July 25, 2006

Ford's Powertrain Warranties:

How does a carmaker get people talking about product quality and confidence? By lengthening the warranty on the engine and transmission. But it didn't work so well for Chrysler, so why should it work for Ford?


On July 13, the Ford Motor Co. announced the lengthening of powertrain warranties for 2007-model Ford and Mercury vehicles to five years or 60,000 miles, and upped the powertrain coverage on Lincoln vehicles to six years or 70,000 miles.

That puts Lincoln way in front of Cadillac, and pushes Ford and Mercury up to the same level as Nissan and Toyota, in terms of warranty coverage. And perhaps most importantly, Ford can now boast that it has the best warranties of all the Detroit brands.

Ford also took the opportunity on July 13 to announce that it will cut the dividend paid to common stock holders from 10 cents to five cents per share, and it also will cut the pay of its board of directors in half. These moves are expected to save the company $368 million a year. But it's not so much the amount as it is the message it sends: less for shareholders, less for the board, more for customers.

Whitney Drake, a spokesperson for Ford, told Warranty Week that the timing was no accident. "Part of what we've said from the beginning of our Way Forward plan was that we want to bring more value to our customers and that they are very important to us. It was a message that we wanted to send," she said. "We want people to know that we are adding more value and more content and improved warranties, because customers are very important to us, at the same time we made the dividend announcement."

Warranty As a Competitive Advantage

Drake said the people at Ford definitely see longer warranties as a competitive advantage for the company. "We think that customers do look at warranties when they're making their purchase decisions. Therefore, we wanted to increase our competitiveness by offering an extended powertrain warranty. We think that customers do want it, and do care about it," she said.

Back at the end of 2004, DaimlerChrysler began to trim its powertrain warranties back from the seven-year, 70,000-mile level, suggesting that customers didn't really respond to the offer. Now the question is whether Ford customers will respond, or will they simply wait for lower interest rates or bigger rebates?

"With our warranty being extended, we hope that it will put us on more people's consideration lists as a vehicle," Drake said. "We think that some people weren't considering Ford products because we didn't have an extended powertrain warranty versus some of our competition. We hope that it will increase our competitiveness."

We should note that Drake and several others interviewed for this article continuously used the word "extended" to refer to the new offer. While the dictionary definitions of extended and lengthened are virtually interchangeable, we always try to use the latter term to avoid confusion with extended warranties as in extended service plans or service contracts. This new offer is free to the customer, unlike extended warranties which are always sold as a separate contract. But we digress...

Part of a Package

Drake noted that besides the dividend cut, pay cut, and longer powertrain warranties, the July 13 package also included some other goodies. Buyers will now get free roadside assistance, including towing, fuel and lock-out service, for the entire warranty period. And Ford has made side airbags standard on 14 vehicles, along with rollover sensors.

"It's not a standalone thing for us," Drake said. "It's paired with a lot of things that we have going as part of The Way Forward and our Bold Moves, including more standard safety equipment, and more features and options for customers. So it's about giving more to our customers."

So how will Ford pay for these longer powertrain warranties? When Chrysler did it, warranty claims soared, peaking at just under 5.6 billion euros (US$6.66 billion) in 2005 -- a world record for all manufacturers. In comparison, Ford paid out just shy of $4 billion last year, while General Motors paid out just under $4.7 billion for warranty claims last year.

The answer, simply, is that Ford thinks its engines and transmissions are good enough to outlast the warranties. The company doesn't break out its warranty claims by make or model or type, but people who know cars will readily admit that Ford engines are built to last. If the company is vulnerable to higher warranty costs, it's probably going to come from areas outside the powertrain such as electronics. And those warranties are still at three years or 36,000 miles.

It's a bit of a chicken or the egg question: do the longer warranties imply better quality, or does the higher quality allow for longer warranties? We'd suggest they must arrive together, as has evidently happened for Hyundai Motor America, which first neutralized its Yugo-like image with 10-year powertrain warranties, and then delivered on promises of Toyota-like quality. Doing the former without doing the latter would have cost the company dearly.

Quality Is Still Job One

Drake suggested that in Ford's case, the quality improvements came first. "We are able to offer an extended warranty because our quality is improving," she said. "So yes, we do believe there is an association between better quality and longer warranties. But it's more about the fact that our quality continues to show improvement, and we're backing that up with a longer warranty."

Out among the franchised dealers, the early word is apparently very positive. Josh Gobin, the F&I manager at Earl Floyd Ford-Mercury of Carrolton, Kentucky, told Warranty Week that he thinks the longer warranties show that Ford as a whole has more confidence in their vehicles. "Maybe it's showing that confidence to the customers, so they can be even more confident in buying it. It's Ford saying that we have enough confidence in our vehicles to give you more warranty at our cost, so it raises the quality image of the vehicles that we're putting out there on the market."

He also said that customers seem to be responding. "Say they're looking at some competitors, and they see a truck or a car that's roughly around the same price and the same payment," Gobin said. "Everything is the same, and they're not exactly sure why they would want to choose one or the other. And then they find out that the vehicle that Ford is offering has five years of warranty, as opposed to three years, plus the additional roadside assistance that comes with the five years. I would say that could be something that would put them over the edge."

So where does warranty rank in the minds of customers? "I think it ranks up there," Gobin said, "because one of the interview questions that I ask while trying to find out whether they'd want to purchase an extra -- an ESP, or an extended warranty -- is what kind of value would you put on this factory warranty? And how much would we have to lower the price of the vehicle to get you to buy it without a warranty? And a lot of them say they wouldn't buy it without a warranty, or that we'd have to lower the price by $3,000, $4,000, even $5,000 in order for them to consider purchasing it without a factory warranty."

