Is it too late to save Detroit?
Seems you can't pick up a newspaper these days without reading yet another story about how Chrysler's doomed, Ford's scraping for cash, and General Motors is on the brink of bankruptcy. And yet, defying the old truism that "it's always darkest before the dawn," last week Detroit caught a ray of sunshine in the midst of its economic twilight.
Said sunshine came in the form of the 2009 Vehicle Dependability Study, published annually by McGraw-Hill (NYSE:MHP) subsidiary J.D. Power and Associates, wherein we learnt that two "American" cars now top the ratings for long life in automobile-dom.
Detroit rules the roost
Top marks for dependability in the 2009 VDS go to General Motors' (NYSE:GM) Buick brand, and Jaguar -- formerly a Ford- (NYSE:F) owned brand, purchased one year ago by India's Tata Motors (NYSE:TTM). The two nameplates topped J.D. Powers' list with 122 problems reported per 100 vehicles surveyed -- significantly fewer than the industry average of 170.
(Typical "problems" include everything from issues with "noisy brakes," to "window fogging," to "issues with the dashboard.")
Bad news is no news
What's that you say? You thought Toyota (NYSE:TM) cars were the best on the road? Well, that's a common impression -- but it's a bit out of date. As far back as 2006, Toyota's slip began showing, when the firm's vaunted Lexus luxury brand lost its pole position at the top of J.D. Power's Initial Quality Survey. Nor did Lexus reclaim the crown in 2007. Nor in 2008.
And seeing as how the Initial Quality Survey rates cars coming off the assembly line as-is, and the Vehicle Dependability Survey measures how well they fare once three years old, Toyota's 2006 fall from grace on the IQS foreshadowed its loss of the VDS title in 2009. In short, last week's results should have surprised precisely no one.
Lies, d***ed lies, and statistics
Now don't get me wrong. Toyota's not selling clunkers, exactly, and J.D. Power isn't saying anything of the sort. Fact is, if you drill down to the 19 automotive "segments" that J.D. Power rates -- categories like "top compact" or "top large truck" -- Toyota brands near swept the field, claiming 10 of the top honors and placing in the top three choices in 13 out of 19 categories. Meanwhile, overall, both of Toyota's two key brands -- both Lexus and Toyota proper -- remain very near the top of the dependability rankings, occupying third and fourth place respectively.
Likewise, that other favorite of American car buyers -- Honda (NYSE:HMC) -- performs well in this year's stats, with both its flagship Honda brand and its Acura luxury mark scoring above average in the VDS. (Meanwhile, Nissan (NASDAQ:NSANY) needs to get back to its cars-for-the-everyman roots. While the firm's Infiniti luxury division took home sixth-place honors, honest-to-goodness Nissan-brand jalopies are knocking and pinging, with car buyers reporting nearly two problems per vehicle.)
Three cheers for Detroit!
That said, this year clearly belongs to Detroit. In addition to its now-sold Jaguar, Ford placed three of its top-selling brands on the top rungs of the survey -- Mercury in fifth place; Lincoln in eighth; and Ford proper in 13th. Next door at GM, neither workaday Chevy nor GMC made the cut for "above-average" honors. (Yet GM proved that when it puts its mind to building a quality product, it's capable of doing so; Cadillac joined Buick in the top half of the survey.)
So, what's all this got to do with investing?
Fair question. Here's the answer in a nutshell: In commentary on last year's rankings, J.D. Power told us: "Those models with the largest increase in problem levels show the most pronounced declines in satisfaction and the likelihood of owners to recommend their vehicle model."
In other words -- and at the risk of stating the obvious -- when a car company builds better cars, car buyers buy them more willingly, and recommend them to others. This has a whole series of follow-on benefits to the makers of "good cars." Chief among them:
- Once you've got a reputation for excellence, you don't have to pay ad agencies as much to argue in your favor. It's assumed that you make good cars.
- Further cost savings derive from the "word of mouth" effect. If your customers are happy, and they talk up your cars to their friends -- again, there's less need for you to advertise.
- Less obvious, but even more important, cost savings come from the warranty effect. Better cars need fewer repairs, and when manufactures warrant their cars against defects, the savings from not having to fix problems accrue to the manufacturer.
Based on the 2009 VDS, Ford and GM stand to reap these gains today even as Toyota loses its lead. Assuming, of course, they can remain solvent long enough for car buyers' perceptions to catch up to the new automotive reality.
How has the reality of vehicle quality changed over the past few years? Read all about it in:
