General Motors (NYSE:GM) Cuts Production for Cadillac
Last year, General Motors (NYSE:GM) gave one of the biggest stories to the auto industry by reviving its luxury brand – Cadillac. Strong, new models were introduced in the market that attracted a lot of appraisal from critics. Consequently, sales increased by 21.9% in the previous year.
However, things have changed in this year; in November, Cadillac’s sales fell by 5.9%. Meanwhile, other brands for luxury vehicles set sales records curing the same time. According to the data, the new sedan models are priced much higher than they were before. The customers are not used to these high prices. This is why the sales are falling now.
The two new Cadillac luxury sedans are ATS, which is new, and CTS, which is in the third generation. The new CTS model for 2014 model year costs $6000 more than the old models that were introduced in 2013. This difference is more than $15,000 in trim lines.
The new CTS is much better than the older won; it won a Car of the Year award last year. It is also performing better than German luxury cars in performance tests. However, CTS’s price is comparable to that of its competitors. The problem is that Cadillac has never set its prices this high before and so the customers are turning away and going to other brands for shopping. Meanwhile, the customers of competition brands have not yet shifted focus to Cadillac. So, the Cadillac is not gaining new customers to make up the difference of losing its old customers.
In ye’ olden times, General Motors (NYSE:GM) would have responded by cutting the price for Cadillac. But now, the company is under the new management of Johan de Nysschen. So, naturally, the company responded differently; by cutting down the production of Cadillac sedans last month.
This announcement attracted much criticism because while General Motors (NYSE:GM) was cutting its production of luxury sedans, its competitors were increasing production. However, de Nysschen believes that this was a necessary move in making Cadillac a global luxury brand in true essence. The reason behind cutting production was that the car dealers in U.S. already have a large inventory of Cadillacs. Optimally, dealers must have 60 days’ worth of inventory, but the CTS and ATS dealers have over 110 days’ worth of inventory.
High inventories become a problem because the dealers will be urged to sell the cars at lower prices to clear out the stock. This is not the way to handle premium business as de Nysschen says. De Nysschen has already approved of some incentives to clear out the stock. However, he is not willing to reduce the price of Cadillac for long-term. This will undermine the initial profit as well as the residual values. If residual values become lower, the leasing deals on new models will become less competitive. This will be a bad move in the luxury vehicle market as leasing deals attract most of the sales.
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Overall, the best solution was to reduce the car production for the time being, until the sales increase.