Ford’s new CEO will manage warranty costs to increase profits

It was written by Ben Klayman

DETROIT (Reuters) – Quality is again Job Motor at Ford Motor Co.

Ford’s new CEO, Jim Farley, taking a page from the advertising slogans of carmakers of the 1980s and ’90s, is working to curb rising warranty repair costs, a key reason for the carmaker’s financial performance in Dearborn, Michigan. He lagged behind his archivist, General Motors Co., in North America.

As part of its new efforts to reduce warranty costs, Ford has informed suppliers that it will charge them half the cost of the warranty issue in advance. Suppliers can get some of their money back if they resolve problems faster.

“What we’re striving for is to resolve the issues as quickly as possible so that these adjustments are kept to a minimum,” Kumar Galhotra, president of the Americas and International Markets Group, told Reuters. “They’re more likely to work with us.”

Ford North America CEO Lisa Drake, who is responsible for quality and bringing vehicles to market, said in the same interview that supplier contracts have always allowed for such loads.

“We never did it, and frankly, that was probably one of the reasons we became a little more uncompetitive,” he said.

Some supplier managers are concerned about pre-filling component manufacturers.

“They are putting so much pressure on their suppliers that this is causing a weakness in the supply base’s knee,” said one manager who did not ask for his identification.

But for Ford investors, action to cover the U.S. carmaker’s vehicle defects has been delayed. Ford’s warranty costs in the first nine months of 2020 were more than $ 2 billion higher than GM’s costs.

Industry officials have blamed the automaker’s higher costs for introducing several large vehicle platforms and powertrains, as well as the reasons for Takata’s airbag recall, which has now hit GM as well.

Bad suppliers from suppliers account for about one-third of Ford’s warranty costs, Drake said. The rest stems from design and manufacturing issues, Galhotra said.

Automakers “increasingly see warranty restoration as a source of revenue,” said Ann Marie Uetz, a Foley & Lardner attorney who works with automotive suppliers. “You often get a little grabbed.”

To overcome internal quality issues, Ford has assembled teams that monitor the quality of incoming parts at its plant. These teams were eliminated earlier as cost-cutting measures. Farley encourages managers to solve quality issues beyond 30 days.


Ford’s quality gap with GM has worsened over the past three years. Warranty claims have been nearly $ 2 billion since 2017, said Credit Suisse analyst Daniel Levy.

In 2012 and 2013, Ford’s warranty claims as a share of sales were below 2% each quarter, according to the industry’s Warranty Week publication. But at the end of 2018, warranty costs exceeded 3% and reached 4.3% in the second quarter of this year as total sales slipped due to the shutdown of the coronavirus.

For a graph of Ford warranty costs, click:

In the first nine months of 2020, Ford’s warranty costs totaled $ 3.87 billion, while GMs accounted for $ 1.68 billion, according to official submissions.

“It can be improved,” said Eric Arnum, editor of Warranty Week about Ford. – They just have to make an effort.

Ford investors are focusing on launching the redesigned and lucrative F-150 van and the new and highly anticipated Bronco SUV, but reducing the amount spent on dealerships to repair vehicles could give a big boost to the bottom line.

“We’re striving for fully competitive warranty expenditures on collateral, and that’s next to a lot of zeros,” Farley said in a Oct. 28 earnings conference talk, arguing that it should be “punitive” to suppliers who deliver defective parts. .

Galhotra said Ford is applying the lessons learned from the mistakes made in last year’s costly presentation of the redesigned Ford Explorer SUV to keep its current launch on track.

Part of the quality effort involves reducing the complexity of the automaker’s vehicles, Farley said.

For example, the F-150 truck’s proximity key unlocks all four doors, but Farley says consumers only use it for front doors, meaning Ford can eliminate two sensors – saving on manufacturing costs and potentially reducing warranty risk.

Ford also plans to use the data collected from the vehicles to troubleshoot problems more quickly – in some cases months instead of minutes – and fix them with over-the-air software updates, Farley said.

Levy, an analyst at Credit Suisse, said investors hoped Farley could change things, but he would have to prove it.

“There has been a result in the past that Ford is underperforming and I think that is a frustration for investors,” he said.

(Report by Ben Klayman in Detroit; edited by Matthew Lewis)