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Honda Asking Dealers to Push Factory Service Contracts

December 27, 2006

American Honda Motor Co.’s new mandate that all Honda and Acura dealerships must now offer factory service contracts to each customer comes is already drawing fire from dealers, according to a report in Automotive News.

Already known for having one of the toughest service contract provisions in the industry, Honda’s recent move is part of a more stringent franchise agreement the company has gradually rolled out to dealers nationwide. Some dealers, who prefer to sell more lucrative independent service contracts, are challenging the move, the report said.

New Honda Vehicles will carry a factory bumper-to-bumper warranty of three years or 36,000 miles. For 2007 Acura vehicles, basic coverage is four years or 50,000 miles. Automotive News quoted an unnamed Honda exec as saying that a Honda extended-service plan for six years or 70,000 miles retails for $1,300, with Honda charging the dealer $600 for the plan and nets $475 after claims expenses.

The new provision, a Honda spokesman said in the article, is meant to protect consumers. The promotion of factory service contracts is also one of several dealer mandates that have triggered dealer protests.

Earlier this year, several Florida dealers filed a complaint against the automaker with the Department of Motor Vehicles. The complaint alleged Honda introduced a new agreement without bargaining appropriately with dealers. It barred dealerships from misrepresenting American Honda products to customers, such as overstating vehicles safety features. The old agreement also only pertained to the dealer principal.

The case was dismissed in November after Honda allowed complaining dealers to continue operating under the previous agreement. And in a Sept. 22 letter to Florida dealers, Honda said dealers could operate under the old agreement despite 96 percent of its nationwide dealers agreeing to the revisions.

Honda isn’t the only manufacturer that has put mandates on dealers, as many, like Honda, say their extended service contracts are safer and more reliable. These contracts, however, can generate lucrative profits for automakers, too, Automotive News reported.

The Chrysler Group, the article pointed out, requires dealership to tell customers when the service contracts they buy are not factory plans. Non-complying stores could face losing their Five Star status, the mandate stated. Nissan North America requires underperforming dealerships to meet sales targets to avoid losing their franchises.

The article also cited dealers as saying that Subaru of America requires some underperforming dealerships to sell factory service plans to 20 percent of new-vehicle buyers to qualify for co-op advertising money. GM also sought to require dealerships to push its Protection Plan to customer, but the automaker backed off after dealers objected.

A lawyer representing the Florida dealers was quoted as saying that other manufacturers agreed to negotiate after protests from dealers while Honda has not. Instead, the automaker allowed dissenters to follow the older agreement.

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