Do warranty extensions make sense?

Remember that guy on late-night shopping slots on TV trying to sell a set of a gazillion kitchen knives for a ridiculously low price that you could potentially pay in “easy” installments? He often threw in a lifetime warranty as well.

I often wondered how he would make any money long-term if most buyers took him up on his warranty offer five years down the road. Would he honour it? Would he simply go out of business? Or was he just assuming that most would not even bother with the warranty?

Cars are no kitchen knives, but I got wondering again this week on seeing Mazda Canada’s decision to drop all mileage restrictions from its warranties on all 2015 models. Years of ownership will still matter. Bumper to bumper will remain three years while powertrain will hold steady at five, but if you’d like to make a few more road trips a year, you’d still make the cut for a free faulty sensor replacement at a Mazda dealer.

Earlier this year, Tesla did something similar. Always the great disrupter, the luxury electric vehicle maker removed mileage caps for Model S battery packs and drive units, regardless of model year.

CEO Elon Musk even made a personal statement on the company blog to reinforce the message: “If we truly believe that electric motors are fundamentally more reliable than gasoline engines, with far fewer moving parts and no oily residue or combustion by-products to gum up the works, then our warranty policy should reflect that.”

Warranty offensives are not new to the car industry. Hyundai probably did it most famously back in the late ’90s when they upped the industry standard from three years to five years for basic warranty and a whopping 10 years for powertrain. At that time, they were drawing a lot of flak for vehicle quality and wanted to show potential customers that they could back their products.

For upstarts Hyundai, the strategy was a killer. Along with attractive pricing (they also introduced 84-month financing a few years later), the Korean automaker was able to make a serious market-share grab in North America.

Indeed, Hyundai’s strategy almost single-handedly forced other automakers to tweak their own warranties.

Longer warranties are great for customers — that’s a no-brainer. They are good for dealers, too, as they guarantee more work for their shops.

Warranty work has low profit margins but most dealers break even, at the very least.

But I am not sure how useful this move has been for automakers.

Sure, it makes sense for brands aiming to break open a market. Hyundai and Kia definitely made it work.

Similarly, Tesla needs to convince more customers about its product and the warranty extension sends the right signals. Musk is also aiming for product differentiation by essentially saying that electric vehicles are far more robust than combustion engines. In fact, he is so confident that this is the right long-term move that he is willing to part with short-term profitability — as he made clear in his note to customers.

But the opposite may be true for mainstream automakers — are they sacrificing long-term gains for short-term goals?

I think that a company like Mazda has more to lose.

One might argue that unlimited mileage may be more lip service and posturing than anything else. Most non-commercial vehicle owners will be hard pressed to clock more than 80,000 kilometres — Mazda’s existing mileage limit for pre-2015 vehicles — in three years. So the impact on warranty repairs, a cost that is borne by the automaker, may be minimal, but there will be one.

In fact, industry-wide powertrain warranty extensions in the last decade, somewhat forced by the Hyundai blitz, heavily impacted actual money-making sales of related parts across many automakers.

But what does Mazda stand to gain? The Japanese automaker does not have a brand image or quality issue like Hyundai did. If Mazda is aiming for higher share of the Canadian market, I am not sure how far the warranty bait will help. The company currently has a solid lineup — arguably its best ever. But it’s only seen a 2.6 per cent growth in 2014 so far compared with last year.

To me, it almost seems like a desperate move. Anything to bring in the numbers and jump-start some serious growth.

In the end, Mazda, just like the warranty-baiting Mitsubishi, may not have the heft to get other automakers worried.

But their current move sure does add another milestone to the road to unlimited warranties. If I were an automaker, I would be in no rush to get there.

Kumar Saha is a Toronto-based automotive analyst with the global research firm Frost & Sullivan.

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