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(ylisrrur rrrtitr Spotlight 4b(b.w,t*10) , fhuraday, January 16, 1975 WARRANTY M . ! Everyone pays for service but who profits ? By RICHARD GOLD Who pays for warranty work on a new automobile? This question is not as simple as it may seem, because it is not always clear who is footing the bill. It might be the factory, the consumer, the mechanic or the dealer. One thing is clear, however, the financial incentive for the dealer and mechanic to do retail repair is much greater than the incentive for warranty work. Bill Brown Sr., of Bill Brown Ford in Lansing says, "There's no question that we make more money in retail repair on a per capita basis. We're lucky to make any profit on warranty repairs, and I've been a dealer for 34 years. The factory probably approves work for me that they wouldn't for other dealers." Donald Randall, author of "The Great American Automobile Repair Robbery, A Ten Billion National Swindle and What You Can Do About It" is more emphatic about the relationship between the factory and the dealer, the mechanic and the consumer. "In effect the retail customer, the dealer and the mechanic subsidize warranty work—the retail customer by paying more than the manufacturer for the same repair, the dealer by taking in less income for the same job and the mechanic by earning fewer wages for warranty work than for retail work." he writes. WHEN A NEW CAR owner brings his auto in for warranty repair work, the dealer does the work and bills the factory. The rates for labor and parts are established by the manufacturer and must be accepted by the franchised dealer. According to Randall and many car dealers, the rebate from the factory is inadequate and this is where the problem begins. The dealer either loses money or makes at best a "marginal profit." The mechanic at a dealership is pdid according to a flat rate manual. The manual designates the number of hours a job should take and the mechanic is paid accordingly, regardless of the number of hours it actually takes him. But the warranty manual is established by the manufacturer, while retail work is done according to another manual, usually "The Chilton Auto Repair Manual" or "The Motor's Auto Repair Guide." However. the flat rate guide for warranty work allows fewer hours than the manual for comparable retail repair work In some instances, in fact, the hourly wage is less on warranty work. As a result the mechanic and the (jlealer get less money on warranty labor than on comparable retail repair. (The dealer and the mechanic split the labor fee on 50-50 basis.) SIMILARLY, profit on parts for warranty work is reduced by the factory. The factory pays the dealer cost plus 20 to 25 per cent on parts, and many dealers argue that this does not allow them any profit. On retail work, the dealer often makes more than 40 per cent on parts. In 1968, the National Automobile Dealers' Association hired an independent consulting firm to find out if they were losing money on warranties. According to Randall, "The study showed that dealers were losing $3.45 per warranty claim on warranty-related clerical and administrative costs alone " Jim North of North Brother's Ford Inc. in Westland concurs. 'There's a lot of special work that goes on in a warranty repair. There's extra clerical work and we aren't compensated for that." The survey also indicated dealers were often losing money on labor and barely breaking even on parts. The Ford Dealers' Association, a dissident group of Ford dealers is fighting the warranty rebate provisions. One member, Ed Mullane, a dealer for 20 years, claims he is losing money on both parts and labor. "We get cost plus 25 per cent on parts, and the consultant we hired said that in 1969 we needed 33 per cent just to break even. Now we need 40 per cent over cost if we arent going to loae any money on the deal. Since the factory doesnt pay us enough, our customers and our mechanics end up subsidizing the manufacturer on warranty work." ONE LOCAL Ford dealer, who asked to ref / main unidentified, agreed, "I'm doing all right if I'm breaking even." Lou La Riche, of Lou La Riche Chevrolet in Plymouth, explains, "We break even in warranty and we make it up in retail. What we need is for the factory to turn out better cars. The people just don't have pride in their jobs any more." He also says the brunt of any money loss usually falls on the mechanic. "There should be more latitude in the manual so our people can do all right on warranty work." Bob Cann, of Fiesta AMC and Jeep in Plymouth, views the problefri in a different light. "What we have to do is get rid of the gray areas in the warranty. There are tjwo coverages in most warranties, one involves a 90-day adjustment period, and the other coverage is for 12 months and 12,000 miles. If an adjustment problem comes up in between 90 days and 12 months there's a hassle between the dealer, the buyer and the factory. With our new Buyer Protection Plan we avoid this issue." Cann also explains that pie dealer has to give a "discount" to the