Wednesday, April 8, 2009

Are Car Dealers Really the Culprit In High Priced Repairs? Nah; Bad Scientists and Special Interest Groups Just Want You to Think So

In a recent press release, AAIA claims that repairs cost 34% more at new car dealers than at independent repair shops. Worse, they state that this blatant gouging by those favorite whipping boys, new car dealers, results in $11.7 billion of excess costs being borne by the poor unsuspecting public.

Wow. Need more detail? Yep; you can get the full report for $400. Otherwise, you have to trust this trade organization (note that this is the same organization currently pushing the pending Motor Vehicle Owners’ Right to Repair Act). We bought the report. My guess is that the purpose of the press release was to poison the water against dealers, and sell the antidote for $400. Otherwise, you’ll just have to take their word for it. Piling on damage to new car dealer reputations by the press release seems to be the intent of the press release – not to mention the side benefit that they get on the Google Top-10 searches for legislator staffs who are examining the merits of this pending legislation. This was a trade association’s version of Swift Boats and the Willy Horton furlough commercial.

To behold the sheer ineptitude of this research is stupefying … no, make that mind-numbing. Let me explain with a very simple example from AAIA’s research. Of the $11.7 billion cost excess, over $3 billion is from front brake pads and rotors. Here’s how they calculated this: they said that the entire multi-billion dollar US market “overcharge” for brakes and rotors could be represented by looking at just two vehicles: a 2002 Chrysler Sebring LX sedan and a 2002 Volkswagen Jetta GL. That’s all you need to do – just look at two cars sold in 2002.

As of a few years ago there were 250,851,833 vehicles on the road in the US. If you were to count the number of make, model, and model year variants associated with this 250 million number, it would be in the thousands. Yet, AAIA thinks all you need are two 2002 model year cars to estimate the differences in front brake repair costs if you take all 250,851,833 vehicles to dealers vs. going to non-dealers. That is preposterous.

For front brake pads and rotors, they had a telephone market research firm (you know, those are the people who call you at home at 6:00 PM, can’t pronounce your name and ask you monotonic questions) call a total of 36 Chrysler and VW dealers (in 6 different cities) to get parts and labor repair estimates for the 2002 Chrysler Sebring LX sedan and a 2002 Volkswagen Jetta GL. They also called 48 non-dealer service installers in these 6 markets to get competitive quotes. They estimated that there are tens of millions of front brake pad and rotor jobs each year. So, they averaged the difference in the 2002 Sebring/Jetta repair estimates from a few dealers and non-dealers and, voila, they came up with a multi-billion-dollar price tag!

AAIA repeated this methodology for another 9 repair types, each time using a different pair of domestic and foreign vehicles. That’s how they bungled together the rest of the $11.7 billion.

Given the above, we tried to parallel what AAIA did in LA for brakes and rotors, for more vehicles than they used. Our survey produced mixed results, as expected. For example, “Foreign Repair Shops” were responsible for both the highest quote for a 2004 Toyota Camry Sedan LE 2.4L and the lowest quote for a 2002 VW Jetta GL 2.0L. We gave up on the survey because it was hopeless – read on.

By the way, for the statisticians out there, the margin of error to achieve a confidence level of 95%, based on the AAIA sample size of 3 to 4 data points per market/repair “inference” is plus or minus around 50% (this is being generous - source: The bar chart gives an illustration of just how inaccurate the AAIA press release is. Let’s consider their press release statement, “customers in Los Angeles pay as much as 46.8% more at dealerships than independent repair shops …” I assumed a $300 named repair at an independent shop and, to come up with the dealer cost, I used the AAIA press release’s statement that dealers are 46.8% more expensive. However, based on the margin of error, the “real” dealership price could just as easily be $200….$100 cheaper than the independent shop! We’re not saying that’s the truth…we’re just saying we don’t know. And if you do want to know with reasonable confidence, you would need over 300 data points per price estimate, not 3 to 4. This would mean a total sample size of over 40,000 to estimate the repair cost differences for just the 10 vehicles analyzed by AAIA… about 50 times larger than the sample AAIA used.

OK, Lets Just Focus On the Parts Quotes That AAIA Used to “Prove” That Dealers Were Ripping Off Poor Customers By Billions of Dollars.

I just don’t get it. Let me explain some of my confusion. I spent 30 minutes on the internet and had someone (a Principal in my firm) call some installers for quotes on that 2002 Chrysler Sebring (did the same thing for the Jetta and some other vehicles). On the internet I went to and and got prices for front brake pads and rotors that fit the 2002 Sebring. There were 11 different front brake pad brand choices and 5 different front brake rotor brand choices. In total, there were 55 front pad/rotor internet combinations that cost between $72.48 and $349.27. (This represents a pure parts cost spread of $276.79, which dwarfs the average dealer/independent cost difference per job for front brake pads and rotors – for both labor and parts – in the AAIA report). These costs are charted in the graphic that has all the red bars. To tell the truth, I could not find any evidence that any of these were “Genuine” replacement parts, nor could I figure out which ones were better than the others. We got 5 telephone parts quotes from LA-based installers – all of which fell within the range of the possible price combinations I got from the internet. All the evidence points to our getting parts cost quotes that reflect “choices” that anybody could get – either at a dealer or at an independent installer. There is certainly no “smoking gun” or foul-play going on. So, I am confused, where is the cost excess here? By the way, when I looked at the AAIA report, LA was the high cost market, brake pads and rotors were the biggest “excess cost” repair category, and the parts price quotes they received were squarely within the chart’s choice set and not very much different than what we have. We did the same thing for the 2002 VW Jetta and came to the same conclusions.

