One of the best, and yet most difficult, things auto investors can do is research the quality and performance of vehicles. With the U.S. new-vehicle market slowing, competition will become intense and better long-term reliability and higher quality will increasingly impact consumers' purchase decisions. In other words, automakers with higher quality have a better chance to protect valuable market share and pricing -- more important than ever for automakers such as Ford Motor Company (NYSE: F) and General Motors (NYSE: GM).
Since it would be near impossible for any single investor to accumulate research spanning the entire industry, it's of great value to take information such as J.D. Power U.S. Initial Quality Study (IQS) and dissect it for takeaways.
How it works
J.D. Power's IQS measures the number of problems experienced per 100 vehicles spanning the first 90 days of ownership, with lower scores reflecting fewer problems and thus higher quality. Because of the study's focus on the first 90 days of ownership, the results offer investors brilliant insight into which automakers' new vehicles are improving, or regressing.
Starting from the top, overall new-vehicle quality improved 4% from 2017, reaching the best level ever, according to J.D. Power's 2018 IQS. "There's no question that most automakers are doing a great job of listening to consumers and are producing vehicle quality of the highest caliber," said Dave Sargent, Vice President of Global Automotive at J.D. Power, in a press release. "That said, some vehicle owners are still finding problems. As vehicles become more complex and automated, it is critical that consumers have complete confidence in automakers' ability to deliver fault-free vehicles."
Ford's Mustang brought home a model-level award for quality. Image source: Ford Motor Company.
Highlights and takeaways
Investors of domestic automakers such as Ford and GM didn't have to dig far into the study to find positive news. All domestic automakers improved their scores faster than the industry average. Fiat Chrysler Automobiles posted the largest jump, improving its score by 7 PP100, with Ford and General Motors both registering a 5 PP100 improvement. Detroit's three automakers performed better than the industry's average 4 PP100 improvement but was outclassed by a surprising foreign group.
Genesis checked in with the highest overall IQS score of 68 PP100, followed by Kia at 72 PP100 and then Hyundai ranking third with 74 PP100. Kia is no stranger to ranking high -- this is the fourth consecutive year Kia ranked the highest of any mass market brand -- but it's the first time three Korean brands checked in at the top of the ranking.
Mazda checked in as the most-improved brand with 25 PP100 fewer problems than the prior 2017 study, with Mitsubishi and Cadillac reporting strong 20 PP100 and 15 PP100 improvements, respectively. Other notable improvements were Infiniti with a 15 PP100 improvement, and Hyundai and Lexus both with a 14 PP100 improvement.
Switching gears back to Detroit automakers, Ford shined in the 2018 IQS. Not only was Ford's IQS score the best it has recorded in the report's 32-year history, the folks at the Blue Oval received more model-level awards under its namesake brand or Lincoln than any other automaker, with five. Those five Ford vehicles were the Expedition; Mustang; Super Duty; Continental (Lincoln); MKC (Lincoln). Second most model-level awards went to Hyundai with four, and BMW and General Motors each with three.
Image source: J.D. Power's 2018 IQS
Down the road
Already there is an emerging trend that will become important if automakers want to improve their score and protect market share: driver assistance systems. As the industry drives toward a driverless car future, more and more advanced driver assistance systems will be included in vehicles. Because those systems are still in the early development stages, they're causing more problems; in fact, the number of problems with driver assistance systems has increased roughly 20% each of the past three years.
And while the reality of driverless cars is far down the road, automakers that have the highest scores with driver assistance technology will have a huge advantage. To put it bluntly, what consumer in their right mind would want to purchase a vehicle that drives itself from a company with a history of low driver assist quality scores?
All in all, investors of domestic automakers Ford and GM should walk away from the 2018 IQS feeling good about the products being rolled out. While it would be difficult to pinpoint in financial data, these high quality scores should lessen the need for incentives and deals to protect sales and market share as the market plateaus. Higher quality vehicles also generate stronger new-car pricing, and retain value better in the used car markets -- all important and positive aspects for investors.
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