Out on Main Street America, it's back to school season for the kids. And on that note, it seems U.S. automakers have learned a lesson from their Japanese counterparts: You can't construct crummy cars and expect to purvey them for premium prices.
For evidence of Detroit's realization, turn with me in your textbooks to the August edition of the 2007 Vehicle Dependability Study (VDS), published annually by McGraw-Hill
The rest of the Big Three
Let's quickly run down how the major players fared in this latest edition of the VDS. First up, Buick parent General Motors
Next up, Ford
Rounding out the Big Three is Chrysler, which did its level best to prove DaimlerChrysler
The other Big Three
Meanwhile, in the land of the Rising Sun, things are as constant as, well, the sun rising in the east. Both Toyota
Meanwhile, Carlos Ghosn's problem child's problems continue. Nissan
I promised to put all of this into context for you, by drawing from this month's news an investing lesson. Here then, is that lesson. Quoting from the VDS: "Vehicle models that demonstrate strong dependability lose their value less rapidly compared with vehicles that are not as dependable. ... Automakers may reap numerous benefits from producing dependable vehicles ... higher residual values, decreased warranty costs [... and an] increased likelihood of customers recommending or purchasing newer dependable models." In investing terms, these laudable goals have the following effects:
Higher residual values
The faster a buyer thinks his new car will depreciate, the less he'll be willing to pay for it. It's only logical that if you know your $20,000 vehicle will, on average, resell for just $11,200 in three years, you'll want to cut your losses a bit. Demanding cash back, or perhaps 0% financing, are both tricks that GM has famously used in the past -- in full knowledge that bribing customers to buy its products in this way is mortgaging its future.
But what if GM can build on the success of its Buick brand? Should GM reclaim a reputation for quality, car buyers might become less fearful that a pricey new Buick will soon become a devalued used Buick. They might then be more willing to pay something more closely approximating the actual list price (gasp!). Result: Stronger gross margins -- and with GM currently eking out a living on a 4% operating margin, every extra basis point counts.
Decreased warranty costs
But building better cars doesn't just help an automaker's margins by inflating its top line. It can boost margins by cutting costs, as well. At the risk of stating the obvious, cars that break down during the warranty period cost money to fix. Money that, by definition, the maker is shelling out. Conversely, cars that don't break down don't incur this cost -- expanding margins from the other side of the equation.
Increased quality means increased sales?
Improving its quality, and its reputation for quality, can also help repair another peculiarly Detroit-ian bugaboo: loss of market share, with consequent declining sales. Maintaining scale is key to maximizing profits in a manufacturer such as GM, which explains why the company has been willing in the past to sacrifice margins in an effort to shore up sales. But if building better products will help GM attract more repeat buyers, and even expand its market share through customer recommendations, GM should be able to boost sales without sacrificing margins.
So any way you cut it, scoring high on the annual J.D. Power reports is key to Detroit's recovery, to GM's income statement, and to investors' returns on their GM stock. Or as GM might put it: "Honest, we fixed it. Are you sure you wouldn't really rather have a Buick?"
Discuss this article on the Fool's own Buying and Maintaining a Car board.
Fool contributor Rich Smith does not own shares of any company named above. Nissan is a Motley Fool Global Gains selection. The Motley Fool's disclosure policy requires him to tell you that, but it doesn't say he has to tell you he drives a battered Chevy S-10. (Oops.)