Luxury-car market demands huge risks and capital

New York — The Big Apple's annual auto show is a tony affair as the world's luxury automakers try to wow one of the ritziest ZIP codes in the world. But this year's premium menu is an expensive hash as automakers try to make all things for all people.

Once purveyors of exclusive sleek sedans and sports cars, luxury-makers now must invest in a buffet of options from sedans to SUVs to electric cars. Trying to satisfy the demands of family buyers, performance enthusiasts and government regulators alike, the challenge is difficult enough for industry leaders like Mercedes and BMW.

But for smaller luxury-makers the challenge holds huge risks that demand dizzying amounts of capital. Take Cadillac and Jaguar, two industry icons that are struggling to make the right choices.

“The landscape has gotten very complicated,” says IHS Automotive principal analyst Stephanie Brinley. “The volumes are in SUVs, but it takes time for automakers to make the transition to those platforms. They are increasingly trying to figure out how to share platforms with other brands.”

This year’s New York show features a patchwork of new models — from the giant three-row Mercedes GLS class, to an electric Genesis coupe concept, to small sedans from Cadillac and Jaguar.

On the heels of splashy Oscars ads introducing its full SUV lineup, Cadillac is shifting gears here to sedans. Its CT5 compact sedan that debuted this week marks a major shakeup in the brand’s sedan lineup as a much longer, roomier and luxurious competitor compared to the outgoing ATS.

Impressive as it is, however, the CT5 enters a stagnant sedan segment at a time when Cadillac is struggling to catch up in SUVs and EVs – markets that the Detroit brand has neglected.

Cadillac product marketing chief Jason Sledziewski says making SUV, sedan and electric platforms is an investment in the future: “In order to be part of the luxury industry in the world overall (we’re) becoming what you need to be. There are sedan customers out there, SUVs are growing and we know there is an EV future.”

The CT5 enters the $40,000 compact sedan market against formidable brands like the BMW with its 3-series and Jaguar with its next-generation XE introduced Wednesday.

Jaguar leveraged its reputation for making the gorgeous E-Type sports car and posh XJ sedan to craft the F-Pace SUV for a utility-mad market. Sports-car maker Porsche pioneered the idea in the early 2000s.

The $45,000 Jaguar F-Pace midsize SUV was the hottest-selling SUV in luxury when it was introduced in 2016. It quickly became the brand’s best-seller, for a time outselling the rest of the Jaguar lineup. A smaller E-Pace ute followed. Meanwhile, the brand's legendary sedans have fallen off a sales cliff.

Still, the XE sedan remains the Jaguar's number-two seller despite a nearly 50 percent drop in sales last year to about 4,700. Like Cadillac, Jaguar has been maligned for its lack of interior luxury next to German competitors, so it has amped up the XE’s insides.  

To juggle changing tastes from sedans to SUVs (and back again if market tastes change) Cadillac and Jaguar have leaned on sister brands to make sense of the enormous capital investment. No longer can luxury brands rely on unique architectures. They must share.

For athletic Jaguar this means, somewhat paradoxically, building on the same SUV platforms as off-road brother Land Rover. The Jaguar E-Pace cuts costs by sharing the front-wheel drive platform of the popular Range Range Evoque.

"The more volume on the same platform, the lower our costs," says Jaguar-Land Rover product planning chief Dave Larsen.

When Cadillac needed to play catch-up in the three-row SUV segment with the new XT6, it went to the GM toolbox and pulled out the same front-wheel drive platform that undergirds the GMC Acadia.

IHS analyst Brinley says automakers that make luxury and mainstream cars on the same manufacturing line have an advantage. For example, the Honda CR-V and premium Acura RDX come off the same line in East Liberty, Ohio.

The electric race pitches another curveball at carmakers. But this one is dictated not by consumer demand, but by government edict as countries mandate battery-powered vehicles.

“EVs are so much more complicated because there is the whole issue of customer demand,” says Brinley. “It’s more government regulation that is driving this.”

France and England have targeted the internal-combustion engine for elimination by 2040 and 2050, respectively. China – the world’s largest auto market — is expected to follow suit. While Cadillac has abandoned Europe, it sees China as a key to future sales.

Yet, Jaguar and Cadillac are investing in electrics despite weak demand.

Jaguar introduced its battery-powered $70,000 I-Pace on a new, so-called "skateboard" platform last year to rave media reviews. But sales have been disappointing. Just 212 I-Paces were sold last month compared to some 15,000 by Tesla, which dominates the EV market.

Until consumer demand warms, Jaguar is seeking opportunities with autonomous carmakers to build volume and meet stringent government emissions requirements.

Jaguar-Land Rover's Larsen points out that Google's autonomous arm, Waymo, has purchased 20,000 I-Paces for the 2021 model year for its self-driving platform. "We’ll be able to meet our federal regulatory requirement with that in the States," he says.

Cadillac is making its own new electric platform, part of GM’s plans to roll out 20 zero-emission vehicles by 2023.

“Regardless of the automaker, selling electric cars is a loss-making proposition," says auto analyst and investor Anton Wahlman of Seeking Alpha, "and with over 200 new models coming in the next 3 to 4 years, the competition for a limited number of buyers will become increasingly difficult.”

At least Cadillac doesn’t have to worry about the European market where emissions standards are tightening fast. While Cadillac has thrown its hybrid powertrains overboard to concentrate on battery-electric, Jaguar-Land Rover is promising a hybrid/plug-in or electric version for every model by 2020 to help with European requirements.

“Time is going to tell which electric car strategies will work,” says Brinley. “On paper right now they don’t make sense.”

Adds Wahlman: “Margins are likely to compress even further. For the time being it’s looking like a horrible time for automotive industry profits.”

Henry Payne is auto critic for The Detroit News. Find him at hpayne@detroitnews.com or Twitter @HenryEPayne. Catch “Car Radio with Henry Payne” from noon-2 p.m. Saturdays on 910 AM Superstation.