September 21, 2004

Warranty Promotions:

Once an afterthought for both manufacturers and customers, warranty is becoming the simplest way to express the quality of a product. Lengthened warranties, which began as a bid for market share by certain auto importers, are now spreading to computers and home electronics.

Long ago, in another century, warranty was simply another cost of sales, over which manufacturers had limited control. Manufacturers could strive to limit warranty costs by improving efficiency and cutting overhead, or perhaps they could shorten the duration of their warranties to months instead of years.

Along came computer automation and suddenly processing time per claim could be cut from weeks to days or even hours. Clerical positions could be replaced by rules and filters. Claims volumes could be cut by increasing the exclusions, decreasing customer service, and cutting warranties to 90 days or a year. In some industries such as consumer electronics and laptop computers, buyers began to accept very short warranties as a fact of life given an environment of constantly falling prices. After all, who needs a warranty on a $39 DVD player or a $79 window air conditioner? If it breaks, even the manufacturer might agree it's not worth repairing.

In some sectors, prices have yet to bottom out, so this disposable attitude is likely to continue. But at the same time, a handful of manufacturers are trying to establish themselves as premium brands, touting their product quality. The average customer may not understand much about mean time between failure or quality benchmarking in general, but there is one word they all know: warranty. Considering the purchase of a digital music player? If you never lost your entire collection of 99-cent songs to a faulty memory module or a dead battery, you may not care that one unit has a 90-day warranty while another has a one-year warranty. But once it happens to you or someone you know, you're going to shop on quality more than on price. You can compare spec sheets and browse the Web for comparative reviews, but most of all you're going to want to ask: what's the warranty on this thing?

Warranty As A Weapon

For manufacturers, the fastest way to announce to the world that your brand is better is to lengthen the warranty. If everybody else is giving 90-day or one-year warranties, make yours three years. If everybody else is limiting their liability with mileage ceilings and/or geographic exclusions, make yours unlimited miles and/or honor claims across international borders. If everybody else limits the product warranty to the first owner, make yours transferable to the second and third owners.

The era of warranty as a promotional weapon is upon us. A warranty is at its root a statement by the seller that the products they sell are free from defects and will continue to remain so for a specified period. The terms of that warranty send a subtle message to the observant consumer. A used car dealer issuing a 10-day warranty is sending a message that their cars won't last two weeks. A manufacturer issuing lifetime warranties is saying that they believe that under normal use, their products will outlive their owner.

Over the past few months, we've noticed with increasing frequency that certain manufacturers are overtly making claims of superior quality and reliability -- a message they distill down to a few words about warranty. In the Aug. 5 edition, we took a close look at the newly-lengthened five-year warranties of disk drive manufacturer Seagate Technology. Years ago, disk drive makers cut costs by shortening their warranties. Now, because of increased quality and improved manufacturing technology, Seagate sees the time is ripe to use lengthened warranties as an overt statement to the consumer that they believe their products are better.

So far, nobody else has matched Seagate, although a press report out of India had Maxtor upping its warranties from one year to three. Another report, quoting another anonymous source, had arch-rival Samsung considering an upgrade to five-year warranties. A few weeks earlier, the same online magazine, the Channel Times of Mumbai, reported that Seagate's sales in the region had shot up 60% in response to the new warranty offer. Said one dealer, "More and more customers visiting our shops are asking for Seagate."

If this market share increase proves to be sustainable, there is no doubt that warranty will become as important to disk drive marketing programs as it already is in certain sectors of the automotive industry. From there, it might spread to consumer laptops and perhaps even to portions of the consumer electronics industry. Only one year? Thanks, but I'll but the model with a three-year warranty. Lengthy warranties, if not an elegantly simple way for the seller to boast about product quality, are at least a reassurance to the buyer that they won't be paying for repairs. It's happened before. Slap a lengthy warranty on a low-priced product with a low-quality reputation, and you've just eliminated a major obstacle for the buyer.

A Month of Hyundais

Hyundai Motor America is perhaps the all-time best example of the power of warranty to enhance a brand's image. In the old days, before warranty became a competitive weapon for the Korean automaker, its brand was perceived as somewhat lacking in quality -- the butt of late-night jokes, as was noted in a Nov. 2002 Fast Company article. Here's a sample. Q: How do you double the value of a Hyundai? A: Fill the gas tank.

Then in 1998, shortly after taking over the U.S. subsidiary, CEO Finbarr O'Neill pushed through a new warranty package that included 10 years or 100,000 miles of powertrain protection, five years or 60,000 miles of bumper-to-bumper coverage, and five years of roadside assistance. The quality deficit was instantly neutralized as buyers began to assume that at least their repair bills would be $0. Market share began to climb almost immediately. U.S. sales were up 82% in 1999, and up another 49% in 2000. Nowadays, almost every advertisement the company places in U.S. media proudly proclaims its vehicles to have "America's Best Warranty."

Hyundai's U.S. market share now surpasses that of Volkswagen and BMW. More importantly, brand quality also rose to support the lengthening warranties. This past April, Hyundai tied with American Honda Motor Co. and was only slightly behind Toyota Motor Sales U.S.A. Inc. in the quality rankings of the J.D. Power and Associates Initial Quality Survey. So rather than having the increasing liabilities of lengthened warranties become a financial drain on the company, instead Hyundai has become the reference model for the successful use of warranty as a competitive weapon.

