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It was less than two years ago that Toyota (TM) surpassed General Motors as the world’s largest auto manufacturer. Well, things have certainly taken a turn for the worse for Toyota over the past year. Although the company posted a better-than-expected operating profit in the final quarter of its fiscal year, which ended March 31st, the company is still reeling from quality issues that have plagued it for the past several months. The company has recalled more than 8.5 million cars since the end of 2009, largely due to faulty gas pedals, problems with sticking accelerator pedals, and braking concerns.

The company recently agreed to pay a record $16.4 million fine for failing to notify U.S. authorities about problems with its accelerator pedals. And two months ago, it had to suspend sales of its luxury Lexus GX 460 after Consumer Reports warned shoppers not to buy the sport utility vehicle because handling problems could cause it to roll over on sharp turns.

As a result of these developments, we have noted a marked change in consumer attitudes towards Toyota and some of its American competitors. An Associated Press and GfK Roper survey conducted in March showed that 38% of Americans believe that American cars are the best-made vehicles in the world, while 33% said Asian vehicles are the best. The same survey done in December of 2006, reported that 46% of Americans thought that Asian cars were the best, with only 29% favoring American cars.

This is certainly a good sign for American car makers. It’s been a long time since Americans viewed their automobiles as being superior to their Asian counterparts. For many years, American automakers were falling short of their Japanese counterparts, and they became a symbol of American failure. However, this could be an inflection point, and we believe that General Motors, Ford (F), and Chrysler could all reap long-term gains if recent trends continue.

Of the three American automakers, Ford is expected to benefit the most, as it is further along in the turnaround phase than General Motors or Chrysler. The company recently posted its third consecutive quarter of profits, and sales for April rose 25% from the year-earlier period. Demand is improving steadily, and the company has boosted domestic and global production, as a result. 

General Motors has made significant headway as well. The company is seeing a boost in international sales, with strong demand from China. In fact, China is GM’s biggest market so far this year. It sold 230,048 vehicles in China in March, a 68% jump from a year earlier. This was more than the 188,011 cars it sold in the U.S. for the month. Ford sales in China were also strong, with the automaker selling 153,362 units during the month, an 84% increase from the prior year. This compares with Toyota’s output of 61,200 units in that country in March. Toyota needed to use strong sales incentives due to the fallout from global recall, which weighed on profits. 

Given recent trends, it appears that customers around the globe are slowly changing their perceptions of the quality of American cars. The view that American cars are big, gas-guzzling behemoths may be coming to an end. Both Ford and General Motors are focusing their efforts on smaller, more fuel efficient vehicles. The Ford Fusion, for example, has gained a lot of praise from auto enthusiasts. Demand for GM’s smaller models, including the Chevrolet Cruze and New Sail, has also been robust, particularly in China.

Toyota’s woes have given Ford, General Motors, and Chrysler a significant opening and opportunity to fundamentally change consumers’ views of the American automobile. All three automakers should be able to capitalize on the newfound respect if they continue to build good models and market them well. We believe this is likely a turning point for Detroit. After years, or even decades, of losing to Japan, and Toyota, in particular, the Big Three appears to be back at the forefront of technology and innovation. As long as they continue to produce good-quality, high-performance vehicles, we believe customers will continue to be impressed with the improving quality of the American automobile.