Please ensure Javascript is enabled for purposes of website accessibility

Here's Proof That General Motors Really Has Changed for the Better

By John Rosevear – Feb 28, 2016 at 8:05AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It's one thing for your friends to tell you that their new GM car is nice. It's another thing entirely when J.D. Power says that GM's quality now matches Toyota's. Here's the story.

The highest-ranked small SUV in J.D. Power's latest Vehicle Dependability Study wasn't a Toyota or a Honda. It was the hot-selling Buick Encore, and that was no fluke. Image source: General Motors.

Has General Motors (NYSE: GM) really made huge strides in the quality of its vehicles?

Let's put it this way: It wasn't much of a surprise to see Toyota (NYSE: TM) at the top of the latest J.D. Power Vehicle Dependability Study, released this past week. But if you haven't been following GM closely, it might have been a surprise to see the General running neck-and-neck with its longtime Japanese nemesis.

What this J.D. Power study is all about
First, let's explain what we're talking about. J.D. Power's Vehicle Dependability Study is an annual study that measures problems in the third year of a vehicle's ownership. In other words, we're talking about 2013 model-year vehicles. Late last year, J.D. Power surveyed 33,560 people who have owned 2013-model-year vehicles since they were new, asking them about problems that have shown up in the previous 12 months.

(There's another annual J.D. Power study, the Initial Quality Study, that looks at problems in the first 90 days of ownership. That will come out in June.)

The idea is to see how an automaker's vehicles are holding up over time. J.D. Power ranks the individual brands by the number of reported problems per 100 vehicles, and then names the top three models in each of the major market segments.

So there are a couple of ways to "win" here. First, an automaker's brands can rank highly in the brandwide tallies. Second, an automaker can have a large number of models named in the top of their segments.

By both standards we can see that General Motors' four U.S. brands are turning in very strong results these days.

How GM compared with the world's best
Here's how the brand rankings turned out in this year's Vehicle Dependability Study. 

As you can see, Toyota's luxury Lexus brand topped the charts. But look at who came in third, ahead of the Toyota brand -- and fifth and sixth, ahead of Honda and just about everybody else. And even the one GM brand that lagged a bit, Cadillac, was right between rivals BMW and Volvo, and still above average.

GM also cleaned up in the segment rankings, with Chevrolet, Buick, or GMC-brand vehicles top-ranked in eight of the 19 segments, more than any of its rivals. (Toyota won six. Honda? Mercedes-Benz? Just one each. And Ford? None. Ouch.) You may be thinking, "This must be a fluke, right?"

Nope. GM did very well last year, too.

So what's it mean?
It means that all of GM's talk about improving quality is showing up in its products, and that it has been for a few years now.

One truism in the auto business is that if an automaker builds great products and keeps costs under control, sales and profits will follow. In part, that's because great products don't need big margin-eroding discounts to sell well.

In the old days, GM relied on those discounts to keep sales of its less-than-great products going. That crushed the company's margins and left it extremely vulnerable during a downturn. (So vulnerable that it eventually crashed into bankruptcy court, as we all know.)

But now, GM's products don't need great "deals" in order to impress customers. GM is able to keep its discounting under careful control, and the visible result has been the company's very strong profit margins. 

And if and when the economy goes south and car sales drop off, GM should be in a good position to muddle through without much drama (or red ink), because its products will still be just as competitive with those who are willing and able to buy. 

John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool recommends BMW and General Motors. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.