Pohanka: Warranty Issues

Warranty Issues

John J. Pohanka

The major problem for new-car dealers during my tenure as president of NADA had to do with warranty administration. Manufacturers wanted to keep their cost of warranty expense down, so they paid dealers less than what dealers charged customers for both parts and labor.

Since domestic cars had more product malfunctions than imports (their expense was about 10 times that of imports), the domestic manufacturers were more aggressive than the import manufacturers in controlling warranty-related expense. They sought ways to avoid paying claims that dealers would submit and made the paperwork and procedures cumbersome, difficult and expensive. They required dealers to retain the parts removed from a car in a warranty claim, label them and attach a repair order to them so that periodically a manufacturer service representative could come by to scrap these parts, examining each one individually and testing it to see if it really was defective. If they decided it wasn’t defective, they would charge the dealer back the claim that they had already paid. Often the dealer would say, “Look, the part was defective. Call the customer. He will tell you he had a problem. We replaced the part. He does not have the problem anymore. The part is defective.” The manufacturer representative would say, “I’m sorry, it’s not defective. We’re not paying you.”

The fear of a factory audit was constantly hanging over the dealers’ heads. If a dealer’s warranty expense for a new vehicle was above the zone average, he was eligible for a factory audit—which was worse than an IRS audit. There was no court to go to, to argue its decision.

All of this created a problem for the dealer’s employees as well as the dealer himself. The technicians and service writers earned less because they were paid on productivity. Of course, it impacted the service manager because it reduced department profitability. As a result, everyone’s attitude toward warranty was negative, from the dealer right down to the service manager, service writers, technicians, even the lot attendants. It was a very bad atmosphere, not conducive to taking care of the customer, particularly a new customer who had just bought a new car and had come in for service for the first time.

Developing a Strategy

NADA had been unsuccessful in working with the manufacturers to correct these problems. I felt that the most important thing that I could do as president would be to find a solution. We would start with a comprehensive survey to dealers inquiring as to their attitude towards warranty, and identifying the tactics that each manufacturer used.

General Motors had a staff person assigned to dealer relations, and he and I got along very well. I showed him the survey before we sent it out, and he made an excellent suggestion that we ask each dealer how the manufacturer’s service contact person spent his time when visiting the dealership. How much time did he spend helping with service problems? How much time did he spend working with customers? How much time did he spend scrapping parts, denying claims and so forth? We modified the questionnaire accordingly, and I thought it was interesting that I had developed a relationship with a manufacturer representative who was sympathetic to our situation.

Twenty percent of the 32,000 surveys sent out were completed and returned, signaling that dealers felt this to be a very important issue. The surveys confirmed all of our concerns and provided detailed information regarding each manufacturer’s process.

I pondered as to the best way to use the surveys and its findings. General Motors was the key to getting industry changes made. In addition to being the largest manufacturer, getting 50 percent of the market, they had long been the model for the other manufacturers, including imports. General Motors’ franchise agreements and dealer financial statements became the model for all manufacturers. And, of course, it was with General Motors that I had my best ties, as I was a General Motors dealer. So I approached my friend at GM and said I would like an appointment with Pete Estes, president of GM, with whom I had a good relationship. Pete was a car guy. He had run the Pontiac division and he’d originally come from the Oldsmobile division, and I felt I could talk candidly with him. But my GM friend said that I was going to the wrong person; it was not an issue for the president. Warranty was not considered an operational matter. It was instead a matter of expense, a financial matter coming under the chairman of the board, GM’s chief financial person. That was a revelation to me.

It showed that GM was looking at warranty not as something operational, where the dealer is taking care of the customer, but as an expense! An expense they’ve got to control! It posed a problem for me. I’d never met Tom Murphy, chairman of the board, but now it was necessary for me to see him. My friend said that he could arrange such a meeting.

Suggesting Ways to Improve Warranty Administration

Manufacturers don’t like surprises and want to avoid being embarrassed. By now GM knew about the survey and was curious, and probably apprehensive about the results. I took it upon myself to provide my friend with a copy of the findings just prior to their publication and authorized him to give them to Tom Murphy. A few days later, on Dec. 15, NADA released the information to the press and sent every dealer and manufacturer a copy, which included a 12-page chart that showed how the dealers for each make responded to each question.

