Service contracts: Time to tap in?

Jan. 1, 2020
Vehicle protection plans, be they factory or third party, may offer an avenue to more business for aftermarket players. Just beware of the roadblocks.

Recent stats show that finance and insurance products account for 40 percent of total profit for a car dealership, one reason extended vehicle service contracts will continue to proliferate.

Eileen Sottile, director of government relations for Keystone Automotive Industries, believes more car companies will be pushing some type of extended program for today’s new vehicles. “I think that this is a growing trend and that we will see more extended warranties offered to the motoring public.” She believes that extended warranties “certainly hurt the aftermarket since they further secure the car company’s efforts to control the consumer dollar from the cradle to the grave.”

The growth of these vehicle protection plans should signal to the aftermarket that it needs to stay involved to ensure a piece of this very large parts and service pie.

According to an article on the American International Automobile Dealers Association’s website, there are three reasons extended service contracts are a compelling buy. The first is the fact that many consumers have purchased vehicles that are too costly, leaving them ill-equipped to pay out of pocket for unexpected repairs. Plus, car loans are averaging between 60 and 72 month notes with factory warranties often expiring in that timeframe, so “midway through their loan terms, consumers are left with no coverage in case of mechanical failure.” The third reason is somewhat of a catch 22: Because vehicles are becoming even more sophisticated and advanced, they perhaps are more susceptible to unexpected breakdowns due to the many “new, untested systems being added to vehicles every year.”

Reality vs. perception

Some in the aftermarket suggest that the industry just has to deal with the fact that consumers go back to the dealer when their vehicle is under warranty. “We are pretty much locked out of the service and repair on warranty items,” says one executive from a major program group who prefers anonymity.

“Eventually that vehicle will end up in the aftermarket and hit us in our sweet spot,” he continues, explaining that “the sweet spot” is the overwhelming amount of six- to 12-year-old vehicles that are being serviced by the aftermarket.

“We get these cars when they come out of warranty,” agrees Bob Redding, Washington representative for the Automotive Service Association (ASA). “So, the longer the warranty, the less work we are getting — that is our perception.”

But are these perceptions accurate? Does the aftermarket lose business due to  these vehicle service contracts?

“I don’t think that extended warranties are good or bad for the industry,” says Tony Molla, vice president of ASE. “If we are able to compete, then extended warranties can actually be a good thing.” He adds that the threat to the aftermarket is if the consumer’s right to choose is limited.

Molla says industry sources suggest that roughly 70 percent of the maintenance work being done by the aftermarket is for vehicles under warranty. “Those facilities include independent repair shops, but also the likes of Jiffy Lube, Midas, Pep Boys, NAPA AutoCare shops and more,” he explains.

The ASA recently asked its members if they service vehicles covered by extended warranties and 90 percent said yes.

From these vantage points, it seems as if there is little to write home about — the aftermarket gets its fair share of work from vehicles with service contracts.

But the push at the dealer level for more parts and service business will surely impact the aftermarket, along with the amount of cars on the road and the number of service contracts sold that limit the consumer’s choice.

One thing is certain: Extended service contracts can help auto dealerships secure the “cradle to the grave” consumer. 

The right to choose?

Julie Heggli from CNA National Warranty Corporation, a wholly owned subsidiary of CNA, an insurance organization, says when something is covered by the factory warranty, many of which are now on extended terms, “there may be more restrictions on where the work can be performed.” An automobile dealer may require that an owner take the vehicle back to one of its dealerships for warranty repairs “so that its own technicians can perform the work,” she says.

For instance, a 24-month/30,000-mile vehicle service contract for a used 1997 Honda states that in the case of a mechanical breakdown to “return the Covered Vehicle to the Issuing Dealer immediately for repair or replacement of the Covered Part(s).” Not unless the driver is more than 50 miles away from the Issuing Dealer are they directed to call the Administrator to obtain the name of an authorized repair facility.

A sample extended service contract from DaimlerChrysler Corporation (obtained from www.extended-warranty-pro.com ) states that it “will not cover or apply to loss or expense resulting from plan service obtained from other than a Chrysler, Plymouth, Dodge or Jeep Dealer unless authorization is first received from DaimlerChrysler Service Contracts; for repairs required as a result of use of other than the vehicle manufacturer’s parts; repairs to a covered component caused by the failure of a non-covered component and/or an aftermarket installation not performed by an Authorized DaimlerChrysler Dealer.” It also says that all part installations as a result of insurance or damage claims must be with new or factory authorized remanufactured components and parts.

Clearly, consumer choice in both these cases is extremely limited.

As for most national service contract providers, they are more flexible, “allowing consumers to take their vehicles to the dealership or repair facility of their choice,” says Heggli.

CNA National sells extended service contracts through thousands of dealerships nationwide, the vast majority of which are through new car franchised dealerships, yet they pay for warranty repairs “performed by thousands of other licensed repair facilities, including used car dealerships, national chains such as Pep Boys and Midas, as well as independent repair shops,” says Heggli.

