Why General Motors Made Cadillac Wait for the All-New XT4 SUV
Last week, General Motors (NYSE: GM) introduced the all-new Cadillac XT4. It's a stylish crossover SUV, a size down from the brand's existing XT5, that will go on sale in the U.S. and China later this year.
The XT4 is a product that Cadillac has sorely needed for a couple of years now. The brand has had to watch from the sidelines as sales of compact luxury crossover SUVs boomed in both the U.S. and China over that time. The good news is that the XT4 looks like a winning product. But why did Cadillac have to wait so long to get it?
As Cadillac's president explained to me in an interview last week, he had to go halfway around the world to convince GM to fund the new vehicles that Cadillac needed.
The all-new 2019 Cadillac XT4 will go on sale this fall. Image source: General Motors.
Cadillac needed new products, but it needed something else first
The story starts in mid-2014, when longtime Audi and Nissan executive Johan de Nysschen joined GM to take on a daunting mission: restoring Cadillac to the top of the world's luxury-car rankings.
De Nysschen demanded (and got) plenty of leeway from CEO Mary Barra and the blessings of GM's board of directors. One of the first things he did was to draw up an ambitious product plan for the brand. But he quickly ran into trouble: As he told me in an interview last week, his sales projections weren't enough to get those new Cadillacs funded:
We recognized that there was all this white space in our product portfolio. But General Motors is now run with a very high degree of vigor in terms of financial discipline. That's why the company is performing well.
But the downside of that is that there are no pet projects. If a vehicle program doesn't pay its way, then it doesn't happen. And Cadillac's struggle had been that it was literally starved of product.
It sounds like a Catch-22, but it was a genuine dilemma. Cadillac's sales were poor because it urgently needed new products, but de Nysschen couldn't get GM's board to fund those new products because its sales numbers were poor -- meaning that any reasonable sales projections weren't enough to justify the investments.
"We couldn't get the numbers to work," he said.
What de Nysschen and his new team needed was a way to start selling a whole lot more Cadillacs, quickly. Fortunately, the answer was right in front of them.
Johan de Nysschen, shown here at the New York International Auto Show last week, has led Cadillac since 2014. Image source: General Motors.
To fix the U.S., Cadillac had to invest in China
"We had to prioritize China in order to solve our U.S. product challenge," de Nysschen said.
GM had a large presence in China, and Cadillac a modest one, when de Nysschen came on board. But luxury sales were booming in China, and de Nysschen saw an opportunity to invest in a much bigger presence.
We invested very heavily, far more aggressively perhaps than what might normally be the case. We decided that the only way to be competitive is to localize, so we could avoid the big tariffs [that China levies on imported vehicles].
So we built the plant [an advanced Cadillac-only factory near Shanghai that opened in early 2016]. In a way it was sort of akin to burning the ships, because once you've built the plant you had better make it work.
Cadillac also invested in a big expansion of its China dealer network, de Nysschen explained, carefully selecting high-quality dealers who were willing to take chances on stores devoted entirely to the Cadillac brand.
In 2014, Cadillac had sold about 68,000 vehicles in China, far short of the 170,000 it sold in the U.S. that same year. But growth came quickly once de Nysschen's effort got underway: Sales rose 17% in 2015, 46% in 2016, after the new Shanghai factory was up and running, and another 51% in 2017 to 116,406.
"The China business has now become self-sustaining. It doesn't need our investment anymore," de Nysschen said. "In fact, now the opposite is happening. It's sending us money, which we can now directly apply here."
GM opened a new, highly flexible Cadillac factory near Shanghai in early 2016. The added production helped Cadillac's China sales rise 46% that year, and another 51% in 2017. Image source: General Motors.
Success in China should help drive growth in the U.S.
Cadillac's sales in China have boomed since 2014, but its U.S. sales haven't: Cadillac's U.S. sales in 2017 were about 170,000 -- roughly equal to its 2014 result -- despite strong growth in luxury-vehicle sales overall.
The XT4 is the first in a series of new Cadillacs that should help change that for the better. De Nysschen confirmed that the next new Cadillac will be a larger, three-row crossover SUV and it's likely to be unveiled late this year or early in 2019.
More new Cadillacs will follow -- on average, one every six months or so -- until the brand's portfolio expands to cover more than 90% of the luxury market, up from 65% today. Those will include an all-new version of the big (and hugely profitable) Escalade SUV and at least two all-new sedans to replace the ATS, CTS, and XTS.
(There may be a third Cadillac sedan in the works: A version of the stunning Escala show car could go into production as a new top-of-the-line model for the brand early next decade.)
Those new Cadillacs seem all but certain to give the brand's U.S. sales the boost its dealers have been waiting to see. Of course, they'll boost the brand's sales in China, too -- and given the fat profit margins on Cadillacs, those sales gains should have an outsized impact on GM's bottom line over the next few years.
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John Rosevear owns shares of General Motors. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
