After winning the hearts of Chinese customers in the minivan and small car segment, General Motors (NYSE:GM) is hoping to cash in on the growing demand of the luxury car market in China, through its Cadillac brand. The automaker got the approval from the Chinese government to build a $1.3 billion plant with a capacity of 150,000 units to manufacture the Cadillac cars locally.  Until now, GM used to sell imported Cadillacs in China, as a result of which, the prices of its models swelled due to the high tariffs imposed on imported vehicles. Due to the price reduction, Cadillac will now appeal to a greater number of price sensitive Chinese customers.
Although GM is the market leader in China with ~15% share in the automotive industry, it could only manage to sell 30,000 Cadillacs in China last year. This dwarfs in comparison to the 326,000 units sold by BMW.  On the bright side, the automaker has set an ambitious target of generating 100,000 unit sales by 2015, with the help of a new model launch every year through 2016.
Last year, GM earned about $1.5 billion from China which translates to an income of $536 per vehicle sold. If GM can increase the proportion of Cadillac vehicles, we could easily see some upside to the income earned per vehicle. China is the most valuable division and contributes about 37% to the stock price as per our estimates.
The Cadillac brand is undergoing a transition phase in the U.S., with new models introduced last year (namely the ATS and the XTS sedans) in order to better compete against foreign luxury makers such as Mercedes-Benz, BMW and Lexus. As a result, sales of the Cadillac brand in the U.S. are up 37% through April. The refreshed CTS will go on sale later this year. Furthermore, the strong American showing could have a positive spillover effect on its Chinese performance as well.
The luxury car market is booming in China as incomes continue to rise. In 2012, the market grew more than 20% to 1.25 million cars. Furthermore, a recent report released by McKinsey & Co forecasts the figure to rise to 2.25 million by 2016 and to 3 million units by 2020, making it the biggest luxury car market in the world. Currently, the market is dominated by the German autos BMW, Audi and Mercedes, which together account for three-fourth of the market. 
However, challenges do remain for GM. Outside of the U.S., the Cadillac brand relatively unkown. The names Mercedes or BMW are synonymous with luxury, but the same doesn’t hold true for Cadillac. That being said, it is important not to compare Cadillac against the German luxury giants. Make no mistake, Cadillac is not going to overtake the Germans anytime soon, the gap is too wide at the moment. But as long as the sales continue to rise, the company’s profits will swell and that is a good thing for GM.
We currently have a near $31.50 price estimate for General Motors’s stock, which is about 5% lower than the current market price.
- GM: China approves new Cadillac factory, cbsnews.com
- Luxury Car Makers Brace for Slower China Sales, April 21, 2013, wsj.com
- China on track to become globe’s top luxury car market, March 7,2013, nbcnews.com
Disclosure: No positions