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15 Jun 16

Extended warranty has measurable residual value impact

Remarketing is a lot like haute cuisine: it's a complex business, and if you neglect even the slightest ingredient, the result could be less than delicious. The trend towards warranty extensions is one of those smaller remarketing ingredients, but it does have a measurable impact on residual values (RVs) – and on lease prices.

A growing number of car manufacturers are extending the warranties on their vehicles. It's becoming increasingly common for them to increase the traditional two-year warranty to three years. Outliers are Toyota and Hyundai, which have extended their warranty to 5 years, and Kia, which has gone as far as 7 years.

Vehicle complexity
It's accepted wisdom to interpret these extensions as proof that overall vehicle quality is improving. In which case, “warranty extensions mainly are key attempts by car makers to improve customer loyalty for their network support”, say experts at Arval Italy – without forgetting that “we have to consider the real warranty coverage – i.e. the limits of actual warranty application”.

However, says Maarten Baljet, International Sales Director at RV forecasting and consultancy expert BF Forecasts, warranty extensions could also be seen as proof of increasing vehicle complexity: “It is worth looking at the number of recalls and to assume that the number of recalls is still increasing. Therefore, obviously the new cars are getting more and more complex, at least electronically. So maybe the extended warranty is not only a marketing issue, but also a real necessity (for OEMs) to cover problems that may occur with the car over a longer period”.

RV impact
So, in practical terms, how do these extended warranties influence RVs? “Used-car buyers are likely to pay more because these extended warranties provide them with cost certainty and peace of mind that all, or at least most, of the potential parts costs are covered”, says Michael Kleber, Product Manager for Consulting Services at Automotive Intelligence and Consulting, a part of EurotaxGlass's Group.

But of course, the impact of extended warranties varies, according to a number of conditions, including the model of the car and the type of warranty offered. “For example, an OEM-based extended warranty is likely to secure a larger increase in RV than a manufacturer's warranty that is provided through a third party”, says Kleber. In cases analysed by Automotive Intelligence and Consulting, “the RV improvements from introducing extended warranties have ranged from 2% to 6%”, says Michael Kleber. “Depending on the model in question, this can reflect an increase in value of between €120 and €1,500 when compared to previous models that did not have extended warranty. Importantly, RV improvements are only achievable if the warranty is transferable to second and third owners”.

Mr Baljet concedes there might be slight improvements due to warranty extensions, but “(it) is still one of the minor drivers. Car buyers are mainly focused on manufacturers with a high reputation rather than the ones with a long warranty. However, for manufacturers with longer warranties, the guarantee is a solid way to stay in the focus of the commercial buyer and attract private customers at the same time”.

Lease price impact
If there is a positive impact of extended warranties on RVs, however minimal, surely that must mean that beneficial effect eventually filters back into the lease price?

Perhaps, but certainly not in all cases, the Arval Italy experts point out: “There are too many factors that could have an impact on the warranty application. In case of long-term, full-service rental contracts, we need to consider the mileage limit that also limits warranty coverage. In fact, we have mileage averages greater than 100,000 km at the end of long-term contracts. That's why many cars and their potential issues fall outside of warranty coverage anyway”.

Mr Maarten Baljet agrees: “When it comes to lease prices, longer warranties can help sharpen pricing. However, compared to other cost types, the effect will be rather small, especially when taking into account the leasing term of three years”.

Authored by: Frank Jacobs