Auto Dealership Fixed Ops Expert: Warranty Costs Will Rise

Automakers’ build quality has improved dramatically over time, but warranty costs will increase in the years to come.

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

Roche was a former executive of Xtime, a Cox Automotive unit dedicated to after-sales service software applications.

He recently launched his own software company called WarrCloud. He says he did it to modernize what he calls the outdated handling of auto dealership warranty claims.

In a Wards Q&A, Roche (photo below left) talks about his new venture, how the increase in warranty claims is affecting dealerships, automakers and car owners differently, and how a warranty program helped save Hyundai. Here is an edited version of the interview.

Neighborhoods: WarrCloud sounds mystically Native American. Was it wanted?

rock: Not really. Think about warranty and cloud (computing). I take a data-driven approach and look for problems that people don’t solve. Over the years I have visited about 2,000 dealerships. If you opened enough doors for them, you eventually found a closet with stacks of paper almost to the ceiling. This would be the Warranty Claims Office.

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

Neighborhoods: How important is warranty work to dealers?

rock: In service, there are two revenue streams: work paid for by the customer and work under warranty. Customer-pays growth had been fairly anemic before the pandemic, while warranty growth, pre-pandemic from 2015 to 2019, was 38.2%, or about 7.7% each year. It increased four or five times more than the customer pays.

After the pandemic, at WarrCloud, we expect that through the end of 2025, the warranty (growth) will increase by 27% compared to 2021. First, more cars will be sold. Second, more parts will become available as this chip shortage becomes apparent.

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

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

rock: It is complicated. Every dealership setup is different. And every OEM is different, with literally 10,000 different rules as to make, year, model – and manufacturers are constantly changing the rules.

Neighborhoods: Are there often disputes between car dealers and car manufacturers regarding warranty claims?

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

Neighborhoods: What exactly does your software do?

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

Neighborhoods: Dealers love warranty work as a source of revenue. But it’s a negative payment for automakers. And that’s a potential impact on customer satisfaction; Not many people like going to a dealership to get their car repaired, even if it’s free.

So where is the line where warranty work becomes an issue for everyone but dealers?

rock: First of all, it’s an integrated loyalty tool because you have to go to the dealership to have the warranty work done. If you have a great service experience, you’re much more likely to go back.

People feel great about doing safety recall warranty work to protect themselves and their families. All the data shows that most warranty work comes from recalls these days.

But if something constantly breaks on a vehicle and you have to repeatedly have it repaired under warranty, I agree with you: it doesn’t matter who pays, it’s a nuisance.

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

It has a lot to do with the fact that we’re putting more and more advanced technology into cars, and it’s breaking. This drives up warranty costs. The average repair order has increased by almost 70% since 2014. We expect this increase to continue as more technologies are installed for the development of autonomous vehicles.

Neighborhoods: What awaits us?

rock: Beyond 2025, we may see claims stabilizing. But from 2021 to the end of 2025, I think we will see a 27% increase in the guarantee.

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

rock: Typical range is three to five years and 36,000 to 50,000 miles (57,600 to 80,000 km). It’s basic. You will get more for luxury vehicles.

Neighborhoods: A car manufacturer has to have some confidence in its products to offer a generous warranty program, right?

rock: Absolutely. You might remember when Finbarr O’Neill was the head of Hyundai Motor America, and he came out with the 10-year, 100,000-mile powertrain warranty. They didn’t do this on a whim. They analyzed their powertrain claims and realized that these motors were pretty strong.

Neighborhoods: I interviewed Finbarr O’Neill after he became CEO of Hyundai’s US unit in 1998. He had been his lawyer. Lawyers don’t usually end up running car companies, but Hyundai was desperate at the time, with dismal sales and disinterested dealerships. Something must be done. This led to this unprecedented powertrain warranty.

rock: That was clever marketing, right?

Neighborhoods: Clever but desperate.

rock: And it worked.