Though it still has a long way to go, Cadillac is making surprising progress in making a significant contribution to General Motors’ bottom line.
Though its newest cars are getting good reviews, its new-found financial health has more to do with how the business is being run.
Johan de Nysschen, the president of Cadillac who formerly worked at Audi and Infiniti, says Cadillac now is being managed more like a start-up company. He moved operations from Detroit to New York and focused his organization on achieving three simple targets: Get more models, reduce dealer inventory and boost transaction prices.
Even though de Nysschen has been at the helm only for 19 months, his plan already is showing meaningful progress. Last year, Cadillac boosted transaction prices an average $5,000 per car. In fact, de Nysschen says Cadillac was behind only Mercedes-Benz in U.S. transaction prices. So far this year, it’s ahead of Mercedes, he claims.
As far as more models, Cadillac is adding two this year, the all-new CT6 sedan and XT5 CUV. It will introduce 11 new models over the next five years, which will significantly expand its portfolio. But AutoForecast Solutions reports the brand recently cancelled plans to make the CT8 flagship sedan.
The XT5 is a replacement for the SRX, but it should sell better, if only because the SRX now is seven years old, an eternity in the car business. The CT6 is not replacing anything, so every sale represents incremental volume.
Perhaps more importantly, the CT6 and XT5 also will be built in China. That will nicely sidestep a 25% import tax, which should goose sales in Cadillac’s fastest-growing market. Last year, it shrugged off a slowdown in the Chinese economy and posted a 17% increase to nearly 80,000 cars.
Cadillac’s efforts to reduce dealer inventory is instructive if not illuminating. De Nysschen says that having less inventory changes the conversation in the showroom. Instead of resorting to a hard sell to clear what’s on the lot, salespeople now can spend more time listening to customers and helping them order what they want.
Cadillac’s U.S. dealers ended 2015 with only a 48 days’ supply on hand. De Nysschen’s goal is to whittle that down to 30 days. So far this year, WardsAuto data shows Cadillac’s inventory levels have shot up to 78 days, so there’s clearly more work to be done.
Transaction Prices $5,000 Higher
Cadillac’s most impressive progress involves boosting transaction prices. The most intriguing move came from unbundling option packages, where customers were forced to take a bunch of options they didn’t want just to get the one they did. For example, to get a panoramic sunroof you had to buy a $10,000 accessories package. Too many customers simply chose to go without.
Automakers like to bundle options because it simplifies the build process in their assembly plants. Allowing customers to choose what they want adds complexity and cost. But de Nysschen convinced GM that to play in the luxury segment it had to bite the bullet, accept higher manufacturing complexity and offer more stand-alone options.
Now customers are spending more money to get what they want, offsetting the cost of added complexity.
In 2015, the transaction prices on the CTS went up $8,000 and the ATS was up $2,000. So far in 2016, the ATS is up another $1,500, while the XTS is up $3,000. “2015 from a revenue basis was a killer year,” de Nysschen brags.
Cadillac’s next step is to evolve its hard-edged “Art and Science” styling theme and make it less severe. De Nysschen says they’ve tested a car in consumer clinics in China with new styling that got the highest scores of any GM vehicle evaluated there. He won’t identify the car, but says it represents Cadillac’s new look.
Last year, Cadillac sold almost 278,000 vehicles worldwide. Because the average transaction price for a Cadillac in the U.S. market reportedly is $53,000, that means the brand generated about $15 billion in revenue for GM.
If we assume Cadillac is making roughly $4,000 in profit on each vehicle – not an unreasonable assumption – that means it’s now generating about $1.1 billion in profit annually for GM. In five years Cadillac hopes to sell 500,000 cars a year. If it does, those financial numbers practically could double.
You have to wonder if GM would ever break out Cadillac’s profits in its annual report. That kind of visibility might convince Wall Street there is more value hidden inside GM than the analyst community realizes.
GM stock currently is trading at a paltry five times earnings. The stock market average is 14 times. So if GM could just get Wall Street to value its stock at the market average, its share price nearly would triple. Cadillac could be one of the catalysts to make that happen.