Is GM losing China luxury market?
Despite the company's efforts, the Cadillac brand lags behind German brands.
The Chinese luxury car market surged more than 20% to 1.25 million cars last year. A recent report by McKinsey & Co forecasts the figure to rise to 2.25 million by 2016 and to 3 million units by 2020, making China the biggest luxury car market in the world.
While the Cadillac only accounted for 30,000 out of its 2.8 million sales last year, the company has set an ambitious target of selling 100,000 units by 2015 in the country.
What is GM doing?
The first and foremost step is to build cars locally in China so that the automaker can circumvent high excise duties imposed on foreign vehicles. It recently began manufacturing the XTS sedan locally; the ATS and CTS are expected to follow suit shortly. Its other models, including the SRX and the Escalade, will be exported from North America for the time being.
GM also plans to expand its dealership network from about 150 currently to 250 in about two years (See Motor Authority). The marketing also will get a boost. It recently contracted Brad Pitt to do a commercial for the XTS.
The luxury car segment in China is dominated by the German autos BMW, Audi and Mercedes, which together account for three-fourth of the market. Brand recognition for all three of the above is tremendous. Forget China -- even in countries where these companies have little or no presence, they have a loyal fan following. The same cannot be said about Cadillac. The biggest problem with Cadillac is that outside America it is relatively unheard of.
GM's past success has hinged on building cars tailored to the needs of the average Chinese customer. But the luxury market has different dynamics. Right now, the Cadillac brand doesn't evoke the same prestige as a BMW, a Porsche or a Mercedes. Brand building often takes years. That's the issue with premium products. Customers won't be compelled to buy even a vehicle that toe-to-toe matches the existing bestseller in terms of quality or technology unless there's some sort of sheen or prestige associated.
Another problem is GM's smaller portfolio. Compared to the German autos, Cadillac has fewer cars in its portfolio and addresses fewer sub-segments within the luxury market. Also, as already mentioned, the Escalade and the SRX will be exported from North America, which makes these models all the more expensive. Gaining volumes for these models will be an difficult task.
We have a $28 price estimate for General Motors, which is in line with the current market price.
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