Plante & Moran

Domestic OEMs need to pay attention to all aspects of quality if they expect to succeed.

When one analyzes the competitive positioning of the Big 3 totally, unemotionally and through an objective lens, it is reasonable to question the ability of these great institutions to compete long-term in the hyper-competitive global automotive industry.

The issues of competitive disadvantage are old news and well known. Design cost penalties in certain segments exceeding $1,000 per vehicle, excess warranty costs exceeding $400 per vehicle, legacy costs topping $1,000 per vehicle, 20-50 percent higher engineering development and tooling costs for new vehicles, and the list goes on.

What can Detroit OEMs do to fundamentally improve their competitive positioning most quickly and in a sustainable manner? Get serious about quality!

Big 3 vehicle quality has improved dramatically over the past ten years. The quality gap has narrowed between Detroit’s Big 3 and the European OEMs, and the Asians (in particular). This improvement is reflected in J.D. Power and Associates Initial Quality Study data as well as OEM internal quality metrics.

But the progress isn’t nearly good enough. The gap in vehicle quality continues to be a substantial competitive disadvantage for the Big 3. Quality differences exist in multiple nodes along the entire life cycle of a vehicle. Japanese and now one Korean OEM’s initial quality is substantially better than Big 3, warranty costs per vehicle for the Big 3 are reported to be four times higher than the benchmark Toyota; Big 3 are experiencing excess vehicle recall costs at an alarming rate; and lease residuals for Big 3 vehicles have been dragged down by consumer concerns about long-term vehicle durability.

Table 1 presents J.D. Power’s latest Initial Quality Survey results reflecting better quality performance for Japanese and one Korean OEM, and just below industry average for GM, DCX and Ford.

Nagging quality is not just a Big 3 problem. In Germany, domestic-branded cars break down an average of 51 percent more often than Asian manufacturers. Asian brands for the last six model years averaged 9.4 breakdowns per 1,000 vehicles compared with 14.2 breakdowns per 1,000 vehicles for Germanyassembled vehicles over the same period.

Asian brands occupied the top seven positions as measured by breakdowns per 1,000 vehicles as shown in table 2.

Vehicle recall data tells much of the same story. Toyota leads the pack with 100 vehicles recalled per 1,000 sales based on 2003 North American sales. This compares with GM, Ford and DCX at 1,370, 872 and 777 respectively. Honda recalls 600 vehicles per 1,000 units of North American sales, while Nissan recalls 1,818.

Despite these nagging quality issues, there is reason for optimism. Hyundai’s quality over the past five years has gone from poor to nearly best. They have done this by making quality their number one objective, involving their Chairman in monthly quality meetings, and creating an incredibly powerful reinforcing mechanism.

Their adoption of a ten year and 100,000 mile warranty is certainly a BHAG (Big Hairy Audacious Goal) that everybody can rally around and support. This contingent warranty liability certainly provides a powerful motivation within the organization to permanently fix both small and large quality and reliability issues at Hyundai.

Ford has also realized dramatic quality improvements by paying attention to the basics. Warranty costs are reported to have been cut by 27 percent recently, and quality improvement related savings have exceeded $0.5 billion, not to mention positively reinforcing the brand image.

American and Japanese organizations typically take a very different approach to quality management. Japanese design it right the first time with engineers that deeply understand costs, component and assembly reliability, and manufacturing processing considerations that impact quality.

They release designs that work, manage design stability throughout the life of the part and use new vehicle launches to make small continuous refinements that improve cost, quality and reliability. Suppliers are treated as valuable supply chain partners. Aggressive cost reduction targets are viewed as the joint responsibility of the supplier and customer alike and substantial effort and resource is expended by customers to assist suppliers in meeting cost targets without margin erosion.

They also use the same or very similar parts across many of their car lines and platforms. These practices, well known within the industry, drive excellence in quality and reliability. In contrast, the Big 3 tend to do complete redesigns with the introduction of a new vehicle; design parts with little regard for design for manufacturability; and incur massive engineering changes often after design freeze, which drive higher tooling, piece cost, and warranty costs.

Suppliers are viewed more as a source for profit capture through mandated price reductions than as valuable supply chain partners. Too many OEMs take the view that there is always another supplier to take the place of an uncooperative or failing supplier. They also share fewer parts across platforms than their Japanese competitors.

Excess global assembly capacity exceeding 20 million vehicles has eroded profitability to unacceptable levels for all but a handful of OEMs. How much longer can the Big 3 afford to maintain quality, business and manufacturing practices that drive up warranty costs, tarnish brand image, contribute to expensive product recalls, and foster an uncooperative relationship with a supply base they increasingly rely on for innovation and technology?

While quality improvement is not a silver bullet, it serves as a powerful lever for building margin, growing brand equity and moving metal off dealership lots. Just ask Hyundai.

Craig Fitzgerald is a partner at Plante & Moran, PLLC and helps suppliers use strategic positioning to improve financial performance.