Tesla last in quality, but it's the industry that needs to improve

J.D. Power ranks Tesla last, unofficially, among 32 brands in its 2020 Initial Quality Study. One might expect the "low quality" manufacturer, which just this year hit 1 million total vehicle sales, to be less valuable than mainstream carmakers such as General Motors, which sold nearly 8 million vehicles in 2019 alone.

In reality, Tesla's market capitalization far exceeds that of traditional automotive companies. How is Tesla, with its reputation for poor quality, among the most valuable companies in the world? The answer stems from how quality is measured and suggests quality metrics — and the organizations that embrace them — must evolve.

This was the first year Tesla was profiled in the study. Its last-place finish was unofficial because the automaker doesn't allow J.D. Power to survey owners in 15 states, which is a requirement for the study. But J.D. Power said it had a large enough sample from the other states to calculate Tesla's score.

J.D. Power's surveys have compelled automotive companies to improve quality and competitiveness since the 1987 Initial Quality Study first measured the number of "things gone wrong" per 100 vehicles 90 days after purchase. This metric made sense when TGW varied significantly among the Detroit 3 and Toyota, but today it has lost differentiating value, as TGW has evened out and as failures have shifted from noticeable (engine failure) to subtle (squeaks).

Tesla's 250 TGW is high, yet automakers with half to two-thirds of Tesla's TGW are getting their lunch eaten. Why?

The market values different traits than J.D. Power would have us believe. Any modern car is "reliable enough," and Tesla's defects minimally impact user experience and brand perception. Instead, the company sells intangibles such as emotional response, desirability and comfort.

Tesla doesn't sell a car — it sells innovation and a vision for the future as "individualized customer value." Whereas traditional manufacturers designed cars for "the people," and then for groups of people, Tesla instead designs a car for one person by using data from its connected fleet and social media to identify — and adapt its products to — consumers' real needs.

This mirrors other industries such as advertising, which traditionally focused on raising brand awareness, then identifying and targeting specific market segments, and now leverages microtargeting to figure out what Fred wants and sell that product to Fred, rather than targeting "what people like."

And Tesla, like advertisers, adapts to meet changing market conditions: An already-delivered product may be transformed through software updates, rather than hardware changes. This ensures a user's experience is high quality, even if the product isn't.

As an example, Tesla offers Joe Mode, a feature pushed to many vehicles via over-the-air update. Suggested by one Twitter user, Joe Mode alters chime volume so as not to wake sleeping children. This mode embodies the participatory, data-informed design and targeted adaptations that make Tesla valuable relative to automakers developing one-size-fits-most solutions.

The ability to identify and address real consumer needs, the desire to innovate, and the ability to create compelling user experiences are how automakers — and other companies — should be evaluated in a world where quality is a commodity. Industry 4.0 makes it simple to ensure that any product can be built right; now is the time for companies to use data to build the right products.

It is worth noting that in today's highly instrumented factories, built quality may be easier to correct than designed quality. In a recent Chinese survey, Tesla led competitors in quality. While the contrast with J.D. Power's findings might result from different testing methodologies, it may also reflect Tesla's Chinese factory's continuous improvement and suggest the company is doing something right by first solving for intrinsics and later building traditional quality capabilities.

When investors weigh in on stock prices, they eye a firm's future and potential value, not its past. We implore the auto industry to embrace novel quality metrics, product reconfigurability and real-time, unbiased consumer data to remain sustaining enterprises. Whether automaker, supplier or customer, we all stand to gain from the innovation-seeking automotive industry of the future.