The press release stated that “warranties were administered in an atmosphere of fear and threat. Warranty administration was based on cost control rather than customer satisfaction. Dealership service managers were subjected to nitpicking, second guessing and factory pressures to reduce warranty claims, even though the claims were justified.” The press release went on to ask manufacturers to:

  • “Change the focus of warranty administration from cost control to customer satisfaction;
  • “Call an immediate halt to nitpicking and practices that were used to invalidate justified warranty claims;
  • “Give factory service representatives time and authority to help dealers to improve their service departments; and
  • “Increase warranty labor and parts formulas to allow more adequate dealer compensation.”

I then approached my GM friend for an appointment with Murphy, and the response that came back was, “Mr. Murphy feels this is a very important matter. He will give you the first appointment that he has when he returns from his Christmas vacation. On Jan. 3, 1977, you and he will have lunch on the 14th floor of the General Motors building in Detroit to discuss the matter.”

As I was pondering the best way to make my case to Murphy, an interesting thing happened. The previous January in his keynote speech at the NADA convention, Murphy had criticized NADA for “inviting government intervention into our business.” He did not explain what he meant by that, but I thought that he was referring to NADA’s support of government fuel-economy standards, which in my mind had been the right thing for NADA to do, but which the manufacturers disliked. Now, in December, Murphy was quoted in Newsweek magazine as saying that “government intervention was the result of industry not taking care of the customer.” To me, this signaled a big change in attitude on his part.

Shortly after I had read the Newsweek quote, my general service director, Mike Sopjack, who was a good man and very customer-oriented, came to my office and said, “Boss, when the next warranty customer comes in here I’m going to throw him out the door.” I said, “Mike, come on now, that’s no way to talk. Why do you feel that way?” He said, “I’ve had it, I’ve had it, I’ve had it! These factory people are driving me crazy. They will not pay justified claims. It’s not fair. Everybody’s upset, and I just can’t handle this anymore.”

I thought to myself, if somebody like Mike Sopjack feels this way, there must be many more service managers who are just as angry and upset. Of course, the survey results confirmed this, but the emotion in Mike’s voice provided a dimension to the problem that survey statistics alone could not convey. If I could capture Mike’s feelings on audiotape and interview some other upset GM service managers as well, it might come in handy in making my pitch.

Recording the Problems

For GM to make the changes I wanted them to make, there had to be something significant in it for them. My argument would be, “if GM dealer service personnel feel this way, there is very little chance that they will do a good job of satisfying the customer, and if you don’t do that, you could have government intervention!” Murphy would get the point.

I sat down with Mike Sopjack and captured his feelings on audiotape, also getting details as to troublesome procedures, etc. I then called on a Chevrolet service manager and a Cadillac service manager and interviewed them. They were equally bitter and had gripes of their own. This was important, because I knew, having dealt with the manufacturers for years, that they just paid lip service to serving and taking care of their dealers. They really weren’t all that interested. Their heart wasn’t in it. I had to show them somehow that it was in their interest to pay warranty claims—and thought that maybe I had found a way.

On June 3, 1977, I arrived on the 14th floor of the GM building in Detroit and was greeted by my friend, who said I was going to have lunch with the entire GM executive committee. Wow! That included the chairman of the board, the president, and the heads of all the car and truck divisions. In addition, we would be joined by Bill Buxton. Bill had been head of the Oldsmobile division, so I knew him well. He was very much involved with service all those years. He knew the service business better than anyone in that room, and he was a fair and intelligent person. He also had a reputation for speaking his mind, not holding back to anyone, including his superiors. They brought him on the executive committee for a short period of time so that when GM retired him, which they were planning to do that spring, they could retire him at a high pay level. Yes, General Motors could have a heart when they were dealing with their own people! I was happy that Bill would be there, because he really understood warranty and what goes on in a dealership, certainly better than the chairman of the board or the heads of the various car divisions.

News from the Front

Before going to lunch I chatted with my friend from General Motors and told him about the tape. After listening to some of it, he said, “Why don’t you play that for Mr. Murphy at lunchtime? I think he’d be interested in hearing that.”

“Do you think I could do that?” I replied.

“Sure,” he said. “Why don’t you suggest it.”

And I did.