How Much Will It Cost?

Ron Davis, president and general manager of Santa Monica Ford in California, agreed that the new offer delivers a message of confidence in the product. "Obviously, Ford is a company that watches expenses, and if they didn't believe that their products were capable of holding up to these extended warranties, they wouldn't be doing it," he said. "And I think it really draws attention to the product. It's a good thing for the consumer, and I think it's going to be a good thing for the company. Already, we've had people come in and inquire about it. So the message is out there."

Davis said he also thinks warranty is very important to the customer. "I think warranty would be in second or third position," he said. "Especially on a large investment -- with the price of vehicles these days -- you want the company to stand by the product, on the major components, for as long as possible."

But he added that he suspects most customers assume there's not much difference between the warranties of the major brands. "So I think when you do something like this, it stands out and puts warranty back up higher on the list." Santa Monica Ford, he said, is already advertising the longer warranties in all its print ads.

"The truth will be in the results that we get," Davis said. "If we're successful -- and I believe that we're starting to see some success -- it will bear out that Ford was right. Just a few years ago, you remember what Hyundai did [with its 10-year powertrain warranties] and it basically turned around their company.

"It's an important step in terms of confidence for Ford Motor Company to do this," he said, "and I think by doing this, they can showcase -- they have a story for the consumer that 'our quality is good, and we're standing behind that quality.' We're able to advertise that. And it's an important message."

Warranty Differences

In the chart below, we've ranked the 37 most popular U.S. nameplates in descending order based on powertrain and bumper-to-bumper warranties. On such a list, the Lincoln brand now has the eighth best powertrain warranty, bested by only Hyundai, Kia, Mitsubishi, Suzuki, Isuzu, Infiniti, and Acura, and tied with Lexus. Then comes Volkswagen in tenth place, then Ford and Mercury are part of a seven-way tie for twelfth place with Honda, Nissan, Scion, Subaru, and Toyota.

The other 20 brands can be grouped into two categories: those with four-year or 50,000-mile warranties, and those with three-year or 36,000 warranties, with no difference between the bumper-to-bumper and the powertrain coverages. Into the former category fall Mercedes-Benz, Ford's Jaguar, Land Rover, Mazda, and Volvo makes, and GM's Buick, Cadillac, Hummer, and Saab makes. Into the bottom category fall DaimlerChrysler's Chrysler, Dodge, and Jeep makes, and GM's Chevrolet, GMC, Pontiac, and Saturn makes.

We left out a couple of ultra-luxury brands, but for your information, Rolls-Royce has a four-year warranty with unlimited mileage, and both Aston Martin and Ferrari feature a two-year warranty with unlimited mileage. Lamborghini has a two-year, 24,000-mile policy, while Maserati has a four-year or 50,000-mile policy, and Lotus is at three years or 36,000 miles.



Major U.S. Passenger Car Brands
Powertrain & Bumper-to-Bumper Warranties

  Bumper-to-Bumper Powertrain Warranty
  Brand   Years   Months   Years   Months
  Hyundai 5 60k 10 100k
  Kia 5 60k 10 100k
  Mitsubishi 5 60k 10 100k
          
  Suzuki 3 36k 7 100k
  Isuzu 3 50k 7 75k
  Infiniti 4 60k 6 70k
  Acura 4 50k 6 72k
          
  Lexus 4 50k 6 70k
  Lincoln 4 50k 6 70k
          
  Volkswagen 4 50k 5 60k
          
  Ford 3 36k 5 60k
  Honda 3 36k 5 60k
  Mercury 3 36k 5 60k
  Nissan 3 36k 5 60k
  Scion 3 36k 5 60k
  Subaru 3 36k 5 60k
  Toyota 3 36k 5 60k
          
  Audi 4 50k 4 50k
  BMW 4 50k 4 50k
  Buick 4 50k 4 50k
  Cadillac 4 50k 4 50k
  Hummer 4 50k 4 50k
  Jaguar 4 50k 4 50k
  Land Rover 4 50k 4 50k
  Mazda 4 50k 4 50k
  Mercedes-Benz 4 50k 4 50k
  Mini 4 50k 4 50k
  Porsche 4 50k 4 50k
  Saab 4 50k 4 50k
  Volvo 4 50k 4 50k
          
  Chevrolet 3 36k 3 36k
  Chrysler 3 36k 3 36k
  Dodge 3 36k 3 36k
  GMC 3 36k 3 36k
  Jeep 3 36k 3 36k
  Pontiac 3 36k 3 36k
  Saturn 3 36k 3 36k
          


So the big question is, does warranty really matter? The problem with warranties is they cost the manufacturers money -- real money, counted in billions of dollars for some of the largest. So slapping a long warranty on a vehicle can cost some real money if quality isn't up to par.

Then again, sometimes perception is reality, as is apparently the case with Volkswagen, which gives customers a factory warranty slightly better than Toyota's and slightly behind Honda's offer. That's about where most people might place them, until they had a look at some actual repair data.

And what is Isuzu doing so far up that list? According to the J.D. Power and Associates 2006 Initial Quality Survey, Isuzu ranks second to last, with an average of 204 problems per 100 vehicles during the first 90 days of ownership, precisely twice as many as reported for Hyundai.

According to that most recent J.D. Power survey, the Lincoln, Ford, and Mercury brands are pretty close to the industry average in terms of quality. Now, they're above average in terms of warranty coverage. Let's see if customers respond.


Other Stops on the Warranty Tour

Automotive Warranties

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Computer Warranties


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