Open Editor's Digest for free
Rula Khalaf, editor of the Financial Times, picks her favorite stories in this weekly newsletter.
Not a day goes by that I don't scream at televisions, pepper grinders, lawnmowers, or Tupperware. Such bad design. It was very poorly implemented. If only Steve Jobs or Sir James Dyson made you, damn it!
Hence my sadness at the news that Apple cars will remain a dream. Who wouldn't want to see what the maker of the iPhone — the most popular, stylish, and practical product since the Post-it Note — could do with cars?
They would have ideally taken themselves out of the box. A great finish is taken for granted. Such high standards are no doubt why Apple decided to cancel the project – a lot of corners would have to be cut.
Quality is an amorphous concept but its importance to value seems clear. With the exception of Microsoft—I spent more hours watching its hourglass than I did with my kids growing up—the biggest companies in America all make the best products in their fields.
As in the European Stoxx index, ASML is the world's highest quality lithography equipment builder, Novo Nordisk is a maker of diet drugs and LVMH is a luxury goods maker. In the top 10, not even Nestlé is stacking it big and selling it cheap.
The exception in terms of country is Japan – but only because its longstanding obsession with quality has overshadowed any focus on shareholders. On the sector side, there are still the weird mega banks, even though they lag far behind best practices in every way.
I was thinking about the issue of quality and the dismal performance of China's stock market even before the fire wrecked my boat on Monday. The culprit was a Chinese lithium-ion battery overheating or exploding — as more than 1 percent of them now do globally, according to Gitnix data. Fortunately, no one was killed. A memorable advertising slogan, but not a great one for a country with a poor reputation for quality.
In a recent European survey conducted by GfK, more than 40 percent of respondents said that China is their least favorite country of origin when it comes to buying a car. How is that? Low quality, about a third answered, while almost half said they “don't trust the country in general.” A fifth believed the cars were not safe.
Whether China deserves this reputation is beside the point. In fact, the survey admits that most respondents confused Chinese cars with Japanese, South Korean and even French cars. In the blind test, only a few could tell the difference between the cars.
But bias is everything. As Robert Pirsig points out in his book Zen and the Art of Motorcycle Maintenance: “Quality is neither mind nor matter, but a third entity independent of the two…” . . Although quality cannot be defined, you know what it is.
Or rather, we think we know. Thus investors suffer from behavioral biases regarding quality as well. For example, a paper in the International Journal of Research in Marketing shows that stock prices fall more when the quality of a company's products declines than they rise if quality improves.
Companies use branding as a way to confront what is known in microeconomics as the negative segmentation problem. Customers, knowing that they know less about the product than the seller, rightly ask: Why should I buy something you're trying to beat me up with?
Brand loyalty is one way to mitigate information asymmetry. I can't tell you how the inside of a mobile phone works, nor the lithium-ion battery. But as long as there's an Apple logo, I don't care. No wonder Chinese automakers have been quick to enter into joint ventures with established Western brands.
Why then buy a yacht bomb from an unknown manufacturer? Because the other way to entice nervous customers is to sell products at a very cheap price so that the poor quality is sufficiently compensated for (although this is not in my case).
This is usually a good long-term strategy as well, as Clayton Christensen notes in his book “The Innovator's Dilemma.” Competitive threats to incumbents mostly come from the bottom, starting cheap and working their way up the quality curve.
Beijing's “Made in China 2025” policy encourages precisely this. Unfortunately, trust deficits take a long time to resolve. They can also cross borders, from products to policy to finance, as the survey above showed.
Recently viral videos of angry Chinese buyers smashing faulty robot vacuum cleaners may seem trivial. But it adds to the lack of confidence in local stocks, which have already fallen 15 percent over the past 12 months. Last year, foreigners bought Chinese stocks the least since 2017, according to Bloomberg data.
When I save a going compass, I can't blame them.
stuart.kirk@ft.com
