Quality gain has hitch for Ford dealers
With less warranty work, automaker develops programs to raise parts sales, service.
Bryce G. Hoffman / The Detroit News

Ford Motor Co. is improving the quality of its cars and trucks but, in an ironic twist, the gains come at a price for dealers who have come to depend on regular warranty work to keep their stores in the black.

Dealers know that having better vehicles will help them in the long run, but they are looking to the automaker for help developing other parts of their business to offset the loss in warranty business. This week, Ford delivered with several new programs.

"We are working on giving them the tools to improve their retail parts and service business," Ford Americas President Mark Fields told the News.

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"We need our dealer partners to be successful. But the real benefit to the dealers is that, as we continue to improve our quality, we're going to get more people into the showrooms and we're going to sell more cars."

In the meantime, Ford is expanding its aftermarket replacement parts and accessories business to help dealers. As they gathered for their annual conference in Las Vegas this week, Ford unveiled a new brand called "Customs" that will offer everything from bug-shields to bed-liners for Ford vehicles. The focus will be on high-profit items like custom wheels and electronics, said Jay Davis, general marketing manager for Ford's customer service division.

He said Ford will also give dealers e-commerce tools to build their customization business online.

"As the market moves, we need to move with them," Davis said. "All of these things help build owner loyalty."

Dealers profit on warranty work
General Motors Corp. is seeing some decline in warranty work at its U.S. dealerships and also is working to expand dealers' retail service business. Chrysler LLC said it is not a major issue.

Experts say that if Ford was selling more vehicles, the decline in warranty business would be less of an issue. But Ford's U.S. market share has been declining since the mid-1990s.

Paul Taylor, chief economist for the National Automobile Dealers Association, said dealers lose an average of $30 on each new car and truck they sell and make it up in other parts of their business, such as financing and service. But loss is much greater for the typical U.S. brand dealer than for the typical Asian brand dealer. That means domestic brand dealers need to make more money off things like warranty work.

But warranty work generated just under $7.7 billion for U.S. dealers last year, Taylor said, a 2 percent decline over 2006. Ford, which has had the strongest quality gains of any of the domestic automakers, saw its warranty business decline by 12 percent nationwide during the same period, after a similar drop between 2005 and 2006.

"It's something I hear about from dealers," said Curt Yun, director of global warranty analysis at Ford, who said the automaker's warranty costs dropped $1 billion last year worldwide. "That's more money for us to invest back into the business, back into new products."

Dave Knittel knows the problem all too well. Things are quiet these days in the service bays at Charlotte County Lincoln Mercury in Florida, where he is the general manager. A little too quiet.

"Ford's cars don't break down anymore," Knittel sighs. "You don't see the amount of warranty work we used to."

In 2001, Knittel's store did $400,000 in warranty work. By 2006, that figure had dropped to $93,000. And last year looks to have been even lower. Knittel remembers a time when he did as much as $100,000 in warranty work in a month.

Ford and Lincoln Mercury dealers across the country are reporting declines that, if not as steep as Knittel's, nonetheless represent a substantial blow to their bottom lines.

Michael Kennedy, who owns four Ford stores in the greater Philadelphia area, knows that Ford's improving quality is good news for his business in the long run. But he still has to deal with a 40 percent decline in warranty business over the past two years.

"It's a double-edged sword," he said. "Financially, it hurts a little bit. And it could push some of the smaller dealers over the edge. But it also means we're going to do more repeat business."

Kennedy also owns a Chevrolet franchise. Warranty work is down there, too, he said, but not to the same degree it is at his Ford stores.

Fewer recalls, less service work
Professor Jeff Bennett of Northwood University in Midland, an expert in the retail auto market, said nearly every manufacturer is seeing some decline in warranty costs because quality is improving across the board. He said recalls are down dramatically since 1999, when nearly 20 million cars and trucks were recalled in the United States -- 3 million more than were sold that year.

That may have been good news for service writers, but it was a major contributor to the decline in U.S. brands like Ford, once known for their quality. "It used to be that dealers looked at their service departments as a necessary evil," Bennett said. "It was not a profit center."

That began changing in the late 1970s when cars became increasingly computerized. At the same time, U.S. manufacturers began heaping big discounts on their products to compete with newcomers from Japan. That undercut dealer profits from new car sales, forcing them to rely more on their warranty business.

Ford is trying to help its dealers change the equation again by beefing up their retail parts and service business.

It began a couple of years ago by offering to help dealers set up "Quick Lane" service bays to handle routine maintenance like oil changes.

Earlier this year, Ford began rolling out a new rewards program called "Owner Advantage" that offers customers incentives to take their vehicles to their dealership for such routine work. In addition to marketing support, Ford will be mailing customers credit cards pre-loaded with $10 that they can use for things like tune-ups at their dealership.

Many of these changes are being pushed by Jim Farley, Ford's new global chief of marketing, sales and service. He knows how important the retail parts and service business can be to dealers from his days as a Toyota Motor Corp. executive, NADA's Taylor said.

The aftermarket parts business is worth more than $45 billion annually, and Toyota is one of the leaders.