The automotive industry has seen significant changes over the last few years. The impact of Internet sales, the evolution of the menu, and product innovations, such as GAP insurance, etch and vehicle return programs, have changed the way dealers conduct business. In every instance, adapting to market conditions is what determined a dealership’s ability to remain profitable. Now, the industry will have to factor in the emergence of factory-extended warranties, a trend that could present more upside for a savvy dealership.
How extended powertrain warranties impact dealerships remains to be seen. Where dealerships stand to gain is in the amount of warranty work returning to the service department. The increase in factory coverage will also eliminate the chance for customers turning to outside service shops for repairs, which should have a positive impact in service department absorption.
Additionally, increased customer awareness about factory warranties creates an opportunity for business managers to educate customers about the factory coverage, which naturally leads into menu selling. For example, 25 to 40 percent of claims on new vehicles may occur on powertrain components, which means 60 to 75 percent of the exposure still exists for the customer. That statistic alone provides the perfect lead-in to sell a wrap coverage to supplement the extended powertrain warranty.
Service Contract Sales and Extended Powertrain Coverage Can Coexist
Many service contract providers offer wrap coverage to fully protect customers. The dealership cost and retail prices for wraps are significantly lower than traditional coverage, allowing business managers to carry more with a lender. In addition, lower service contract costs equate to payment relief for the customer, which should increase VSC penetration. Combining these advantages with realignment in VSC marketing and product offerings will enable service contract sales to coexist and even increase with extended powertrain coverage.
Dealers also have powerful resources at their disposal to do this. Outside development partners that have a full portfolio of products and development programs, such as wrap programs, can provide marketing solutions to maximize sales. For example, many of these companies already have wrap programs developed with reduced pricing that exclude the powertrain components now covered by the manufacturer. Many companies have also developed, or are in the process of developing, “upgrades” to allow for terms that exceed the
extended powertrain coverage.
Complementing the manufacturer’s programs is not a new phenomenon to the industry, and with the right processes and training, the industry as a whole stands to benefit.
Factory Powertrain Warranties Open the Door to Profitability
Kia, Hyundai and Mitsubishi set the trend for 100,000-mile powertrain coverage, with Honda, Ford and now GM recently responding with changes of their own. As a result, these manufacturers have shifted claims exposure from extended service contract programs to the factory on some of the most costly repairs. This shift of exposure will also be a positive for extended service contract companies because they will subsequently have less claims exposure. With sound actuarial data, appropriate reserving methods and less claims exposure, VSC underwriting profits have the potential to flourish.
For dealerships selling vehicles with extended factory powertrain warranties, the opportunity to enjoy more robust underwriting profits becomes increasingly attractive. For years, many dealers across the country participated in retrospective commission programs or affiliated reinsurance companies. Based on the recent industry changes, there hasn’t been a better time to jump into one of these programs. Underwriting profits and investment income can be significant. In many cases, the formation costs can be as low as an initial $3,500 investment.
The increase in factory powertrain warranties is exactly what the industry has been waiting for. With additional service department revenue, increased consumer awareness, lower vehicle service contract costs and widely profitable service contract programs, what could be better?
As the vice president of VSC sales for American Financial & Automotive Service Inc, Dennis Alexander works with dealers across the country to maximize the profits associated with the sale of MasterTech Vehicle Service Contracts and pre-paid scheduled maintenance.