GHOST OF OLD GM?

Overproduction, hefty spiffs sink residuals of Cadillac ATS

Cadillac is counting on the ATS to attract young buyers to the brand.
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DETROIT -- Since its launch 18 months ago, the Cadillac ATS sedan has been lauded as having the performance chops to help the brand finally compete with the German luxury juggernauts.

So why did ALG, the industry's arbiter of resale values, slam the ATS at the outset of its 2014 model year?

It wasn't because of driving dynamics or refinement, but rather bloated inventory and high incentives.

A year ago, the ATS had among the highest residual ratings in the competitive compact luxury market, better than those of the BMW 3 series. But ALG's latest ratings put it toward the bottom of the pack, citing an overly ambitious volume forecast that left Cadillac dealers with inventories routinely exceeding a 140-day supply, more than double the level that's considered healthy.

It's a setback for GM executives who, since the 2009 bankruptcy reorganization, have preached a new religion of balanced supply and demand, one in which resale values and brand equity trump market share.

The "New GM" mostly has stuck to that formula, keeping incentives tame on new pickups, for example, despite frothy discounts from rivals and pressure from dealers. But on the eve of this week's transition to a new CEO, the ATS case offers fodder to those who warn about GM returning to its old habits.

"They've been managing their production much better in the New GM era," says Eric Lyman, ALG's vice president of editorial and partner development. But as ATS inventories began to swell, GM didn't throttle back on production "like we'd like to see," Lyman said. "Instead they piled on the incentives to try to move that product."

Cadillac's overall sales last year fell short of the brand's goal of 30 percent growth, rising 22 percent to 182,543. The ATS sold 38,319 units in 2013; December sales were 3,887 units, up 31 percent compared with December 2012.

The ATS is crucial to Cadillac's growth ambitions as a gateway to the brand for young buyers, who then can graduate to larger, pricier Caddys. GM says it's working: More than 70 percent of ATS buyers are new to the brand, and 55 percent came from a non-GM brand.

But the weaker residual will make it more costly for GM to offer competitive monthly lease rates in a segment where leasing is the name of the game; two-thirds of ATS deliveries last year were leases. Lenders typically must compensate for lower ratings by artificially inflating residual values to cut monthly payments and by setting aside reserves for potential future losses.

As of Jan. 1, ALG's average forecasted residual after 36 months across all ATS models is 48 percent, down from 55 percent a year earlier. That's lower than the 52 percent residual for the segment overall, which was flat.

GM spokesman David Caldwell said Cadillac is not likely to alter its lease offerings as a result of ALG's move. He says the brand is "happy that we have an established compact sports sedan in the segment for the first time ever," and is pleased with the car's high conquest rate.

Some dealers say it has been difficult to convince prospective customers that the ATS is worth the same price as the 3 series or Mercedes-Benz C class, despite car reviews that suggest otherwise. "Getting customers to look at Cadillac for first time, it's not an easy process," says Todd Snell, CEO of Snell Motors Inc., a Buick-GMC and Cadillac dealer in Mankato, Minn.

GM gradually raised incentives on the ATS throughout 2013 as inventories piled up. For the year, GM spent an average of $4,617 per car, according to ALG parent TrueCar Inc., far more than the spiffs on the 3 series ($2,908), the C class ($3,051) and the Audi A4 ($3,374).

ALG also cited weaker-than-expected prices on used ATS models sold at auction as a reason for the residual reduction. Black Book, a used-car valuator, pegs the current wholesale value of a 2013 ATS in a performance package, a high-volume trim, at $26,550. The current value on a comparable BMW 328i is $30,650.

Chris MacConnell, dealer principal at Thomson-MacConnell Cadillac in Cincinnati, says his ATS inventory is a bit high, but he says the car has brought an influx of customers who owned other brands.

"Thank God for that car," says MacConnell, who estimates that the sedan accounts for nearly a quarter of his sales.

One Cadillac dealer in the Northeast, who didn't want his name used, says he recently turned down a portion of his ATS shipment from GM.

"Every dealer in my area is loaded," he says. "We have great cars now, but we also have perception issues. We made not-so-great cars for a long time."

You can reach Mike Colias at mcolias@crain.com.


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