U.S. auto warranty costs soar
From the Detroit Insider:
U.S. auto warranty costs soar
As tab hits $12 billion, suppliers pressed to help bear burden
By Ed Garsten / The Detroit News
DETROIT — Automakers face a staggering $12 billion annual bill to fix vehicles covered by warranty and there’s growing tension with parts suppliers and repair shops over who is responsible for the skyrocketing cost and how to reduce it.
“It’s the most alarming issue on the table, along with health care,” said Andy Cummins, executive director of the Southfield-based Automotive Industry Action Group, which represents major automakers and suppliers. “Warranty costs could break the back of the industry.”
For some automakers, warranty costs are wiping out profits.
According to AMR Research, warranty costs shave 1 percent to 3 percent off revenues, a huge financial burden because many automakers already are struggling to boost slim profit margins.
Increasingly, automakers are offloading some of the financial burden on to suppliers, when the defect can be traced to engineering, design or manufacturing flaws on their end, further heightening the friction between the two.
Warranty costs are climbing because product development cycles have become compressed and sometimes rushed, vehicle complexity is growing with a greater reliance on computers and software, and because of an overall push to lower costs that can adversely affect quality.
A surge in product recalls also is pushing warranty costs higher.
“By the end of the second quarter of this year, more vehicles have been recalled than all of 2003,” said Marianne Grant, an analyst at El Segundo, Calif.-based consultants Syncata Corp.
Through August, 22 million vehicles have been recalled, compared with 19.45 million last year, according to the National Highway Traffic Safety Administration.
The average recall campaign now takes 250 days to get all vehicles repaired, at an average cost of $1 million a day, AIAG’s Cummins said.
Faced with balance sheets already sagging under the costs of incentives, health care and retiree benefits, automakers increasingly are turning to suppliers to pony up when warranty claims or recalls are triggered by defects in parts.
Bob Andersson, vice president of purchasing for GM, says the amount of warranty costs that should be borne by a supplier depends on the part.
For a starter or generator, he said, it’s often the supplier’s entire responsibility. With a climate control system, it can be 50-50, because most of the elements, and in some cases, 100 percent of the parts, are the automaker’s responsibility.”
At an AIAG-sponsored Auto-Tech conference earlier this month, automakers and suppliers sought new solutions to reduce the burden of warranty costs, including ways to detect problems earlier.
“Customers expect no problems, and if there’s a problem they expect to have it taken care of,” said Rick Wagoner, chairman and CEO of General Motors Corp. “It’s a cost element for both of us, one way or another.”
Neil DeKoker, president of the Original Equipment Suppliers Association, said the industrywide solution does not lie in shifting all costs to suppliers.
“It’s very, very important the focus be on warranty cost reduction, not on cost sharing,” he said. “Suppliers understand it’s some of their responsibility, but there should be limitations.”
A supplier that produces a $5 part and clears a 50 cent profit would be severely hampered if it was forced to pay $100 in warranty or recall costs on the part.
“It would wipe out the supplier immediately,” DeKoker said.
“Warranty costs deserve to be placed where the fault occurs,” Cummins said. “But our idea is to take the cost out, not pass it down.”
At DaimlerChrysler AG, warranty responsibility is determined early during new product development, said Tom Sidlik, who heads global purchasing for the German-American automaker.
“Before we source parts, the supplier, our engineering group and purchasing will get together and define responsibility,” Sidlik said.
Tony Brown, Ford vice president of global purchasing, says figuring out who’s responsible is a matter of “getting the right people in a room and sort through it.”
Because of competitive reasons, warranty expenses have become a closely guarded secret among automakers.
While warranty costs are a burden, they are coming down for some automakers who now share the expense with suppliers. Wagoner said GM’s warranty costs have dropped 22 percent in the last four years.
At Chrysler, warranty costs have dropped 50 percent since 1996, and 25 percent in the past three years, Sidlik said.
The key to reducing warranty and recall costs is more collaboration between automaker and supplier during the product development process, analysts say.
“They need to share responsibility but also share information,” said Syncata’s Marianne Grant.
Automakers have adopted programs to reward suppliers when they come up with new ways to improve quality.
After the massive recall in 2000 of Firestone tires equipped on Ford Explorers, the federal government passed the TREAD act aimed at creating an early warning system. It funnels repair and warranty claim information into a database the industry uses to quickly flag problems.
AMR Research asserts the early warning system could slice warranty costs by reducing the time it takes to resolve a repair issue from the 160 to 220 days now to about a month.
AIAG also is setting up a system to collect repair data from dealers and make it available to the auto industry.
East Moline, Ill.-based 4CS Solutions Inc. has developed an electronic claim processing system called iWarranty in which information from dealers on warranty repairs is used to flag any defect trends, said Gene Weber, a senior warranty consultant with the company.
If new technology now available can cut warranty costs in half, an automaker could increase its profits by 300 percent, AMR research estimates.
Repair techs take hit
Repair shops and technicians are also under pressure from automakers to reduce charges for fixing vehicles under warranty and they’re fighting back.
For the past 18 months a group of technicians who work at Ford dealerships has been trying to organize a class action suit again Ford Motor Co.
They want Ford to provide and cover additional time for many warranty repairs that were reduced in 1999, according to Mark Ward, publisher of Flatratetech.com, an Internet discussion board for technicians.
“We all took a big hit,” said Ward, a technician at a Eufaula, Okla., Ford dealership. “We don’t believe the times are valid.”
Ward says annual income for technicians has declined by as much as $10,000 because of cutbacks in warranty repair payments.
Don Henderson, a senior master technician with Capital Ford in Raleigh, N.C., says his dealership is losing money on warranty repairs.
He claims Ford forces technicians to cut corners, such as not charging for the time they spend reviewing service manuals before making a repair.
“Quality doesn’t suffer because we know if we don’t fix it right the first time, it’s gonna come back to us to fix it all over again,” Henderson said. “Then it’s harder to get paid.”
Ford spokesman Glenn Ray said the company does not determine how much dealerships charge for repairs and improving vehicle quality is a key reason some technicians may be earning less income.
“As quality improves,” Ray said, “there’s less warranty work. Customers are getting higher-quality vehicles.”
Ford and Lincoln Mercury dealer traffic for warranty repairs has dropped about 46 percent since 2002, from about 10 jobs a day to about 5.5.
The automaker holds periodic technician review panels to re-examine repair procedures and the time it takes to perform them, Ray said.
To help recoup some of the lost warranty repair revenue Ford assists dealers in setting up new money-making operations such as quick oil change lanes, and light service and repair operations, Ray said.