Several other service provider websites suggest similar programs. Warranty Direct says they will pay the repair facility of the consumer’s choice for the “reasonable cost to repair or replace any part of the vehicle where failure has occurred” as long as it’s covered under the warranty. 

Yet dealerships are continuing to tout their parts and service, recommending to consumers that they bring their vehicle back to the dealer when it’s under warranty (be it a factory warranty or extended service contract sold through the dealership).

A Lincoln-Mercury dealer rep in Ohio told us that when a vehicle is under an extended service contract, consumers “should always want to take it to the dealer because they have factory trained technicians and OE parts.” When asked directly, he did tell us that any licensed shop can perform the work as long as they itemize all parts and service needed and get approval before moving forward.

“I believe the perception is that the consumer must return to the dealer in order to keep the warranty in force,” says Sottile. “Of course, we know that a warranty cannot be voided for using an aftermarket part due to the federal Magnuson Moss Warranty Act.” Unfortunately, she points out, consumers just aren’t aware of this protection, because the dealerships are doing whatever they can to grab more market share.

It should be no surprise that dealers are blowing their own horns, suggests Molla. “This is America, we compete.” His real concern is whether the consumer’s choice is truly limited, which in many cases, it seems to be. We need a fair playing field, he suggests.

Breaking the silence

So, is our industry’s response, or lack thereof, essentially saying we agree with the dealerships’ messaging?

“I think so,” says Craig Fetter, owner of Fetter Auto Repair in Baltimore, Md. He believes it’s the independent repair shops’ responsibility to “stand up for what they know is right: that an aftermarket part is as good as or better than an OE part,” and send that message to the consumer.

Fetter gets warranty work at his shop and as long as he follows proper guidelines by calling for authorization and sending an estimate before beginning, there typically aren’t any problems. “We can clearly use aftermarket components and generally do.”

His program group, Auto Pride, recently distributed a poster titled, “Important Consumer Information About Your Vehicle’s Warranty.” It references the consumer’s protection under the Magnuson Moss Warranty Act and is aimed at combating misperception with factory warranties.

Melissa Jolls, Auto Pride’s marketing director, reports that the idea resulted from a shop owner council meeting. “I have already made 2,000 of these signs and have just about gone through all of them,” she says, adding that the rationale is to educate repair shop customers. “They need to be told that the warranty is not void when they get repairs done at the independent shop.” 

Our anonymous source says that they don’t really want to take the OE dealer to task “because they are potentially a customer as well. If we are going to market, we want to have a positive message.”

About the poster hanging on his door, Fetter says, “It’s not speaking negatively, it just gives consumers the other side.”

Redding, of ASA, adds that, “It is to our advantage for consumers to be knowledgeable about warranties. We would encourage others to support initiatives that do increase awareness to consumers.”

Major industry organizations are incorporating messages about vehicles under extended warranties and service contracts  into their materials as well.

“The Car Care Council, through the ‘Be Car Care Aware’ campaign, takes every opportunity when talking with the media to counter the misperception among the motoring public that they must return to the dealership for maintenance and repair while the vehicle is under warranty,” says Rich White, AAIA vice president of marketing & member relations and executive director of the Car Care Council. “In fact, we were successful in influencing a recent Consumer Reports article on this subject that resulted in a pro-independent service provider clarification.” The article was published in April.

The proper maintenance message

Those we spoke to agree that the aftermarket can surely use extended service contracts and warranties to their advantage by educating consumers on the need for proper vehicle maintenance.

Even though warranty work must be  done at the authorized facility, a warranty cannot be conditioned on the use of OE parts or service for non-warranty items such as maintenance under the Magnuson Moss Warranty Act, says Aaron Lowe, VP of government affairs for AAIA.

“The perception that a car company part is the only viable way to maintain or fix a vehicle has been creatively planted in the consumer’s head through car company propaganda and marketing,” claims Sottile. So, the aftermarket must educate if it wants to secure more business from consumers.  

Most warranties and contracts clearly state that for the vehicle service agreement to remain in effect, the purchaser must perform all maintenance services as recommended in the owner’s manual and that this “may be performed by any qualified service facility.”

Molla of ASE suggests that distributors could certainly assist shop owners and technicians in the process of educating consumers regarding what maintenance is required to maintain a vehicle’s warranty. There might also be an opportunity at the distribution channel or manufacturing level to “have parts put on an approved list” for replacements, he adds.

“Marketing material would be helpful” for any professional shop, says Fetter. “Bay banners from distributors and manufacturers could include information on honoring extended warranties.” 

A national Jiffy Lube campaign touts that they do a variety of preventative maintenance service, according to the vehicle manufacturers’ recommendations. Though it doesn’t say anything about the vehicle’s warranty, it communicates that they can help properly maintain a vehicle.

“Most consumers make car service decisions based on convenience, trust and price. And the aftermarket has done a pretty good job connecting with their customers and offering personalized service,” says Molla. “[Vehicles] are designed to need as little repair as possible, but there is an increasing need for maintenance.” Convincing the consumer that they need to maintain their vehicles so they don’t void the warranty is key, he adds. “Maybe these warranties are a blessing in disguise.”