Cadillac vies for luxury redemption

October 1, 2013, 1:00 PM UTC

FORTUNE — When Cadillac invited curious reviewers and skeptical automotive journalists to drive its new ATS sedan earlier this year, General Motors (GM) executives were holding their breath.

In every technical category, ATS scored well as a worthy competitor against BMW’s 3 Series, the industry’s most highly decorated sports sedan and embodiment of automotive elitism.

But big questions remained: Could ATS overcome its (and Cadillac’s) lack of cachet? Would a shopper who aspired to drive a BMW consider Cadillac’s new entry? Was GM’s luxury franchise, once the envy of the world, on the road to regaining its lost prestige?

My son, a 30-something brand snob who wears Ralph Lauren clothing, eats sushi, and drives a 2008 BMW 328xi, was quite impressed after a couple of days behind the wheel of the ATS. He didn’t think owning one was a silly notion, as he would have years ago if I suggested he buy the late and unlamented Cadillac Catera.

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My daughter, an even bigger brand snob, who drives a Mercedes, admitted she “liked” the ATS after driving it.

GM execs should be encouraged by these anecdotal tidbits because they suggest that a younger demographic shopping for luxury automobiles will do so curiously and will consider Cadillac. Sales of the ATS have been strong — but GM wants more: prestige. With prestige will come the ability to price Cadillac products higher and to avoid discounts and subsidized leases, which erode profit.

Cadillac, once a vaunted brand worldwide, fell into disrepair three decades ago and was supplanted in the 1990s by the German luxury franchises and Toyota’s (TM) new Lexus vehicles. BMW and others capitalized on Cadillac’s reliance of cheap glitz over superior quality and technology.

More than a decade ago, GM embarked on a long-term and very costly project to rebuild and revive Cadillac. First came CTS, a midsize rear-wheel-drive sedan positioned in size between BMW’s 3 Series and the larger 5 Series. Reviewers praised CTS’s game effort to build a European-style sedan.

Csaba Csere, a former editor of Car and Driver, gives Cadillac high marks for styling and handling. GM’s engines and transmissions aren’t up to BMW’s, he avers.

“Cadillac is absolutely moving forward” in its quest to be considered in the same breath as BMW, Csere says. “It’s a long process.” Cadillac needs lots more coupes, convertibles, performance versions, and crossovers to match the proliferation of styles available from Lexus and German luxury brands. GM knows this and is developing several new models.

Stephanie Brinley, an analyst for IHS, agrees that GM’s luxury brand is getting stronger, noting that consumers in their 20s and 30s are notoriously fickle when it comes to brands. “This is an opportunity for Cadillac,” she says.

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Notwithstanding the openness of consumers, convincing them to switch to ATS from BMW, Audi, or Lexus won’t be easy. My son, for example, though impressed with ATS and its product attributes, prefers his BMW.

“Why trade the standard for a facsimile, albeit a good one, unless it took my driving experience to the next level?” he says. “With a $52,000 price tag this car isn’t in a class where a couple of thousand dollars [less] will make the difference in my buying decision,” he tells me.

GM has come quite a way with Cadillac. The road ahead remains long, requiring many years and billions more in investment.