Thursday, July 30, 2009

The Future of New Vehicle Warranties - David Sergeant

Over the last 20 years, vehicle quality has improved significantly – vehicles last much longer and warranty costs have declined dramatically. Yet, the volume manufacturers have stayed with the traditional 36-month new vehicle warranties.

Why?

Partly to save money.

Partly, because new vehicle owners have traditionally traded in their vehicles by the fourth year, as the warranties expired (or sooner if under lease). As such, leaving the 36-month warranty in place encourages a similar behavior by that segment despite the much higher quality of today’s vehicles.

Perhaps it is time for the mainstream OEMs to revisit the basic warranty and consider what the customer really wants.

Back in the 80s, OEMs offered new vehicle warranties of 12 months, with multiple options for paid, extended warranties. This remained unchanged for decades.

Times changed. In the early 90s all the OEMs moved to 36-month warranties, plus the optional extended warranties. And that’s pretty much where the mass volume manufacturers sit today, with a few interesting exceptions (i.e. a few 50,000 mile bumper-to-bumper warranties, 100,000 mile 5+ year powertrain warranties, 10-year powertrain warranties, etc.).

Perhaps the only real recent innovation has been vehicle warranties that include prepaid maintenance, which is the province of companies like VW and BMW (with BMW’s being much more comprehensive).

Vehicles of the late 80s were quite different from today’s efficient, safe, high-quality marvels. Defects have dropped significantly for all OEMs and so have warranty costs. The rising quality, change in mix and higher cost of vehicles has led to longer contracts (up to 84 months) for a segment of new vehicle purchasers. This type of extended contract doesn’t match up well with the 36-month warranty, which has led to a proliferation of OEM extended warranties that can be purchased and some abuse by private companies.

Beyond all that, what did the original longer 36-month warranty do for the industry and the car owner? It basically forced the OEMs to reduce defects on a regular basis for the 36-month warranty period, which of course meant a huge improvement in quality.

Hyundai entered the US market in 1986, and came out of the starting blocks like a sprinter. In 1986 they sold more than 200,000 units and set the benchmark for all new market entrants. Unfortunately, their reputation for product quality was not so sprinty. But, this is a brilliant company. It appears that they learned the lessons from the domestics about the corrosive nature of tarnished quality on brand reputations. Taking a page from Chrysler’s early 80s strategy, they introduced a limited 10-year powertrain warranty. The results have been breathtaking. Hyundai has leapt to the top of the pack, winning significant quality awards … they could have been bankrupted.

Back to our original point – perhaps the mainstream OEMs need to revisit the basic warranty and consider what the customer really wants. Are VW and BMW customers extremely pleased with a warranty that includes maintenance? What are the advantages of such a warranty?

Some benefits that come to mind are maintaining close customer contact, blocking out the aftermarket, ensuring higher quality vehicle maintenance, simplifying repair of non-safety defects within a normally scheduled (and prepaid) visit, and basically maintaining tighter control over the entire customer ownership experience.

Weighing the advantages of including maintenance in the basic 36-month warranty versus the powerful marketing message of 10-year non-transferable limited powertrain warranties, I’d have to consider the trouble-free maintenance-included warranty to be a viable alternative.

That doesn’t mean that a longer 50 or 60-month warranty isn’t overdue. It just might be that basic warranties, which include maintenance for some period of time, may also have strong appeal. It would be very interesting to test consumer preference of a 10-year powertrain warranty versus the 50-month BMW all-inclusive warranty with maintenance.

So, OEMs appear to have three options for warranty coverage:
  1. They can stay where they are, accrue the benefits of increased quality to the bottom line, and risk losing service retention, which can lead to a loss of repurchase loyalty.
  2. They can extend the duration of the warranty period. This can help maintain customer loyalty until the ownership cycle is complete, but won’t do much for those who buy new vehicles frequently.
  3. They can expand the content of the warranty with features such as free maintenance. This strategy can lead to the richest OEM-dealer-customer relationship, as the customer will return to the dealers for reasons other than “my car don’t work.” The risk here is that parts and service are currently a significant profit center for both the dealer and OEM.
Conclusion: depending on customer mix and OEM costs, different warranties may make sense for different OEMs. But, on balance as OEM costs go down due to quality and the importance of service retention goes up, longer and more innovative warranties just make sense.

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