October 2013 Myth: A Stitch in Time Part I

Michael McTague |

Saves nine; a phrase known to mothers whose children tear their clothes and perhaps to those in the now far-flung garment industry. “A stitch in time” may prove an apt phrase for investors and for managers in many industries. Did the company take action before a major rip in its profits or its image?

General Motors fell into bankruptcy, rose from the ashes through a huge IPO and now struggles to regain massive profit. What reinvigorated GM? Was it the money from the IPO or from the bailout? The hottest financial story of 2010, its IPO plucked $20 billion. The government pumped at least $50 billion into GM – before it went belly up. The size of the IPO and the government investment obscure the true reason for GM’s turnaround.

The Detroit giant shook off its torpor and sliced the huge gap with Toyota and Honda by revitalizing its quality. For years, GM lagged its competitors with defects in all parts of its products. A massive retooling did not turn the tide either. According to the latest (18th annual) Total Quality Index Study in the automobile industry -- a comprehensive survey of 442 variables -- domestic automobiles outperform imports. Volkswagen topped the auto maker list, thanks largely to Audi, which tied Lexus for first place as individual brands. Ford came in second. In a massive turnaround, General Motors tied Hyundai for third. Major individual winners in particular automobile categories include the Chevy Volt, Dodge Dart, Ford Fusion and Chrysler Town & Country.

Easily bypassed by investors who focus on the numbers, quality spells long term success and profit in manufacturing. In 2012, Consumer Reports found GM improving through redesign, which means it was fixing and improving every aspect of its products that did not attain excellence. Chevy, Toyota, Honda and Ford topped the Consumer Reports list with very small gaps in quality. The Detroit Big Three caught up to their rivals by working through every glitch related to quality, one stitch at a time. Showing a reversal of fortune among the industry leaders, Toyota, Mitsubishi, Suzuki, Infiniti and Mazda dropped against key quality factors, in large measure due to their failure to acknowledge or quickly resolve product defects.

Defining Quality

Quality used to refer to engine and body reliability. Now, seven criteria define automobile quality: Safety, Quality, Value, Performance, Environmental friendliness, Design/Style, Technology/Innovation. Safety leapfrogged other indicators and now heads the list. In this critical area, GM has stepped up to the plate, maintaining first place in ABI Research’s safety and security telematics competitive assessment. Ford and Toyota came in second and third respectively. These results show GM is more attuned to what customers want than they were prior to the IPO and that they are running faster than their rivals.

Exactly how close are the leaders? The JD Power survey, for example, checks off the number of defects racked up in the first 90 days. In 2012, for the first time in 24 years, cars made in the US topped foreign brands. Toyota’s recalls hammered the company’s performance. JD Power reports that the industry average is 109 problems per 100 vehicles, basically one problem per car. The US manufacturers reported 108 problems while the imports reported 109. Ford performed best with 93 problems. GM did quite well, earning eight JD Power awards.

Cutting Into the Quality Circle Edge

Manufacturers know that each defect and each unresolved problem can only be solved through the best efforts of every employee. For decades, the Japanese manufacturers held an edge in the traditional meaning of quality -- durability and reliability. Strong evidence shows that Quality Circles allow employees to offer valuable solutions better than the top-down management style of the Big Three where suggestions may be ignored. Quality Circles now form a DNA string for American manufacturers, narrowing quality gaps with the Japanese firms.

But, is a stitch in time enough? Did quality revitalize GM and Ford? What about all the money the government poured into the auto industry? Could this outweigh the daily efforts of engineers and assemblers getting those products out the door? According to CNN Money, GM alone received at least $50 billion from Washington. But after the money dump GM did go bankrupt. It must be clear to investors that the new life in GM, which is increasing sales and profits, and the rebound of Ford, which was not a bailout recipient, derives not from the government or the GM IPO but from a focus on quality – one stitch at a time.

GM serves as a beacon for the importance of quality, which yields long term industry leaders. While Information Technology depends on innovation, a rather frivolous commodity as witnessed by Apple’s ups and downs, more traditional industries live by product quality. Even the Information Technology leaders must deliver product integrity and reliability. The trick is to see a problem before it tears apart profit and the company image and of course to fix the glitch.

In Parts II and II of our investigation of this pervasive myth we will look at two other compelling business situations where investors are fretting about the handling of thorny issues: holiday cruises and oil spills. What exactly are they doing to prevent future disasters?


Michael McTague, Ph.D. is Executive Vice President at Able Global Partners, a private equity firm in New York City.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


Symbol Name Price Change % Volume
F Ford Motor Company 12.02 0.05 0.42 24,364,204
HMC Honda Motor Company Ltd. 29.79 0.12 0.40 800,307
QURS Quri Resources Inc New n/a n/a n/a 0
TM Toyota Motor Corporation 115.27 -0.87 -0.75 174,701


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