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Can America build luxury cars?

After all but ceding the luxury auto segment to the Germans and Japanese, Detroit is trying to compete again.
Only 50 Bugatti Veyrons are built per year, and the super-luxury car has a sticker price of $1.4 million.
Only 50 Bugatti Veyrons are built per year, and the super-luxury car has a sticker price of $1.4 million.Bugatti
/ Source: Business Week

For years, America built some of the world's most coveted luxury cars. Between the wars, marques like Packard and Duesenberg were driven by millionaires and movie stars. But beginning in the 1970s, increasing competition forced Detroit to concentrate on more high-volume cars, all but ceding the luxury segment to rivals in Japan and Germany. By the 1990s, Cadillac and Lincoln had become a punch line, the car of choice for retirees and funeral homes. It looked as though America would never again produce a world-class luxury car.

That may now have changed.

At January's North American International Auto Show in Detroit, Cadillac debuted its new 2008 CTS sedan. Coming on the heels of several successful Caddy designs in recent years, most notably its Escalade sport-utility vehicle, Cadillac has seen a resurgence in sales and consumer appeal. The company has finally been able to once again attract a younger, more affluent audience.

From the exterior, these cars looked sleek, and under the hood they provided the power that many of their buyers craved. But they fell down when it came to the interior. Crafted mainly from the General Motors plastic parts bin, they couldn't hold a candle to Lexus, Audi, and BMW. If only, the thinking went, GM could get its act to together and make a better interior, Cadillac could once again truly compete in the luxury segment.

Interior flourishes
And now it has. The new CTS will bring to market the fruits of a long-term, company-wide initiative to wrestle control of the interior away from the accountants and return it to the design department where it belongs. The cabin features sweeping surfaces, with integrated buttons and knobs that look more custom-made. Soft, ambient lighting is piped along the doors. Seats also sport a minimalist, jewel-like chevron insignia. "This second pass allows us to get into the really fine details," says Dave Caldwell, a spokesman for the company.

The car also features a "cut-and-sew" process in which coverings on the instrument panel, center console, and door trim are cut, sewn, and wrapped by hand, allowing for flourishes such as French stitching. It's the kind of attention to interior quality that recent GM products have so badly needed—especially given the competition from Lexus, Infiniti, and Acura.

Such process and detail adds cost, admits Dave Rand, GM's executive director for interior design, but he and other executives believe the improvements in quality are worth it. "All the manufacturers know the new game in town is interiors," says Rand. "The exterior is still the hook, but how you live with the product, well, that's all on the inside."

"Cadillac renaissance"
Much is riding on the new CTS, the second generation of Cadillac's entry-level, rear-wheel-drive sedan. The CTS had been one of Cadillac's strongest sellers, after the company's iconic Escalade, and was its best-seller in 2005. In 2006, though, in need of a redesign, it dropped behind the updated DTS full-size sedan, with sales of 54,846 cars. The new CTS, a 2008 model, will hit dealer showrooms sometime this fall and cost around $30,000.

At the car's January debut, Robert Lutz, GM vice-chairman and head of global product development, said: "This new CTS is a much more capable and attractive car. I see this as phase two of the Cadillac renaissance." Auto industry analysts, for their part, gave the car high marks for its evocative front grille and softened but still sharp body lines—both derived from the striking Cadillac Sixteen concept from 2003.

But competition from BMW's 3 series, as well as all-new versions of the Lexus IS and Mercedes C-Class sedans, will be tough. In 2006, BMW sold more than 106,000 3-series cars in the U.S. alone, and the C-Class is Mercedes' best-selling model.

When GM launched the CTS in 2002, executives said it heralded the revival of the beleaguered brand, which had been losing customers to foreign rivals since the 1970s. Leading up to the launch, $4 billion was directed to the Cadillac project — at the time, that meant a whopping 10% of GM's total capital budget was earmarked for a brand that made up fewer than 4% of total sales. Since then, the company has introduced the rear-wheel-drive STS, a re-skinned DTS, the SRX crossover, and a next-generation Escalade. "Overall, the brand's been moving in the right direction," says Wes Brown, a partner in Iceology, a Los Angeles-based consumer marketing research firm.

If only the same could be said for Lincoln, Ford's perennial also-ran in the domestic luxury market. The company makes a high-end SUV, the Navigator, that's every bit as good and flashy as the Escalade, but in 2006 the Cadillac sold more than 41,000 (ESV and EXT models included) to the Navigator's 23,947. In fact, in a year when light-truck sales were down 6.7% overall, according to Automotive News, Escalade sales were up more than 30%. Even worse for Ford, where Cadillac was up 13.6% for the year, Lincoln plummeted 24.5%.

Lincoln is clearly wrestling with its brand image. Recent models, such as the MKZ sedan and the MKX crossover, are targeted solidly at the less-expensive "premium" market. And while the company recently debuted a rear-wheel-drive concept, it most likely won't be on line until 2009. Long term, it remains to be seen whether Lincoln will continue to pursue its traditional luxury customer. And Cadillac isn't above a little trash-talking. "We don't really consider Lincoln a competitor," says Caldwell.

Will they buy?
And yes, there are some other U.S. car companies, such as Saleen and Mosler, that are turning out very expensive, ridiculously fast cars. But they do so in extremely low volume, and despite their exorbitant prices, tend to favor performance over luxury.

Even with a new product that's strong both inside and out, questions remain about the direction Cadillac's turnaround will take from here. For one thing, even though Cadillac is in a comeback mode, are its customers psychologically willing to accept it as a luxury brand on par with BMW and Lexus? The Escalade isn't a good example, because even though it can cost nearly $70,000, it's still a large SUV. To succeed in this category, Cadillac needs to offer competitive sedans and coupes. The CTS may lead to better things, but the sporty XLR convertible stands as a cautionary tale.

The XLR has an MSRP of $78,000 — and fully loaded, it can cost almost $100,000. Since it went on the market in 2003, it has been a sales disappointment, selling only 3,203 models in 2006, down 14% from the previous year. There are a number of things wrong with the XLR, not the least being its cramped, cheap interior and lack of luggage space. But the main problem is that Cadillac's core customers may be priced out of their league. Even for those who do have the money, would they want to spend it on a Caddy when at that price point there are so many other excellent, albeit imported, cars to choose from?

Missing models
It is, of course, possible for Cadillac to win back the hearts and minds — and wallets — of affluent Americans. After all, look at the success of brands such as Lexus and Acura, which spearheaded the drive to convince buyers that Japan could build a luxury car.

Still missing from the CTS line are variants — a coupe, convertible, or wagon — like those that have helped expand sales of the BMW 3 series. GM is said to be working on at least two of these, but some analysts expected such models to be out the gate by now. "To do it right in that segment you've got to have variants," says Brown. "I assume it's in the game plan." Cadillac product director John Howell adds: "It will take more than three sedans to be competitive."

For now, at least, the CTS is a great place to start.