Sunday, September 26, 2004

Car warranty fixes soar to $12B a year


'Costs could break the back of the industry'

By Ed Garsten
Gannett News Service

Automakers face a staggering $12 billion annual bill to fix vehicles covered by warranty, and there is 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, Mich.-based Automotive Industry Action Group, which represents major automakers and suppliers. "Warranty costs could break the back of the industry."

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 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 were 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.

At an AIAG-sponsored Auto-Tech conference earlier this month, automakers and suppliers sought 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 industry 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."

While warranty costs are a burden, they are coming down for some automakers that now share the expense with suppliers. Wagoner said GM's warranty costs have dropped 22 percent in the last four years.

The key to reducing warranty and recall costs is more collaboration between automaker and supplier during the product development process, analysts say.

Repair shops and technicians are also under pressure from automakers to reduce charges for fixing vehicles under warranty and they're fighting back.

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.



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