Automakers Cut Free Maintenance

NEW VEHICLESAutomakers Cut Free Maintenance 
To Lower Costs

CHICAGO (Sept. 6, 2005) - Many automakers have reduced warranty coverage in 2005, including eliminating free maintenance work. Driven by new federal regulations and internal cost concerns, the changes will impact consumers who will now have to pay for some routine work once included in the purchase of their vehicles - oil changes, tire rotations and more.

When free maintenance programs first showed up in the 1980s, they were aimed at providing incentives to lease customers to better maintain cars they didn't actually own. Over the next decade, automakers began offering free maintenance to all customers to preserve brand image. Free maintenance soon became an added incentive expected by consumers. 

This was before the rampant price discounting seen in recent years. Year-end clearances and employee pricing for all promotions has squeezed the price that automakers netted, while still offering the free maintenance. 

Not only has the economic climate changed, so too has the regulatory environment. Recent federal regulatory changes have changed the cost landscape, in reaction to events like the massive recall surrounding the Firestone Tire/Ford Explorer issue. 

The "Transportation Recall Enhancement, Accountability, and Documentation Act" (TREAD) that went into effect last April directly affects vehicle manufacturers, as well as their suppliers. The National Highway Traffic Safety Administration (NHTSA) now requires that NHTSA receive defect information from manufacturers earlier to hopefully prevent large-scale recall problems. It also requires that in addition to just technical information being supplied, textual information also must be supplied. Simply put, sooner and more means higher costs.

Another new factor is the Financial Accounting Standards Board Interpretation No. 45 (FIN 45) that requires manufacturing companies to closely account for monies held in warranty reserves. That will mean increased cash reserves for those companies that haven't been holding sufficient funds to handle claims.

Non-compliance with new regulations has substantial penalties, including fines. In order to meet the requirement for more timely and informative reporting, it has also required a transition from a largely manual system in place for warranty processing to more computerized methods. Tracking this information more closely and taking appropriate remedial action sooner can bring product and processing changes to protect and minimize a manufacturer's exposure to further claims and/or fines. But such changes have costs. 

According to IT World, Linda Ban with IBM's Institute for Business Value team said that IBM estimated that it can take more than 250 days from the time a problem is identified in a dealership to when information about that problem gets back to the supplier, vendor or manufacturer that had a hand in designing that part(s). By developing and implementing software with both technical and anecdotal analytics that can detect looming problems more quickly, this decrease in reporting time has created a whole new industry in and of itself - warranty management. 

Larry Lieberman, IBM Research's automotive program leader told IT World that in doing analysis of unstructured textual data, the problem you have to deal with is that English (or any language), as people write it and speak it, is truly unstructured. Warranty software is not just searching for words; it's getting an accurate semantic understanding and tracking of phrases and sentences. 

Aside from having less margin to work from because of price discounting, other woes faced by automakers over recent years - rising steel costs, healthcare and pension costs, increased competition and quality, huge layoffs and plant shutdowns, raised fuel economy and emissions standards, etc. - have spurred cost-cutting wherever possible. The regulatory changes, despite their merit and intent, have resulted in unavoidable cost increases for automakers and component manufacturers, costs that aren't susceptible to being cut. 

As automakers continue to review their operations, warranty coverage and assumed maintenance costs were a natural for cost-cutting. In 2005, companies eliminating or reducing maintenance programs include Audi, DaimlerChrysler, Volvo, Mitsubishi, Mercedes-Benz, Toyota, and Audi. 

DaimlerChrysler AG's Mercedes-Benz brand's 2005 model line replaced its free maintenance with packages customers must purchase. Mitsubishi Motors Corp. stopped offering free maintenance to buyers of 2005 model-year cars. Toyota Motor Corp.'s Lexus brand eliminated a complimentary inspection at about 1,000 miles, though it still offers a free scheduled maintenance at 5,000 miles or six months. 

Beginning in 2006, Volvo (owned by Ford Motor Company) is offering just one free-maintenance visit, compared to the first four scheduled checkups before. Volkswagen AG says its Audi unit hasn't yet decided whether to continue to offer free maintenance for 2006 Audi models.

Not all manufacturers are reducing or eliminating warranty or free maintenance coverage. Hyundai and BMW are continuing their current programs. 

That some manufacturers have cut programs while others haven't does raise general questions about quality and value. In J.D. Powers and Associates' recent Vehicle Dependability Study, one of the observations that stands out with regard to the issue of reducing or eliminating free maintenance is self-apparent: Some of the automakers cutting free maintenance listed in the study were cited as having repair and dependability problems, which the authors noted could translate into higher warranty costs. For instance, Volkswagen, Volvo, Audi and Mercedes-Benz were automaker brands that performed lower than average, according to the study.

In the face of recent reduction in coverage, one does wonder if this is just a coincidence. In any event, one thing is clear. Going forward, for many brands, the consumer will be paying more for maintenance than in the past years.