Car Dealership Fixed Ops Expert: Warranty Costs Will Rise

Automakers’ build quality has dramatically improved over time, but warranty costs will rise in coming years.

That’s a prediction from Jim Roche, an automotive-service industry expert and author of books on car dealership fixed operations.

Roche was a former executive at Xtime, a Cox Automotive unit dedicated to service department software applications.

He recently started his own software company called WarrCloud. He says he did so to modernize what he calls outdated processing of car dealerships’ warranty claims.

In a Wards Q&A, Roche (pictured, below left) talks about his new business, how rising warranty claims affect dealers, automakers and car owners differently and how a warranty program helped saved Hyundai. Here’s an edited version of the interview.

Jim Roche (002)

Roche: Not really. Think warranty and cloud (computing). I take a data-driven approach to things and look for problems people aren’t solving. Over the years, I’ve visited about 2,000 dealerships. If you opened enough doors at them, you eventually found a closet with stacks of paper almost up to the ceiling. That would be the warranty-claims office.

Of all the stuff that’s automated at a dealership, this wasn’t one of them. We started working this in 2015, thinking it would take maybe a year. But it took five years because it is a deceptively simple problem to describe, but complex to implement a technology solution.

Wards: How important is warranty work to dealers?

Roche: In service, there are two revenue streams: customer-pay and warranty work. Customer-pay growth had been pretty anemic leading up to the pandemic, whereas warranty growth, pre-pandemic from 2015 to 2019, was 38.2%, about 7.7% each year. It was growing four or five times more than customer-pay.

Post-pandemic, we at WarrCloud project that through the end of 2025, warranty (growth) will increase 27% over 2021. First, more cars will be sold. Second, more parts will be available as this chip shortage works its way through.

Warranty is an increasingly important component of the dealer’s business. But with no automation around it, the cost of processing it – getting the claim to the manufacturer and getting paid – consumes about 12% of the dealer’s warranty-work gross profit.

Wards: Why haven’t warranty claims converted to digital like everything else?

Roche: It’s complicated. Each dealership setup is different. And each OEM is different, with literally 10,000 different rules as to make, year, model – and the manufacturers are constantly changing the rules.

Wards: Are there often dealer-automaker disputes over warranty claims?

Roche: It’s a dispute if you don’t file it properly, if you don’t follow the process.

Wards: What doess your software do exactly?

Roche: It extracts relevant repair orders from the DMS (dealership management system). Our system has a series of bots that go to work on the repair order, identify the claim, then correct and/or validate it, code it and transfer it automatically to the OEM to get the dealer paid. That contrasts to people pushing a lot of paper around.

Wards: Dealers love warranty work as a revenue stream. But it’s a negative payout for automakers. And it’s a potential hit to customer satisfaction; not many people enjoy going to a dealership to get their car fixed, even if it’s for free.

So where is the line where warranty work becomes a problem for everyone but dealers?

Roche: First of all, it is a built-in loyalty tool because you have to go to the dealership to get the warranty work done. If you have a great service experience, you’re much more likely to go back.

People feel good about getting safety recall warranty work done to protect themselves and their families. All the data show most warranty work comes from recalls these days.

But if something is constantly breaking on a vehicle and you repeatedly have to get it fixed under warranty, I agree with you: Regardless of who is paying for it, it’s an annoyance.

And you are right about warranty costs to OEMs. It’s about $30 billion a year in North America. It’s a huge expense.

A lot of it has to do with the fact that we are putting more and more advanced technology in cars, and it’s breaking. That’s driving warranty costs up. The average repair order has increased almost 70% since 2014. We think that increase will continue as more technology is installed for the development of autonomous vehicles.

Wards: What’s ahead?

Roche: Beyond 2025 we may see claims level off. But from 2021 through the end of 2025, I think we’ll see a 27% increase in warranty.

Wards: What is the typical length of a warranty today?

Roche: The typical range is three to five years and 36,000 to 50,000 miles (57,600 to 80,000 km). That’s basic. You’ll get more for luxury vehicles.

Wards: An automaker must have a degree of confidence in its products to offer a generous warranty program, right?  

Roche: Absolutely. You may remember when Finbarr O’Neill was head of Hyundai Motor America, and it came out with the 10-year, 100,000-mile (160,000-km) powertrain warranty. They didn’t do that on a whim. They analyzed their powertrain claims and realized those engines were pretty rock solid.

Wards: I interviewed Finbarr O’Neill after he became CEO of Hyundai’s U.S. unit in 1998. He had been its lawyer. Lawyers don’t usually end up running auto companies, but Hyundai was desperate back then, with dismal sales and dealers losing interest. Something had to be done. That led to that unprecedented powertrain warranty.

Roche: It was smart marketing, right?

Wards: Smart but desperate.

Roche: And it worked.