Second Quarter 2008

Manufacturing/Durable Goods & E-Business

Customer Satisfaction Wobbly

Apple and Google Soar, Big Three Drop

Without a clear trend for the past 18 months, the American Customer Satisfaction Index (ACSI) continues its bumpy ride.  There have been small changes - sometimes up, sometimes down - in a pattern not seen at any time before in the 14 years of ACSI measurements.  This quarter ACSI drops a marginal 0.1% to a level of 75.1. 

The economy as a whole is displaying somewhat similar ambiguity with respect to the length and depth of the downturn.  Without trends forecasting becomes more difficult, but it is also true that consumer spending has been predictably weak.  The ACSI forecasting of the second quarter pointed to a spending growth of 2%.  When adjusted for the possible effect of the tax rebates, the forecasted range was 2-3%.  The preliminary numbers from the Bureau of Economic Analysis put second quarter spending even lower at 1.5% – far off the average of 3.6%.  Perhaps spending would have been even weaker without the tax rebate, but whatever effect it may have had, consumer spending wasn’t boosted much. Future consumption growth is impeded by many factors, chief among them house-price deflation (which has trimmed household wealth), tougher credit conditions, a worsening labor market, and continued high fuel and food prices.  Wages have increased at a pace slower than inflation (which, however, is showing some signs of abating) and few households have enough savings to increase spending on goods and services. Under these circumstances, even if customer satisfaction were rising, it would be difficult to offset pocketbook limitations.  But since ACSI shows no aggregate growth, the outlook for more aggregate spending growth continues to be bleak.  As the world economy also slows, US exports cannot come to the rescue either. Accordingly, the US economy will remain highly dependent on consumers.  The ACSI forecast suggests a third quarter spending growth of no more than 2.3% and the economy will continue to struggle.

But all is not doom and gloom. E-business and technology lead the way.  Customer satisfaction for e-business is up by almost 6%.  Google surges with a record breaking ACSI jump of 10% to its highest ACSI score ever (86). Apple leaps too. Beginning in 2003, customer satisfaction with Apple took off.  In 2004, the company became the customer satisfaction leader in the industry.  With an increase of 8% to a score of 85, it leaves all rivals in the dust.  As customers have become more satisfied, so too have shareholders.  Apple stock has returned almost 1,500% since 2003.  Somewhat paradoxically, customer satisfaction with cars continues at an all-time high of 82.  But it may matter little for a troubled industry - all leading companies are foreign and all laggards domestic. In addition to the stellar performance of some companies, another bright piece of news is the fact that ACSI advancers outnumber decliners this quarter - 48% up, 16% unchanged, and 36% down.

Consumer Durables

Personal Computers: Apple skyrockets
Customer satisfaction with PCs retreats for a second year, falling 1.3% to 74 to match the level of 2004-2005.  Except for Dell (up 1%), the drop is connected with the Windows-based machines - Hewlett-Packard, Gateway, and Compaq are all down by 4%. Not only is Apple bucking the slide, it registers its greatest ACSI increase ever (up 8% to 85) to lead the industry by a wide margin.  The satisfaction of Apple PC customers is 13% higher than Dell in second place and 21% higher than Compaq.  This is one of the largest gaps in customer satisfaction in any industry covered by ACSI.  It is also a record high for Apple.

A year ago, Apple's ACSI score fell by 5%.  This type of volatility is unusual in customer satisfaction, but it is also reflected in Apple's share price, which has been a roller coaster ride for much of the past year. While its ACSI remained at the top of PC makers, it seemed then that the company might have given more attention to its phone business at the expense of its computers.  Regardless of the extent that this was the case, now there appears to be synergy in that the integration of phone, music and computer products is leading to more iPhone and iPod users converting to Apple computer products.  Sales of Apple products are up almost 25% and net income is up nearly 75% from a year ago.

Unlike Hewlett-Packard, Compaq, Gateway and Dell, Apple uses its own operating system and has therefore avoided the issues associated with the 2007 launch of Windows Vista.  The release of this new operating system, itself the subject of criticism, may have contributed to the drop of Hewlett-Packard, Compaq, and Gateway.  Customers have complained about usability of the new system, sluggish processing speeds and problems of software compatibility, while hardware requirements have led to complaints about price.  Another problem has been that many owners of older machines have felt compelled to purchase the Vista upgrade in order to stay current.  Even though Vista is just one (albeit very prominent) piece of software in the Microsoft catalog, the ACSI score for Microsoft (released in quarter 1) is showing a development similar to the Windows-based PCs makers.

