Are OEMs sticking it to dealers on warranty claims?
Frustration among auto dealers and other retailers continues as their OEMs meet warranty labor and parts markup rate submissions with pushback, gamesmanship and rate reimbursements below retail labor, violating 49 states’ laws.
In addition to eroding dealership profitability, the position demeans technician value, which adds to the national technician shortage.
Not all OEMs fit this description, but enough do, including certain Asian and European manufacturers, to irk retailers. And it’s an old competitive sport.
“OEMs say their warranty rate reimbursement are ‘reasonable’, but in many cases they determine what is reasonable from warranty rates being paid and not how state warranty laws define reasonable,” says Mike Volkman, president and CEO of Service Department Solutions Inc., a South Carolina-based dealership fixed operations and warranty services consulting practice.
Interestingly, 49 states’ spirit of the law is founded on the need for the OEM’s reimbursement to be no less than what the “retail customer” paid the dealership for the same warranty-like repair. Still, OEMs continue to “deal,” and many dealers fold their cards because:
The time and energy investment to counter OEM payment rates exhausts dealers.
Across a year’s worth of warranty claim submissions, even a lower reimbursement dollar still adds up to big dollars, so dealers don’t want to bite the hand that feeds them.
Too many dealers aren’t aware of how they’re being treated or fear potential retribution.
Volkman says some OEMs need to be called out.
“These practices amount to price fixing. Some OEMs take advantage of the law just to delay an increase,” Volkman says.
At stake are money and an erosion in recruiting technicians, who are dissatisfied with the warranty time paid on many repairs.
Approved OEM parts and labor warranty claims contribute 15% or more to a dealership’s gross profits. Warranty work is 25% of a dealer’s service volume. That’s a rich incentive to annotate warranty parts and labor claims and submit them correctly, as the OEM’s warranty-claim stipulations require.
Volkman advises dealerships to pay more attention to the details of this “delicate dance.”
Here’s an example extracted from an Asian import dealer who submitted the 100 required qualified repair orders for OEM analysis. The dealership submitted a labor total of $200. The OEM did its analysis among its franchises in the dealer’s market. It agreed to reimburse $150, not $200. Unfortunately, there are two issues with this:
Many of the state’s statutes have a defined reasonableness, and in this case, the surrounding dealership’s market is not the mandate, but the OEM used it.
The rates quoted by the OEM resulted from the previous submissions that the OEM had shortchanged.
“State statutes vary from state to state, but they all say the manufacturers’ reimbursed labor rates shall not be less than what the dealer charges customers retail for those same repairs,” says Frank O’Brien, partner and head of the warranty reimbursement services group at automotive accounting firm WithumSmith+Brown, headquartered in Princeton, NJ.
He says the effect is the widespread and ever-changing OEM interpretations, which limit dealers from achieving full retail reimbursement rates.
Put Up Your Dukes?
OEMs control costs by limiting rate payment. That’s not a new idea. Sometimes, dealers inflate claims, playing along in the hope that the settled reimbursement is somewhere north of what the OEM will accept, based on claim experience, and shortchanging is often experienced.
State laws are generally straightforward about this, though some allow various exceptions and requirements that allow for considerable wiggle room.
“Because the OEMs are the big kids on the block,” O’Brien says.” We find a wide range of disparity between the interpretation of the states’ warranty rate reimbursement practices from one OEM to another. A dealership may have several brands in the same market, and each OEM will treat them differently.”
At issue is how the definition of “reasonable” is determined. States have written out this terminology in their laws, where it exists before, stipulating retail-rate language. Still, OEMs toss their weight around.
OEMs’ use of the term “reasonable” is a specific concern to dealers. What’s interesting is that many state statutes have that clause. Still, it contradicts the statute – the rate will be determined by what the dealer charges its retail customers for non-warranty repairs for warranty-like services.
“We see a wide range of disparity between the interpretation of what reasonable is from one OEM to another OEM and within state laws. It's comparing apples to oranges,” O’Brien says.
Big Business All Round
WarrantyWeek magazine reports on warranty data from all industries and shows us the money involved in the warranty business. At the end of 2024, Ford, General Motors and Tesla collectively held $31.32 billion in warranty reserves, the periodical reports. Reserves are the money these companies set aside to cover the cost of future warranty claims.
Ford spent $5.83 billion on warranty claims payments, a 22% increase from 2023’s total of $4.78 billion. GM paid $4.47 billion in warranty claims, up 12% from 2023’s total of $4.01 billion. Tesla paid $1.45 billion in warranty claims, 19% above 2023’s total of $ 1.23 billion.
These statements cover dealer reimbursements for repairs, parts, labor, tow bills, sublets, paint and similar expenses.
“Don’t forget that part of these increases is a result of OEMs increasing the cost of the part to the dealership,” Volkman says.
Dealer Action
Dealers don’t know how to challenge reduced OEM warranty rate payments, but as much as OEMs control costs, dealers need reimbursement to pay techs and commissions to remain profitable.
“But once dealers know and understand what’s happening here, they’ll get scrappy about it and start making noise,” Volkman says.
O’Brien says, “We have seen an uptick in dealers who are willing to push back legally against the OEMs who adjust their submitted labor rates. OEMs have at times recognized how their definition of ’reasonable’ favors their advantage over their dealer body, and dealer lawsuits and public relations actions have seen some change in their rate aggressiveness.”
“OEMs price-fix by using this reasonableness strategy,” Volkman says, “and their definition of reasonableness is determined by their warranty rates. Which they control.”
Operators may view a $30 difference in rate claim and reimbursement as not worth challenging their OEM, but the difference between a retailer labor claim of $197 and an OEM-approved “reasonable” rate of $160 is the difference in annual reimbursement of $222,000 in lost gross for a dealership that averages 500 warranty hours a month.
The system merits a dealer body challenge. Otherwise, OEMs will continue these practices.
