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WARRANTY: Brands stretch warranties but fleet doesn't feel residual benefit

Date: 31 August 2010

RV pros don't recognise extended car maker warranties, so why should fleets consider them? Rachel Burgess reports

Extended manufacturer warranties are a growing trend, with Vauxhall's unlimited offering the latest in a long list of announcements.

Kia introduced a seven-year warranty in January while Toyota recently extended its offer to five years - no doubt to allay reliability fears after a difficult start to 2010 with its recalls making headlines. Hyundai led the way with a five-year warranty since 2002. But do these extended manufacturer warranties make any difference to residual values, and are they worth considering for fleet managers when a majority of business cars are only kept for three years?

The short answer is, time will tell. Residual value experts Cap hasn't adjusted its RVs on such cars "because there is insufficient evidence yet of precisely how much value it adds (if any) at three years", although it continues to monitor the situation.

Cap's operational development manager Mark Norman says: "Until now, extended warranties have mostly been used to create confidence in lesser known marques trying to establish themselves, hence Hyundai and Kia leading the field. So, while there may (or may not) be a fiscal advantage on the used market because of the longer warranty, it is impossible to quantify. You'd be comparing Kia to Ford, which is like comparing chalk and cheese.

"Also, bear in mind that in order for the warranty to still be active the car must have been serviced in accordance with the manufacturer's schedule. So, in order to uplift a RV on the back of a longer warranty you must be able to guarantee that the car will be serviced bang on schedule throughout its term."

He adds: "Used dealers make a lot of money by selling insurance-based extended warranties (for example, Car Care) so why would they let a great profit opportunity slip through their fingers by telling the customer the car is already covered?"

Rival residual value expert Glass's has a similar opinion, with no RVs adjusted to take into account extended warranties.

The company's senior car editor, Jeff Patterson, says: "We don't think these warranties are worth a lot of money, so in terms of RVs, it doesn't make much difference. If you consider the cost of an aftermarket warranty, you're looking at £300. If you add £300, the RV is not going to change much.

He adds: "Most warranties aren't worth the paper they're written on. And how much of an RV is down to warranty is negligible. At this point, they're just selling peace of mind."

But John Lewis, chief executive of the British Vehicle Rental and Leasing Association, says warranty periods "are definitely something fleets will be keeping a close eye on" with the recent trend of longer leases and contract extensions.

"As far as warranties are concerned, the longer and more extensive the better. They should not be used as marketing gimmicks and restricted to first owners or very short periods," he says. "There is a lot of cost-of-ownership data available, so if extended warranties do end up improving SMR costs or residual values for some vehicles, customers will pick up on this."

Auction company BCA says a valid warranty can mean an extra one or two bids at auction, which is worth an extra £50-£100 on the value of the average fleet car.

Operations director Simon Henstock says: "A valid warranty as part of an overall package of documentation on a well-presented and specified car in good condition will help make it even more attractive to buyers. It is also a useful tool in the pre-sale marketing, building confidence in the vehicles for online bidders."

However, Henstock adds that a manufacturer's warranty is one of the more marginal factors affecting remarketing values and "really only comes into play if it is transferable to a second owner - which is not always the case". He also points out that many warranties require the vehicle to be maintained regularly with the supplying dealer and have a full service history.

The makers' view

Toyota quotes research with major contract hire companies as showing the average age and mileage of contract hire and leasing disposals is 37 months, 67,000 miles. Therefore, the carmaker says its new warranty period gives them "full peace of mind".

It adds that reliability and durability are the main conquest purchase reasons and that SMR rates should fall as contingency for repairs outside the three years/60,000 miles period will be removed.

Meanwhile, Hyundai, an early introducer of extended warranties, says it's glad "other manufacturers are finally trying to compete and are bringing the importance of warranties into the spotlight".

"The unique part of Hyundai's warranty is the unlimited mileage. For fleet drivers, this is a real benefit. It is also transferable between owners with no fee, so a fleet can run a car up 100k miles over three years and still sell it on to a new owner with two years' warranty remaining," says the carmaker.

Kia admits there is no tangible benefit during a three-year-lease customer's ownership period apart from the unlimited mileage cover during the first three years. However, there is the benefit of a third year's cover over some brands that only have two-year warranties. And, it adds, as a manufacturer warranty rather than an insurance-based warranty, should any issues arise, the hearing an owner will receive is likely to be more sympathetic.