AUTOMOBILE DEALERSHIPS
Warranty Parts – Tactics of the Manufacturer
Frank O’Brien Principal, CPA, CIA, CFE
1 August 2018

Since the enactment of warranty parts and labor reimbursements laws, the vast majority of manufacturers have acquiesced with the law’s requirements but this has not stopped certain manufacturers from manipulating the language in the laws to their benefit. Although we have yet to see any direct retribution, based on our experience preparing these submissions for hundreds of dealers throughout the country, the manufacturers have continually found methods to lessen the impact on their bottom line, which, in turn, has negatively impacted dealers’ profitability. Additionally, the types of parts and repairs that are excluded may vary based on the manufacturer.

Below are some examples of the specific tactics that have been employed by certain manufacturers and our advice on how to address them:

General Motors

Manufacturer Tactic

Upon submitting for warranty parts at retail, General Motors transfers dealers from Option C to Option A for both parts and labor. This change results in the dealer’s labor rate being frozen at their current rate. As a result, we have seen many dealers delay their submission for a parts increase, foregoing hundreds of thousands of dollars in additional gross profit.

OCD Recommendation

To combat this tactic by General Motors, we recommend that the dealer submit for both a parts and labor increase simultaneously under Option A. This will often give the dealer a $5 to $10 increase on its labor rate up front to go along with the huge pick up on parts. Additionally, dealers should review their labor rates annually and submit for a labor rate increase at least every other year.

Subaru

Manufacturer Tactic
In the past, Subaru paid dealers based on a convoluted method calculating the difference between MSRP and the dealer’s average mark up. Over the past
several years, Subaru has conveniently reduced their MSRP rates, with the higher dollar parts marked up significantly lower than 67%. Additionally, Subaru capped the dollar value in which they applied the approved rate based upon the parts’ values in the dealer’s calculation. About a year ago, Subaru began approving dealers at a straightforward cost plus rate calculation without any caps.

OCD Recommendation
Subaru dealers that were approved under the old method should resubmit under the new calculation methodology, which will most likely result in thousands of dollars of additional gross profit per month.

Chrysler and Ford

Manufacturer Tactic
Most state statutes explicitly exclude maintenance items from the 100-RO calculation for both parts and labor. Chrysler and Ford have both taken the approach that some maintenance items, such as brakes, alignments, and wiper blades actually do count in these calculations. As these items tend to be competitively priced, the inclusion of these labor operations brings both parts and labor rates down.

OCD Recommendation
Ford and Chrysler dealers should review their pricing on these items. While we understand that they should be competitively priced, the labor should be charged at a rate of at least $100 to $120 per hour and the parts should be marked at MSRP.  Additionally, Ford and Chrysler count accessories, which should be charged close to full retail for labor.

Toyota and Lexus

Manufacturer Tactic
Toyota and Lexus have taken the stance that since they pay MSRP for parts that this means that they are in compliance with the law and can reject dealers who submit for retail using the 100-RO analysis.

OCD Recommendation
“MSRP” is not the same as “retail.” In fact, the states that have passed 100 RO analysis laws clearly state that warranty compensation for labor and parts
should not be less than the rates charged to the dealer’s customers for the same types of repairs, as calculated by submitting 100 consecutive customer paid repair orders to substantiate the rate. We recommend that Toyota and
Lexus dealers unify as a group in conjunction with their respective state associations in an effort to pursue true retail rates for parts.

Mercedes-Benz

Manufacturer Tactic

Mercedes-Benz had taken a similar stance to Toyota and Lexus in the past. However, we have assisted several dealers that have successfully challenged this issue with Mercedes-Benz and been awarded retail rates in accordance
with the law.

OCD Recommendation
We recommend that Mercedes-Benz dealers prepare and submit the 100-RO calculation to substantiate its rate. If the submission is denied, prepare a
response letter to challenge Mercedes-Benz’s non-compliance with the law. This should open a 4 dialogue with the manufacturer that will ultimately lead
to a successful approval.

BMW

Manufacturer Tactic
Most state statutes explicitly exclude tires from the 100-RO calculation for both parts and labor. When not explicitly excluded from the law, BMW has
taken the approach that tires actually do count in these calculations. As these items tend to be competitively priced, the inclusion of these parts and labor operations brings the rates down.

OCD Recommendation
Dealers should contact their respective state association to request that they amend the law to explicitly exclude tires from the calculation.

Honda
Manufacturer Tactic
Honda closely follows the individual state law and requires a complete submission based on their standards. Since dealership personnel are not experienced in the Honda process, the submission tends to get rejected and
must be started again.

OCD Recommendation
Dealers should engage an outside company with experience performing these types of submissions in order to significantly shorten the approval time, which will in turn yield more months of warranty parts reimbursement at
retail rates.

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