Autos:  Detroit Slumps

Domestic carmakers are absent among the top ACSI cars but they dominate the bottom.  General Motors had a quarterly loss of $15.5 billion, Ford $8.7 billion, but it is actually Chrysler (a private company that does not report financials) with its Dodge and Jeep brands that occupies the rear end of customer satisfaction in the industry.  This does not mean that customer satisfaction is low for automobiles or low for US auto manufacturers, however.  Quite the contrary, customer satisfaction with cars remains at an all time high.  Customers consider quality to be high and that prices reflect value for money.  The problem for the domestic companies is that they continue to lag behind their foreign counterparts and that their fuel costs are higher. This year the gap widens on both accounts.

Luxury brands and Japanese and European nameplates continue to dominate ACSI. BMW moves up 1% to 87, sharing the lead position with the Lexus division of Toyota. Toyota and Honda each gain 2% to 86, surpassing Buick and Cadillac to take the number two spot.  Buick and Cadillac each drop 1% to tie with GM Saturn (up 5%) at 85.  Next is Ford Lincoln-Mercury, which is down 4% to 83, tied with Hyundai (unchanged) and the GMC division of GM (up 1%).  Japanese and Korean automakers Nissan, Mazda and Kia all bounce back 3%: Nissan moves up to 82 to equal the industry average, while Mazda and Kia (both at 80) are below average yet still outperform Chevrolet (down 4% to 79) and Chrysler's Dodge (down 3% to 78) and Jeep (up 1% to 76).

GM's Saturn division makes the biggest leap, up 5% to 85, its best score since 1998. Under its new tagline "Rethink American," Saturn has revitalized its lineup, introducing new models including the Aura sedan, which won the 2007 North American Car of the Year, the Outlook crossover and the 2008 sporty Belgian-import Astra.  Continuing this momentum, later this year Saturn will offer a hybrid version of the SUV.  It has started to invite buyers to live chat services online, provide test-drives at home or the office, and has also revamped a number of dealership facilities.  Last year, the division had a 13% increase in retail sales.  Even though sales have slowed considerably since, it has been less depressed compared with several other GM brands.

Ford, with cars clustered in the mid range of ACSI scores - Mercury-Lincoln slightly above the industry average and the Ford brand slightly below - is facing similar problems.  Although its quarterly loss was lower than GM's, it was the largest in company history.  Ford plans to bring their more fuel-efficient European cars to the US, but it will apparently take several years before they can be offered to American market.  Meanwhile, there will be more pressures on price for all carmakers and most of all on those with weaker customer satisfaction.   

Major Appliances: Whirlpool Stumbles

Customer satisfaction with major appliances drops 2.4% to 80 this quarter.  All three major companies, Whirlpool, General Electric and AB Electrolux, fall with Whirlpool sliding by 5% to 80, sharing the same score with General Electric (down 1%), and Electrolux (down 1%).  Remarkably, all manufacturers of major appliances have exactly the same level of customer satisfaction.

The slowing US economy, shrinking domestic demand and rising costs of raw materials have hit Whirlpool hard - the world's biggest appliance maker.  The company also faces increasing competition from Bosch Siemens, LG, Samsung and Haier, all of which have gained US market share.  Whirlpool's customer satisfaction rose after the company acquired rival Maytag in early 2006, but while efforts to streamline operations by closing several plants and cutting costs contributed to profit on declining sales, the boost in satisfaction was apparently short-lived.

Portals and Search Engines: Google Soars

Last year, surprising to some, was the resurgence of Yahoo! and drop of Google.  The phenomenal rise of Google's stock came to a stop over the past year as well.  Now Google's customer satisfaction swells by an unparalleled improvement of 10%.  For a company that already has a high level of customer satisfaction, Google breaks new ground.  Not only does Google now lead Yahoo! by a 12% margin, but the search engine giant can claim the best score ever posted for any e-business company measured by ACSI. 

Google's customer satisfaction prowess goes hand-in-hand with its leadership in developing technologies that make searches both faster and more accurate. Improving search quality and not only keeping up with the rapidly growing information content on the web, but also making search more efficient have contributed to Google's customer satisfaction surge and just like Xerox before it, its name has become a verb.  While Google's origin as a search engine is preserved in its sparse white homepage, it is gaining ground as a portal as well, offering many of the services traditionally associated with portals, such as news, weather, email and maps.  The more Google adds content, the more it may boost the satisfaction of its customers, but probably not of its partner companies.