Ford Hits Toyota Where It Hurts

How's this for a stunner? Longtime quality paragon Toyota (NYSE: TM  ) actually dragged down the average in the most recent edition of the widely watched J.D. Power Initial Quality Study for automakers.

Want another one? Ford (NYSE: F  ) -- yes, Ford -- beat out Toyota, BMW, Audi, Nissan -- and Toyota's longtime quality rival Honda (NYSE: HMC  ) , too.

That certainly seems like big news -- though not necessarily surprising to those who've been following Ford's tremendous recovery or Toyota's ongoing recall troubles. But what's really going on here?

What it is (and what it isn't)
The Initial Quality Study (often referred to as the IQS), an annual survey conducted by McGraw-Hill (NYSE: MHP  ) unit J.D. Power, is often held up as the gold standard of a brand's "quality," but the truth is a little more complicated than that. In a nutshell, the IQS is a survey that asks new-car buyers about problems they may have had in the first 90 days of ownership.

It's very different from something like Consumer Reports ratings, which look at durability -- how a vehicle holds together over several years. By focusing on the first 90 days, the IQS is more likely to capture problems related to the car's assembly, rather than to its design.

Another factor worth noting: The IQS ranks cars by brand, not manufacturer. This is important because, to some extent, the responses to the IQS surveys probably reflect customers' experiences with their dealers as well as with the vehicles themselves. Consider: Luxury brands often lead the IQS, as they did this year, sometimes significantly ahead of their mass-market cousins. For instance, Toyota (the brand) placed 21st in this year's survey, but Lexus -- Toyota's luxury brand, which sells vehicles built on Toyota platforms in Toyota factories -- placed fourth.

In fact, the top four brands were all luxury brands: Porsche, Acura, Mercedes-Benz, and Lexus. Given that luxury-brand dealers tend to go to greater lengths to keep their customers smiling than do mass-market brands, how much of the IQS is really measuring "quality" versus "customer satisfaction"?

Hard to say. But in that light, Ford's fifth-place finish -- right after the four aforementioned high-zoot brands -- is arguably even more impressive.

America wins!
Ford wasn't the only American company to do well. J.D. Power's press release from Thursday trumpeted the fact that American brands, in the aggregate, led imports in quality for the first time in the IQS's 24-year history, with General Motors and most of Chrysler's brands showing solid gains.

But Ford was clearly the shining star of the report. Ford's score in the ICQ -- expressed as problems per 100 vehicles -- has improved steadily for the past nine years, said J.D. Power, and Ford's Lincoln brand also made it into the top 10, a sizeable jump from past years.

Toyota's real quality problem
But what was behind Toyota's stunning fall from sixth to 21st place? Not surprisingly, the company's extensive recalls were a key factor: While J.D. Power traditionally withholds details about makes and models that don't do well, a company vice president did tell The New York Times that owners of Toyota's recalled vehicles seemed more likely "to report anything that seemed odd," and that "the vehicles that weren't recalled actually showed some improvement."

To my mind, that's further evidence that the IQS is more about buyer perceptions and short-term customer satisfaction than it is about the vehicles themselves. And that suggests that new-car shoppers should stick with other measures of "quality" -- those Consumer Reports surveys, for instance -- if they're concerned about choosing an especially reliable model of car.

But for those of us looking at these companies as investments, the latest iteration of the IQS does give us a couple of takeaways. Clearly, Toyota's very public recall fiascos have had a measurable impact on even its own customers' perceptions of its vehicles, suggesting damage that is likely to linger for some time.

And just as clearly, the folks at Ford are on an impressive roll.

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Fool contributor John Rosevear owns shares of Ford. Ford is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 18, 2010, at 5:12 PM, spawn44 wrote:

    Seems like you want to say it but are having a hard time coming to the realization that Ford is underrated to the max and may have already caught and passed Toyota.

  • Report this Comment On June 18, 2010, at 5:26 PM, TMFMarlowe wrote:

    It's not a matter of "having a hard time" with anything... plain and simple, in terms of quality, it'll be a few years before anyone can really answer that question. But certainly Ford is -- at least -- closer than they've ever been, and on an upswing.

    Thanks for reading.

    John Rosevear

  • Report this Comment On June 18, 2010, at 6:03 PM, TMFBreakerRob wrote:

    Another good article, John.

    As a bit of extra information, Ford's internal data shows that our 3MIS (3 month in service) data is a very good predictor of 3YIS (3 year in service) data. In other words, if you're good at three months, you're likely to be good at three years. Both sets of data are derived from surveys of customers at these time periods. So.....its likely that the long term Consumer Reports data will increasingly show the improvements.

    Rob

  • Report this Comment On June 19, 2010, at 12:46 PM, Milligram46 wrote:

    @TMFBreakerBob

    That's an interesting stat. I wonder if this is in part because cars have become so computerized.

    When I worked at Compaq our predictor was at 30 days. If something didn't break on a customers computer at 30 days, it was very likely nothing would break on that unit. Once electronics pass burn in (even mechanically dependent electronic components like CD-ROM drives and hard drives) it is likely they will just keep running.

    I know cars are vastly more mechanically complicated than a desktop computer, but wondering if the tightening of, "if they're happy, and it didn't break," point of three months is in part because of all of the solid state electronics in the car - including solid state components handling major mechanical functions like steering, braking, and fuel delivery (to list just a few).

  • Report this Comment On June 19, 2010, at 3:06 PM, Jazzenjohn1 wrote:

    A good article but you are too enamored of Consumer reports. They are and have always been a thinly veiled publication for promoting foreign brands. They pretend to be unbiased but a simple look at the ratings of cars that are essentially the same shows how biased they are. Compare Ford and Mazda cars built on the same line, with the same components, by the same people and see for yourself.

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