing the gap against Audi can help keep GM ahead of VW.
“Chinese may or may not like America, but they definitely like the power that’s associated with America,” said Michael Dunne, a Jakarta-based industry analyst and author. “They admire, respect and like power and America is the world’s leading superpower, so owning an American car offers an opportunity to be part of that.”
The Cadillac push in China, where the automaker mostly sells Chevrolet, Buick and Wuling models, is part of Chief Executive Officer Dan Akerson’s effort to raise profit margins and develop Cadillac as a top global brand to hedge against the risk of declining sales of high-profit trucks.
Cadillac Catch-Up
GM plans to bring a new Cadillac model to China each year through 2016, Akerson said today at the Beijing auto show. The goal is for Cadillac sales in China to reach U.S. levels by mid- decade, he said.
While Cadillac’s China sales rose 73 percent last year to 30,000, Audi increased sales by more than Cadillac’s total. Audi’s full-year tally of 308,808 made it the country’s luxury leader, according to LMC Automotive, and helped propel VW ahead of Toyota in 2011 global sales to trail only Detroit-based GM.
“Talk luxury cars in China and you’re really talking about German domination,” Dunne said. The three German high-end brands dominate China’s upscale auto market, with a combined share of more than 75 percent last year, according to figures by industry analyst LMC Automotive.
Cadillac’s pavilion in Beijing, erected in connection with the city’s auto show that begins this week, is intended to highlight the brand’s uniqueness. Influential guests will be invited to see art, such as works by pop icon Andy Warhol and contemporary Chinese artist Yue Minjun, displayed around classic and modern Cadillac cars.
Luxury Defined
“We want to create a whole story and tell customers and people here that Cadillac is different,” Kevin Chen, general manager of the Cadillac brand in China, said during an April 21 interview at the monthlong exhibit’s opening for local media. “We own the asset; nobody can replicate” Cadillac’s history, he said.
At the pavilion, GM displayed a 1927 Webster’s dictionary, opened to the entry for Cadillac: “Something that is the most outstanding or prestigious of its kind.”
Cadillac has lost some of its luster as the world’s luxury car market has grown more competitive. Akerson wants to restore the brand and push Cadillac into the top tier globally along with German competitors Bayerische Motoren Werke AG (BMW)’s BMW brand andDaimler AG (DAI)’s Mercedes-Benz. He aims to overtake Toyota Motor Corp. (7203)’s Lexus to become the fourth-best selling premium brand, people familiar with the plans have said.
Hedging Truck Profit
Part of the reason is to make up for less profits on trucks. GM acknowledges that planned tougher U.S. mileage standards, known as corporate average fuel economy, or CAFE, may hurt sales of large pickups.
While GM benefits from high-margin, high-volume pickup sales, “Volkswagen has luxury,” Steve Girsky, GM vice chairman, said of the competitor’s Audi brand. “And if you believe the truck business, because of CAFE or whatever reason, is at risk of going down, globalizing Cadillac and getting more out of your luxury brands is a priority, and it’s a priority for us.”
Akerson is making his push to restore Cadillac first in the U.S. and in China, where the luxury auto market may grow 15 percent this year, according to LMC.
By 2020, GM anticipates half of the world’s luxury goods to be consumed in China, Don Butler, vice president of Cadillac marketing, said in an interview this month in Warren, Michigan. He spent time with Chinese luxury consumers in December and said the brand is highly esteemed, in part because its models have been used to shuttle U.S. presidents from Woodrow Wilson to Ronald Reagan, Bill Clinton and Barack Obama.
“We are held in essentially the same regard as BMW and Audi and Mercedes-Benz, and part of it does go back to this really fond association with America” and its image of power and success, Butler said. “It’s the car of presidents.”
Import Disadvantage
Part of Cadillac’s difficulty in China has been a lack of local production, leaving its vehicles more expensive than those made locally by competitors. The only Cadillac model now made in China is the SLS sedan.
“The premium makers are really enjoying a lot of good profitability in China, but beyond that, the efficiencies that they can gain in their global buying activity from the kind of scale that is generated from the Chinese demand is tremendous,” said Bill Russo, president of auto consultancy Synergistics Ltd.
GM plans to make the new XTS sedan in the country, Akerson said. Production may begin late this year followed by assembly of the ATS compact car in the first half of next year, said two people familiar with the matter. GM is also considering the redesigned CTS for China production, said the people, who asked not to be identified because the plans haven’t been made public. Dayna Hart, a GM spokeswoman, declined to comment on future production.
Along with adding Cadillac production in China, GM also plans to expand the dealer network. Cadillac, which had 11 stores in China at the end of 2006, now has 69 with plans to double the number over the next year, the people said.
Styling Stumbles
Cadillac has also suffered from having too few products that appeal to Chinese taste. The brand’s styling has held it back in the past, said Dunne, the analyst, who wrote a book called “American Wheels, Chinese Roads: The Story of General Motors in China.”
Some Chinese consumers, he said, have referred to the brand as “ben zhong,” which roughly translates to “dumb” and “heavy.”
GM executives such as Butler and Chen say that the new styling of the SRX sport-utility vehicle has appealed to customers and that they believe the ATS compact sedan will also help attract new buyers.
Younger Buyers
While Cadillac faces hurdles in China, it doesn’t carry the same kinds of brand baggage as in the U.S. where it has struggled to appeal to younger buyers. The average age of U.S. Cadillac buyers is 63, according to J.D. Power & Associates, while in China, GM said it’s 35.
Simon Gao, a 33-year-old entrepreneur in Shanghai, is one of those young customers. He visited a dealership in March in Shanghai to buy an SRX, which starts for 429,800 yuan, or about $68,100, 90 percent more than the beginning price in the U.S. Audi’s Q5 SUV, which is assembled in China, starts for 383,600 yuan, or about $60,800.
Gao is the kind of customer Cadillac is targeting, even if he wasn’t familiar with the brand when he began shopping.
“I knew it was an American brand, top of the range for GM, but it was the robust exterior that attracted me to it,” Gao said in an interview. “The SRX is a very manly car. There were too many Audi Q5s on the road, and the design was rather unisex. I wanted a car that was very manly, and when you look at the SRX, you instantly know a man’s going to drive it.”
At the dealership Gao visited in Shanghai, a sitting area for customers included a display of U.S. presidents, including Reagan and Obama, who have used Cadillac as their official car.
To contact Bloomberg News staff for this story: Tim Higgins in Detroit atthiggins21@bloomberg.net; Liza Lin in Shanghai at llin15@bloomberg.net
To contact the editors responsible for this story: Jamie Butters at jbutters@bloomberg.net; Young-Sam Cho at ycho2@bloomberg.net
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