Very early during the lunch I mentioned the tape, which I said contained some candid remarks by some respected GM service managers concerning warranty problems. Murphy immediately warmed to the idea of listening to it. I am sure he seldom if ever conversed with dealer service managers. GM executives were too busy to go to dealerships for service and had lackeys to take care of that.

As they served the first course, I turned on the tape. Two and a half hours later we were still at that lunch table listening to it.

Twenty minutes or so into the tape we had come to a point where Mike Sopjack was talking about GM service reps scrapping parts and denying warranty claims because they had found nothing defective about the parts. Our position was that the part had been replaced and the car’s problem had gone away, so the part must have been the cause and the warranty claim should be paid. Often in these cases, Oldsmobile’s service representative would suggest that we spray the part with yellow paint, put it back in the parts department, and if it was put in a second car and failed, both that claim and the previous claim would be paid. Of course, this meant that we would be putting a used part in that second person’s car. That was not lost on Mr. Murphy. He was concerned hearing this.

The interesting thing to me was that he turned to Bill Buxton and said, “Bill, how long have we been doing this?” He did not say, “Bill, do we do this?” That told me that Tom Murphy had accepted this tape as being gospel—what really happens in the service department—which it was. There had not been much talk up to that point, with each of the executives intent on listening to what was being said on the tape.

Later, when the tape finished playing, Murphy turned to me and said, “Jack, what do we do about this?” For a minute I was at a loss for words. I wasn’t prepared for this much success, so I had to think quickly. I said, “Mr. Murphy the first thing you need to do is to get more detailed information. What you’ve heard is just the tip of the iceberg. I think you need to invite a couple of good service directors from each of the five car and truck divisions up here to learn more. You should make them feel completely at ease, guaranteeing that there would be no retribution for anything that they might say, and hear them out completely. Then you will be able to devise a plan that would be comprehensive and not piecemeal.

He said, “That’s a good idea, but when we do that kind of thing, we never get the right people.” I understood what he meant by that. When GM would ask the heads of the car divisions to suggest a couple of dealers for their opinions, those dealers wound up being people that management had in their pocket who would say pretty much what the division head wanted them to say. They wouldn’t say anything critical or controversial. I was pleased that Murphy apparently realized this and I said, “Mr. Murphy, if you let me choose them, I’ll get you the right people.”

“How soon can you get them here?”

I said, “Give me two weeks.”

Murphy set the date.

I went back to NADA, contacted my line chairman, came up with two service directors from each of the divisions, and they met for two days in Detroit. It got excellent coverage in Automotive News. I attended the meeting as well and was impressed with GM’s entire handling of the sessions. They recorded the entire session, obtaining significant details about how each car division handled (or mishandled) warranty.

GM Gets It Right

The result of all this didn’t take shape for some 60 days or so. By then, my term was up and we had a new president of NADA. GM announced a complete revamping of their warranty programs. They increased the dealer markup on warranty parts. They also allowed dealers to be paid their regular customer labor for warranty work rate rather than the discounted labor rate that General Motors had been paying in the past. To be paid this rate, the dealers would have to post the rate for their customers to see. This meant a substantial increase in pay to dealers and their technicians and for service managers as well. They also directed their service representatives to concentrate on satisfying the customers and helping the dealer find a way to satisfy the customer rather than spending their time denying warranty claims. In effect, they addressed all the problems raised by our survey and adopted the NADA’s suggested remedies.

Frankly, we were more successful than I had dreamed possible. I probably wouldn’t have had the courage to ask for the full customer labor rate. I would have asked only for an increase. I had gotten more by not saying specifically what I wanted but just addressing the overall problem. Other manufacturers, including the imports, quickly fell in line.

It was a major win and, in retrospect, probably my most significant accomplishment as president of NADA.

Reed Draper, who succeeded me as president, did a good job of following through on warranty issues. Some manufacturers and GM car divisions were somewhat reluctant to embrace these changes, but today the focus of warranty administration has mostly shifted from cost control to taking care of the customer and what issues remained seemed very small compared to what had been happening in the past.

Jack Pohanka served as president of the National Automobile Dealers Association (NADA) in 1976. He was a founder and chairman of the National Institute for Service Excellence (ASE), which tests and certifies auto technicians nationally. He also founded and was the first chairman of the National Automobile Technicians Education Foundation, which evaluates and certifies automotive curricula in the country's vocational schools.