OK, What Is the Truth?

The truth is that getting true apples-to-apples comparisons is nearly impossible. In 2007 we surveyed customers, who had dealer service vs. independent service, to ask them questions related to cost of their recent repair. We focused on 3 brands. We concluded that total RO costs were just about a wash … simply because it is nearly impossible to compare independent repairs to dealer repairs. AAIA’s 2002 Chrysler Sebring is a good example of this – we know that there are at least 55 possible combinations (probably several thousand) of parts that can be used in the repair … which combination reflects a “choice” based on judgment, cost, profit, and concern for quality. The realities of comparing dealer to aftermarket service are extremely complicated – but to get the true answer you need to deal with that complication. Here’s a real world example from two weeks ago. A friend takes her Range Rover to the dealer for a lube/oil/filter and 30,000 mile service – all covered under the warranty. Dealer calls her up and says that she needs brake pads and rotors … for $1,400. The dealer’s labor rate is posted at over $100 an hour. She calls me and asks what she should do. I said, give me a minute. I called Midas and gave them all the vehicle information; they said that they could do it for between $300 and $550 – said to bring it over for an exact estimate. Called friend back and said to “just say no” to the dealer for the brake service. Next day she dropped off the Rover at Midas. It took Midas 4 hours to call her back and say that to replace the pads would be $650. Also, they said the rotors were awfully close to being shot – we could replace them for another $1,000 - $1,200. Boy, at $1,800 or so for Midas, the Range Rover dealer looked pretty good at $1,400 – even at $100 or so an hour for labor. What happened here? Let me generalize seven things:
  1. Lots of choices. There are a lot of choices to make when getting a repair – at the very least you have 55 parts alternatives for the 2002 Chrysler Sebring LX sedan’s front brakes and rotors. This can impact your cost by at least $276.79 (high cost of $349.27 to low cost of $72.48.) Worse than having at least 55 choices, there is no way other than “trust” to figure out which is best for you. Complicated, but true.

  2. Trust. Speaking of “trust,” given the choice between a dealer and independent why would we trust the independent more to make the right choices for us? The dealer generally uses Genuine parts that are the same parts used to build your car, parts that are practically pampered from cradle to grave. Their technicians are trained constantly at great cost. They have made incredible enterprise investments in tools and diagnostic capabilities. They have incredible warranties. The manufacturer surveys their dealers to death and comes down hard for anything less than total satisfaction. OEMs and dealers spend millions of dollars on “goodwill” where the costumer is simply assumed to be always right. They give you free transportation and coffee. Contrast all this to what you get at Sammy’s Gas and Repair, where the toilets are cleaned once a month. Complicated, but true.

  3. Genuine parts and the labor cost “myth”. Even though the published dealer labor rates are higher than the independents’, the dealer technicians are better trained, have more factory support, use Genuine parts that fit perfectly, hence require fewer labor hours. Complicated, but true.

  4. Independents “low-ball.” Service independents are experts at low-balling telephone quotes, because they are using rules of thumb and want to bring you in for a more exact estimate. And, when they do get specific, generally they specify cheaper will-fit non-Genuine parts. For example, when we called LA independent repair providers for parts quotes on the front pads and rotors for the 2002 VW Jetta GL, we got one quote for $255 and another quote for $69.95. Complicated, but true.

  5. Quality. We all see JD Power scores advertised to show differences in vehicle quality – this spiraling quality improvement trend has been going on for 26 years. “Genuine” parts are all part of the industry’s quality improvement process. People have such an intense focus on vehicle quality, and are willing to spend thousands more for this quality when they buy. When they go for repairs, most assume they are getting “Genuine” parts and are unpleasantly surprised when they don’t get Genuine, and really don’t get a cheaper price. Complicated, but true.

  6. The trouble with technology. Dealers are hindered by their technology and have a fairly unrefined telephone sales process. They get a call for a quote, and go right to their on-line system that specifies a flat rate labor cost and Genuine parts. The parts that your car was made with. It takes them about 30 seconds to tell you exactly what it will cost .. assuming you want original equipment quality. That’s what you said you wanted when you bought your car; why should the dealer ask, “sorry, but, do you want me to use cheap non-Genuine parts that I can get from the auto parts store a few minutes away?” That would make them consistent with the independents. Complicated, but true.

  7. Complicated, but true. Given all of the above, dealers are not more expensive than independent repair choices. They represent the best value, the most trusting environment, the highest quality, but pretty much the simplest and most unrefined of all possible sales processes.

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