factorv on warranty parts. •They're our biggest customer, and we do the same for the cars we sell to the state. It's a volume discount." MOST DEALERS agree warranty work is the largest single item keeping the shops busy. Usually 40 per cent of the repair;work is warranty and 60 per cent is retail. Dick Green, of Dick Gfeen Plymouth in Detroit says his shop is able tjo run because of warranty work. "This way, I cih keep my men busy, otherwise business would b4 up and down, and I'd either have men sitting around or I'd have to hire more when it got too busy* it stabilizes the back shop." Green is satisfied with his factory arrangement. "They give you what they can. A lot of the time it's the dealer's fault, he's trying to cheat the factory. We have to have a good team effort to give the customer service, we have to work together. Of course though, I'd like to control the rates on warranty work, but we aren't losing money." IF THERE IS a rift bitween the dealer and the factory, the implications are serious for the car buyer. Randall suggests two • When it is possible, the dealer will not do the warranty work, or he will make it a last priority item because the financial incentive is to do other kinds of work first • When the car is brought in for warranty work, the dealer or the mechanic may seek out other repairs on the vehicle that are not covered by the warranty to minimize losses on warranty woric. "Other problems exist that make it difficult for the consumer to get a decent shake on warranty work. Often, Randall says, dealers do not get paid for road tests on a new car brought in for warranty repair, and the incentive for the mechanic to do a complete check up an the vehicle is diminished. Also, dealers do some repairs when the f owner with "excessive a ry may require "prior app of work done under the wa BUT IF the consumer lis getting poor service, his problem is even more insulting because, in essence, the warranty work hjas been paid for in the purchase price of the car. Tom Houston, Chrysler spokesman says, "Obviously the costs of doing warranty work are fully transferred to the consurrjer when he buys the car. It's part of the purchase price." B. F. "Moon" Mullins,; another Chrysler official explains that the cost of warranty work is included in a category called "the cost of doing business." But the price of an automobile is established by two factors, all the coats of producing it and what the competition is charging. Basically, the costs are added together, including the cost of f major problems: t get reimbursed for tory charges the car e." Finally the factoval" on certain kinds anty, forcing the con- sumer to wait up to j"10 days" for work that needs immediate attention. Jim North says, however, that some delays are not the result of prior approval, but simply because the factory doesn't have the part. doing business, and a desired profit percentage is tacked on. This would suggest, in fact, that a profit is being made on the warranty costs, because a profit margin is computed on and added to the entire cost of production, and part of the entire cost is the warranty cost. THE COST of the warranty in the purchase price of a new car is closely guarded information. Representatives of all four domestic manufacturers will not even divulge "ball park" figures. They claim it would "give up their competitive position." But it is clear that the costs of warranty are closely monitored and the manufacturers know precisely which items constantly need attention, and what design failures are causing them the most problems. "We try to determine what the warranty cost will be b&ore we sell the car, but the vehicles are priced before the information is in," says Bud McMullen, a General Motors representative. Larry Knox, a consultant who works for Cummunico, has been intimately involved with all four manufacturers. He suggests warranty costs are between $25 and $50 a car. "They watch for a pattern of repairs over a number of years, and they have the cost of the warranty nailed down to three decimal points," he says. However, one American Motors official, who preferred to remain anonymous, suggests the cost per car is "more like $100. This amount is included in the purchase price of each car." But, he also adds, "It depends on the comprehensiveness of your plan and the company. TTie more cars you sell, the less the cost is going to be for each car. It's a question of size and volume of the company." THE BEST indication of the cost of warranties is the second year option AMC offers. It has been selling for $99.95. George Brown, director of the AMC service department,says the company is lucky to break even on this option. He also states that most warranty work or. a car is done in the first six months of ownership. "Our records indicate that the most trouble and the most adjustments made to a new car occur within six months after the car is sold. Usually any problem will appear in the first six months and the owner will notice it and bring it right in." Brown's statements would imply that the second year of warranty