Until recently, however, this was just an American story. Hyundai models sold in other countries, including within the home market of South Korea, were covered by warranties of shorter durations. Now that's beginning to change. In the UK, Hyundai models are now covered by a five-year unlimited mileage warranty -- the country's best offer. That earned some rare praise from Which magazine, a publication of the Consumers' Association. Regarding the Hyundai Getz, the consumer watchdog group recently said, "Hyundai is so confident about its latest cars that it�s backing them with a five year warranty. That confidence seems well placed, not a single one or two year old Getz in our survey had broken down in the last year."

O'Neill, meanwhile, is now trying to make history repeat over at Mitsubishi Motors Corp. He left Hyundai a year ago to take over as CEO of the company's troubled American subsidiary, Mitsubishi Motors North America Inc. As he arrived, sales were plunging, bad loans were spiking, and the company was becoming better-known for its choice of music for its television ads than for its cars. So what did he do? He upped the company's warranty program to mirror Hyundai's successful formula: 10 years or 100,000-miles on the powertrain; five years or 60,000-miles on the rest of the vehicle; and three years of free scheduled maintenance and roadside assistance.

Other auto manufacturers are now beginning to catch on to the power of lengthened warranties. The new Chevrolet Aveo features a five-year or 50,000-mile "Powertrain Promise" transferable warranty in addition to the three-year or 36,000-mile bumper-to-bumper warranty. And of course, Chrysler remains committed to its seven-year or 70,000-mile powertrain warranties, while American Suzuki Motor Corp. continues to insist it has "America's #1 Warranty" with its seven-year or 100,000-mile powertrain coverage plan.

In India, Tata Motors Ltd. introduced an 18-month unlimited mileage warranty for its newly redesigned Sumo Victa. It's also selling 18-month extensions of that warranty as an option.

In the Middle East, Dubai Bank and Citibank are pursuing warranty innovation of a different kind. Dubai Bank is offering to bundle a one-year extended warranty with its car loans, above and beyond the three-year or 60,000-km product warranty. Also as a deal sweetener, the Behbehani Brothers dealership, the Audi importers in Bahrain, is working with Citibank to bundle car loans with three-year unlimited mileage warranties plus three years of free roadside assistance. They're also offering extended warranties for sale, along with insurance and registration assistance.

Speedy Service Guarantees

Recreational vehicle manufacturers also are finding warranty to be a good way to differentiate their brands. In July, Fleetwood Enterprises Inc. launched what it's calling its "Up & Running" program, which gives dealers an expedited and streamlined warranty parts ordering system -- including prepaid overnight shipment of parts to dealers for warranty work. The program is designed to reassure buyers that should their vehicle ever require servicing, no matter how remote the location, the repairs will be completed as soon as possible and they'll be back on the road as quickly as possible.

Last year, Cummins Inc. did something similar for the truck industry, to overcome perceived customer reluctance to be among the first to try the company's new low-emissions diesel engines. The "Uptime Guarantee" applied to new Cummins ISX and ISM engines purchased and built before Dec. 31, 2003, and the "Same Day Or We Pay" QuickServe Guarantee applied to engines already out of warranty. Under the former, Cummins promised to rent a truck for the customer if repairs could not be completed within 24 hours. Under the latter, Cummins guaranteed same-day completion for all jobs with a standard repair time of four hours or less, or the customer would get a $75 credit towards future service.

In the tire industry, the Goodyear Tire & Rubber Co. reported record revenue and solid earnings for its second quarter of 2004 on Aug. 5. Later that day, CEO Robert Keegan told analysts during a conference call that the return to profitability after years of losses was helped by strong customer response to the new line of Assurance tires and their 80,000-mile tread life limited warranties.

"I am thoroughly convinced that the impact of the Assurance family is going to be far greater than we ever had anticipated," he told the analysts. "There's a buzz in the market today that far exceeds our expectations, and frankly, those of our dealers."

Power Tool Warranties

In the power tool industry, Ridgid Inc. is now turning its new three-year warranties into a product differentiator for its brand. In a June 10 article, Home Channel News said this newly-lengthened warranty policy was helping the company move excess inventory from the shelves of outlets such as Home Depot.

Ridgid's Web site now states that "the best tools in the industry are backed by the best warranty in the industry." Customers can choose to have their power tools repaired by an authorized service center, even for normal wear items such as batteries. During the first 90 days of ownership, customers also can choose to obtain a full refund. Meanwhile, the company's non-power tools are covered by a lifetime warranty.

In consumer electronics, companies such as Philips Electronics are now offering international warranties for their product lines. This doesn't mean much to people who don't travel, but it's of great value to those who shop while on the road and to those who shop on the Web from remote locations. Products bought in one country can be serviced under warranty in another country. Philips is striving to deliver replacement parts to the service center within 24 hours in Europe and within 48 hours in all other countries.

To some extent, other consumer electronics, camera, office equipment, and computer companies such as Canon, Sony, Panasonic, and Hewlett-Packard also provide international warranties on some of the products they sell. But most companies will honor the warranty only in the country of purchase, with limited exceptions. In the auto industry, for instance, Americans living in border states are finding lower sticker prices in Canada. Some auto brands are honoring the warranties across the border while others are not. In a future article, we'll dive into this aspect of warranty in further detail.

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