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Chrysler Focuses on Improving Warranty Situation in Wake of Massive Costs
15 Aug 07
DaimlerChrysler reportedly spent billions of dollars on warranty costs in 2006, and improvement in this area has become a top priority for the new Chrysler LLC.
Global Insight Perspective | | Significance | The former DaimlerChrysler topped the list of automakers for warranty expenses in 2006, with over US$6.10 billion in costs. The company would not specify what percentage of that figure is attributable to the newly independent Chrysler LLC. | Implications | Executive Vice-President Frank Klegon has stated that Chrysler is making progress on improving warranty costs, which have fallen by over 40% in the last five years. Ford has also reported significant progress in its warranty performance, booking US$700 million as earnings in the second quarter of 2007. | Outlook | Chrysler's urgent attempts to improve vehicle quality and the resulting warranty figures are being stepped up as the company introduces a lifetime powertrain warranty on nearly all of its U.S. vehicles this year. With GM and Ford making demonstrable progress in terms of quality, Chrysler must keep up or else face an even more apathetic consumer environment. |
DaimlerChrysler (DCX) topped the list of the world's automakers for warranty costs in 2006, according to online publication Warranty Week and Automotive News. The former German-U.S. automaker spent nearly US$6.10 billion on warranty costs last year, 36% more than second-placed (and much larger volume producer) General Motors (GM), which spent US$4.46 billion. Ford took third place (US$4.10 billion), ahead of Toyota (US$2.37 billion) and then Honda (US$960 million). Toyota and Honda’s figures are until the end of fiscal year 2006/07, ending on 31 March 2007. At DaimlerChrysler, both Chrysler- and Mercedes-Benz-brand vehicles contributed to the staggering bill. Chrysler vehicles routinely fall below average in industry surveys of quality rankings, but Mercedes-Benz vehicles have also encountered significant issues with their COMAND infotainment system, according to Warranty Week editor Eric Arnum. DaimlerChrysler also encompassed the Smart minicar and medium- and heavy-duty truck units, but those are considered to have had a minimal impact on the company's overall expenditure. Global Warranty Costs by Manufacturer: 2006 (US$ bil.) | DaimlerChrysler | 6.10 | General Motors | 4.46 | Ford | 4.10 | Toyota | 2.37 | Honda | 0.96 | Source: Automotive News and Warranty Week |
Chrysler’s executive vice-president of product development, Frank Klegon, would not clarify how much of the US$6.10 billion was attributable to Chrysler-brand vehicles, but he said that Chrysler has made significant gains in recent years, improving warranty costs by 40% since 2002. He further discussed with Automotive News the steps that Chrysler is taking to improve vehicle warranty, such as standardising launch procedures between plants, inviting suppliers in at early stages of the vehicle design process, using employees and suppliers for pre-production real-world test drives, and creating in-house "customer problem resolution teams" consisting of engineers, customer service experts, and others who "debug" vehicles after launch. Outlook and Implications Tackling warranty costs is a prime concern for automakers, and the expense figures for 2006 tell the tale of the various states that the automakers are in regarding quality. Honda and Toyota spend relatively little on warranties (although Toyota's bill has been creeping up), but the massive amount spent by DaimlerChrysler is truly astounding. Ford has stated that it was able to book US$700 towards earnings last quarter due to improvements in quality, results that are borne out by recent initial quality and three-year quality industry surveys. Those improvements in vehicle quality pay dividends across the board, for example in the form of a higher number of retained customers, lower expenditures, and better customer satisfaction scores. Chrysler needs to make improvements now that its operations have been divested from Daimler AG. The urgency of the situation is underlined by the new lifetime powertrain warranty that the company announced a few weeks ago (see United States: 27 July 2007: Chrysler to Offer Lifetime Powertrain Warranty). That new warranty guarantees the parts and labour for the vehicle's engine, transmission, and other drivetrain parts for as long as the original owner possesses the vehicle (provided that they have an inspection performed every five years at a Chrysler dealer). The warranty is offered on nearly every new 2006, 2007, and 2008 model-year Chrysler vehicle currently for sale (diesel-engine vehicles are exempt, as are Canadian models). The company has three years before the costs associated with the increased warranty show up on the books, as that is the time period before the current models' previous powertrain warranty expiration. The company has stated that it has reduced warranty costs by 40% over the last five years; it will likely need to make even greater strides in the coming years if it is to eliminate warranty costs as a source of cash drain.
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