New autos too good, eroding warranty-repair business


New cars and trucks are of higher quality, and that's a problem - at least if you make money repairing them.

Auto dealerships across the country have seen an estimated 20 percent decline in their warranty business in the past year and up to a 50 percent drop over the past five years, say dealers and automakers.

For each dealership, most of which are relatively small businesses, that can be a difference of a few hundred thousand dollars to $1 million a year. The average dealer does about $550,000 a year in warranty sales, according to J&L; Warranty Pros, a dealer-warranty consulting firm.

Not all the decline in warranty sales is because of better vehicles. Automakers are reducing the labor hours for which they will reimburse dealers. They're using cheaper repair parts or sending some warranty work to Mexico. There's also the impact of lower new-vehicle sales. Sales dropped from 17.4 million in 2000 to 17.1 million in 2001 to 16.8 million last year.

Nonetheless, improved quality is a key reason warranty revenue has gone down, dealers say.

"It's a double-edged sword," said Bill McSkimming, a Chrysler-Jeep dealer near Chicago and chairman of the Chrysler-Jeep National Dealer Council. "It's great for the company and the buyer that it's a better product. Not so great for my service department. My warranty business is down 50 percent from 1999."

Among General Motors Corp.'s 7,400 dealers, warranty work dropped 20 percent last year at the same time the automaker's ranking in the J.D. Power & Associates initial-quality survey jumped 11 percent.

Overall, new-vehicle quality - based on the number of customer complaints - improved 10 percent last year and 24 percent over five years, the annual study says. A separate J.D. Power dealer study showed the number of people who returned to dealers with warranty claims dropped 10 percent in two years.

Ford Motor Co. says warranty costs fell 25 percent last year, and the Chrysler Group says warranty costs were down 21 percent last year and are down 50 percent in the past six years. Automakers refuse to disclose warranty spending, but analysts estimate it around $12 billion at the 21,725 dealers nationwide.

Basic new-vehicle warranties are typically for three years or 36,000 miles, though last year Chrysler launched a seven-year/70,000-mile warranty for powertrains.

Considering that warranty repairs account for 5 percent to 25 percent of a dealer's profits, and plunging warranty revenue coincides with dropping vehicle sales, the decline can be a real concern for a dealer.

"The new cars are just better," says Jim Muir, a Sterling Heights, Mich., Oldsmobile-GMC dealer who estimates his warranty income has dropped 35 percent in five years. "Transmissions on new cars just don't burn up like they used to. Five years ago I'd have two guys working all day in the winter fixing transmissions. Now I don't even need one."

Muir and other dealers said they are doing similar amounts of warranty work per car or truck brought in, but substantially fewer are brought in than four or five years ago. The National Auto Dealers Association estimates the average per-vehicle warranty work at about $130, about the same as a year ago.

Fewer defects and higher quality ratings are generally good things for automakers. They mean a better image with consumers and fewer dollars flowing from automaker coffers to dealers for warranty repairs.

In response, dealers and automakers are making a push to get drivers to bring their cars and trucks to dealers after the warranties expire - so-called customer-pay work.

Automakers estimate that the U.S. market for post-warranty auto maintenance and repair is $42 billion.

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