is cheaper than the first, and this would place the cost of warranty minimally at $100 per car. Brown also states a second reason for warranties. "They are more than a protective device for the owner, they are a marketing tool for the company." "Our sales have increased 50 per cent since we instituted the 'buyer protection plan' two years ago. It aroused product interest and helped us sell over 100,000 more cars in each of the last two years," says Brown IN FACT, many of the changes that have occured in warranty policies can be interpreted in. terms of marketing. Prior to the early '60s most warranties were for 90 days or 4,000 miles. Then Chrysler introduced a 12 month-12,000 mile warranty and followed with a five year-50,000 mile warranty on the power train. This proved to be too expensive and too unwieldy to administer, and the company retreated to one year and 12,000 mile coverage. Many auto executives explain the five-year policy as a marketing device to attract fleet car sales, which constitute a large portion of the new car market. Chrysler's new warranty, "the clincher," has a one-year limit, but no mileage restrictions It is also interpreted to be an effort to capture a larger amount of the fleet car market, which constitutes approximately 25 per cent of the total automobile market, according to Ford representative Stephen Madeline. Knox says that he is glad to see the automobile companies use warranties as an advertising tool. "That puts the pressure on all of the manufacturers to come up with equivalent or better warranty programs, and it also puts the warranty performance of the dealer and the factory under the spotlight " THE CENTER for Auto Safety in Washington D C. has a complaint of a different nature against both domestic and foreign manufacturers. Their complaint is against "arbitrary warranty extensions." , These warranty extensions allow some vehicles to be fixed free after the warranty has expired. Usually the problem is "chronic" in that it occurs with great frequency. But the way the warranty extension is implemented is "unfair," says Lowell Dodge, former director of the center. "These policies benefit only those who are either chronic complainers, welleducated, or in the right place at the right time, rather than applying evenly to all affected owners." He continues, "We believe that elementary fairness requires that all auto companies disclose fully all decisions to extend warranties beyond the limits set forth in the standard warranty." New car owners beware: Warranty provisions vary Not all new car warranties are alike, and there are several provisions and disclaimers that are peculiar to individual manufacturers', guarantees. All four domestic manufacturers offer a 12-month warranty for repair of defective materials and workmanship in the car. That is where the parellel ends. With the exception of Chrysler, American manufacturers alsb have a 12,000 mile limit in their warranties. And with the exception of American Motors, there is a 90- day adjustment period, after which the owner is asked to assume adjustments as part of his maintenance. The Chrysler warranty explains this by stating, "After the first 90 days of use, adjustments are considered owner-maintenance responsibility unless required in connection with the repair oj replacement of a part we supplied which proves defective during the warranty period." After 90 days. Ford, Chrysler, and General Motors will not cover items they consider to be "selected wear parts." Items such as spark plugs, PCV valves, filters, hoses and belts are usually mentioned specifically. NOT ALL companies supply loaners when a car is being serviced for warranty repairs overnight. Often appointments have to be made in advance for a consumer to get a "loaner." Tires are warranteed by the tire manufacturer, and batteries are under a special provision in all the warranties with the exception of AMC. They are replaced free in the first 12 months and are prorated thereafter. All four manufacturers have provisions that will prevent repair if "owner abuse" is indicated. The Bulck warranty is representative when it states, "Repairs and service adjustments required because of misuse, negligence, alteration, accident, or lack of reasonable and proper maintenance are not covered." The AMC warranty is a little less specific: "All we require that the car be properly maintained and cared for under normal use and service." rhe Ford warranty has a disclaimer that is common to all warranties with the exception of AMC. It says, "Loss of use of the vehicle loss of time, inconvenience, commercial loss or consequential damages are not covered." BEFORE PURCHASING a new car, consumers should scrutinize the warranty and make sure that all provisions are fully explained. If problems arise after the purchase of a new car, each maiyifacturer has zone offices, regional offices and, in some instances, specific service offices to register complaints. These offices may be of assistance when the dealer and the consumer do not see eye to eye over repair and warranty problems. !