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General Motors Company (GM), Ford Motor Company (F): Can American Cars Earn the Quality Premium?

Recalls, recalls, and more recalls

If reliability had been the Japanese brands’ strong point – recent high profile recalls certainly don’t help. Most notably, the Toyota 2009-2010  ‘Run-Away Vehicles’ scandal. You know a product recall was big if it has an entire Wikipedia page devoted to it. Nine million vehicles were recalled in 2009 and 2010 over allegations that they accelerated unintentionally due to a faulty vehicle design.

The recall and the alleged victim reports were heavily covered and scrutinized by US media; in fact, it was the number 2 most reported story in the beginning of February 2010. Some local Toyota dealerships even pulled ads from ABC stations in protest of what they perceived as excessive media coverage. The recalls have even been suspected of decreasing the resale value of used Toyota models.

That wasn’t the last of the trouble for the Japanese brands, earlier this year, 3.4 million Toyota, Honda Motor Co Ltd (ADR) (NYSE:HMC), and Nissan vehicles were recalled due to faulty airbags prone to catching fire or injuring passengers.

These recalls haven’t completely tarnished Toyota’s and other Japanese brands’ reputation for reliability; they are still viewed very favorably by many consumers. However, these events no doubt had a negative effect on the perception of these brands’ superiority over GM, Ford Motor Company (NYSE:F), and Chrysler that many consumers once had.

A high-end comeback

In 1998 Cadillac ended its six-decade reign as the number one luxury brand in the U.S. market. Due to downsizing in the 80s and 90s and a series of shoddy vehicle releases, such as the Cadillac Cimarron, GM saw its longtime luxury brand fall from grace and many of its loyal customers switch to the Beamers, Benzes, Acuras, and Lexuses of the world.

However, Cadillac made a strong comeback in the past two years with the release of the new ATS compact luxury sedan and the new mid-sized CTS luxury vehicle. Cadillac is currently the fastest growing major automotive brand in the U.S. The number of Cadillac vehicles sold between May 2012 and May 2013 increased by 38%, a growth rate not witnessed for the brand since 1976!

General Motors has become so confident with its new Cadillac line that it’s boosting the the 2014 CTS price by $6,000 over the current model up to $46,025. This puts the vehicle near the $50,000 price level that GM was shooting for with the CTS, thus distinguishing it from the ATS model, priced at $33,000, which is intended to be the new entry level car for the brand. This shows that Cadillac has become competitive against other entry-level and mid-level luxury vehicles from foreign brands such as Lexus, Acura, BMW and Mercedes Benz.

Conclusion

Over the past few decades Japanese car manufacturers have been able to earn higher returns on capital, partly due to the price premiums that they were able to extract from their reputation of superior reliability. With the recent performance of General Motors in quality ratings and its successful comeback with a legendary luxury brand, GM might be able to alter negative connotations to its brand in the minds of consumers over time which will allow it to increase prices and lower incentives thus increasing returns to shareholders.

The article Can American Cars Earn the Quality Premium? originally appeared on Fool.com and is written by Mohammed Shaaban.

Mohammed Shaaban has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Mohammed is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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