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Sunday, September 13, 2009

How Do You Measure Quality in the Auto Business?

Am I presumptuous enough to lecture J.D. Power on how to measure quality? Not really. My point is that there is more than one way to calculate vehicle quality. General Motors and Ford are sporting some gaudy J. D. Power rankings these days. Some of their products are ranked as equal to the leading imports. I’m sorry to have to leave Chrysler out of this discussion. It is anyone’s guess where Chrysler’s future quality numbers will end up, given that many important decisions are being made by Fiat. Fiat’s hallmark has not been quality in the past and many dealers, including myself, still have a bitter taste in their mouth from Fiat’s last foray into the U.S. market. But Chrysler/Fiat will be a subject for another day.
So what might be a better measure of quality than J.D. Power and other quality surveys? I submit that resale value is the most important measure of quality as perceived by consumers and the market in general. Quality is more than fit and finish. Quality includes how well an OEM’s vehicles hold their customer’s money together. In this regard Honda and Toyota have set the mark. Other than their traditionally high fit, finish, and NVH (Noise, Vibration, and Harshness) achievements, they have eschewed large volume fleet sales. They have also disdained direct to consumer rebates. As a consequence, their CPO (Certified Pre-Owned) programs serve to strengthen their strong resale values whereas the Domestics are desperately trying to rehabilitate themselves. Consumers do not appreciate the OEM, with whom they just did business, undermining the value of their new vehicle. They might appreciate the rebate they just received that helped motivate them to buy, but they certainly resent waking up one day and discovering they are thousands of dollars “upside down” in their recently purchased vehicles. Many owners of Domestic vehicles don’t find out how bad their financial situation is when they try to trade their vehicle 36 months or sooner into their finance contract. There is no doubt the resale value issue has a strong impact on whether a consumer is a repeat buyer frm an OEM.

Ubiquity is the Enemy of Cachet
So how do Toyota Camry and Honda Accord, two of the best selling vehicles in the U.S. auto market, maintain their cachet in the face of their large sales volumes? In my mind, its boils down to the fact that you rarely see those vehicles in fleet and rental service. In addition, you don’t see consumer rebates advertised. Just as I was becoming sold on the J. D. Power rating on the Chevy Malibu and the good things said about the car in the press, I observed a couple hundred Malibus decked out as taxis at McCarran Airport here in Las Vegas. At the taxi cab pick up station there was Malibu after Malibu rolling up to pick up passengers. It left a bad taste in my mouth. While there are many Toyotas and Hondas coming back into the market as pre-owned vehicles, they are mostly three year old lease turn ins and natural trade ins, whereas there is a much higher number of Domestics recycling in a year or less. Many of these are daily rental turn ins. This, coupled with direct to consumer rebates outweighs any J. D. Power quality ratings in the mind of consumers..

Resale Value, Residuals, and Leasing
Leasing is in the news again. GM and Chrysler have both announced recently they will re-enter leasing. I still can’t get used to the idea that Chrysler finances and leases through GMAC. Chrysler has been out of leasing since last July when lenders forced them to give up leasing as a condition of granting essential financing. GM’s lack of capital and huge residual losses forced GM to scale back leasing last fall. GM will be leasing through U.S. Bank in 5 northeastern states. Other OEMs have continued to lease through their captive finance arms and independent banks. GM and Chrysler have lost substantial market share as a consequence of their not being in the leasing business for the last months.
What is the lure of leasing to an OEM? They can offer lower monthly payments for shorter terms and achieve a higher degree of repeat business through leasing. In addition, there are depreciation credits available as the title of a lease vehicle is held in the name of the OEM. These depreciation credits come in handy if the OEM is profitable. In addition, trade equity and cash down payment lowers the monthly payment a lot more on short term lease contracts than on long term finance contracts. Cycling the consumer more often leads to increased market share when your competition can’t compete. Lower resale value (residuals) means it costs Domestics to subvent their residuals and money factors to be competitive with Toyota and Honda.
And now we see Ford is pushing their new world class Taurus, bi turbo, direct injection, AWD, etc. as a police cruiser. They already devalued the name Taurus in past years by making it the most common fleet vehicle in history. It appears Detroit has not learned their lesson.