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Earlier this year, General Motors Company (GM) laid out an ambitious long-term goal of having a 10% operating margin across the full company. This would represent a significant improvement compared to General Motors's historical performance. BMW (OTCPK:BAMXY) and Hyundai (OTC:HYMLF) were the only automakers that passed the 10% operating margin target last year. While Ford Motor Company (F) has recently been reporting operating margins above 10% for North America, its global average has been in the mid-single digits, and Ford's margin outlook has been relatively cautious.

Raising margins will be key to driving future profit growth at GM. Before the 2008-2009 industry restructuring, the Detroit Big Three automakers tried to maintain profits by chasing sales with big discounts. This strategy failed, because costs were too high and margins were cannibalized by fierce price competition. However, I do not think GM will be able to match Hyundai's low cost structure, even with a continued emphasis on efficiency and cost cuts. GM's heavy reliance on high-paid union labor in the U.S., Canada, and Europe, probably outweighs its larger global scale vis-a-vis Hyundai from a cost perspective.

Thus, for GM to meet its margin targets in the future, it will have to be more like BMW. In other words, it will have to grow the share of its luxury divisions (primarily Cadillac, but also Buick and GMC to a lesser extent) within the company as a whole. Luxury vehicles have higher average transaction prices (ATPs), for obvious reasons, and also command higher margins on average.

In the last decade, GM (along with cross-town rivals Ford and Chrysler) relied on sales of light trucks and large SUVs to bring margins up. However, with gas prices much higher today than five or 10 years ago, many customers who previously bought trucks and SUVs as prestige vehicles have traded down. GM will continue to have good opportunities in the truck/SUV segment going forward, particularly with the launch of its new K2XX truck platform next year. However, the market for trucks and SUVs will be more restricted to customers who need these vehicles for specific commercial or recreational purposes going forward. So while GM may benefit from pent-up demand and/or gain some market share, the long-term upside is limited.

By contrast, GM's luxury brands still present a major opportunity. Cadillac had a 9.5% share of the U.S. luxury market last year (even with Japanese luxury makes such as Lexus, Acura, and Infiniti being supply constrained), putting it in fourth place. However, Cadillac only offered three vehicles last year: the midsize CTS sedan, the SRX crossover, and the Escalade SUV. This covered only half of the luxury market segments by volume. The addition of the full-size XTS sedan this summer and the ATS compact sedan this fall brings Cadillac to 80% market coverage. With the CTS, SRX, and Escalade all expected to refresh within the next two years, Cadillac is vastly upgrading its offerings.

Cadillac's goal to retake the first position in the U.S. luxury market by 2015 is well within reach. Stocks of the new XTS are finally making their way to dealer lots, and deliveries surpassed 2000 vehicles last month. This total is expected to grow over the next few months. The company has even higher hopes for the new ATS sedan. The ATS has, for the most part, received positive reviews. GM is hoping that the ATS and XTS can follow the sales trajectory of the somewhat down-market Buick Verano, which has grown sales for nine straight months since launch to a total of 5200 vehicles in August.

Two-thirds of the way through 2012, GM's roughly 90,000 Cadillac deliveries puts it well off the pace set by Mercedes-Benz (with 168,462 luxury sales). However, when fully ramped, the ATS and XTS could quite realistically get to a combined monthly run rate of 10,000 sales or better, which would be enough to close the gap. Sales gains of this magnitude for Cadillac, particularly if supported by strength at Buick and GMC, will make the difference between good earnings results and great earnings results for GM, going forward. Investors should keep a watchful eye on the sales trajectory for Cadillac's new models for hints about GM's future performance. With these vehicles due to roll out to GM's other large markets later on (China and Europe), success will support long-term gains in margins and earnings.

Source: General Motors Needs To Be More Like BMW To Grow Earnings