The vehicle shortage in North America has presented an unexpected boon for providers of extended warranty programs, with the industry seeing gains in both the sales of warranty programs and the length of their terms. Anxiety around replacement times and the increased risk of breakdown or failure has some fleet managers opting into programs they had previously discounted, but not everyone is convinced that extended warranties make financial sense.
One thing everyone agrees on is that fleet managers can expect to hold onto vehicles longer than they’re used to, as supply chain issues look set to delay new vehicle arrivals well beyond the 2021 model year, and even deep into 2022.
Traditional two- and three-year lease terms are stretched as manufacturers struggle to fulfil demand, with some OEMs like General Motors reportedly requiring preregistration and approval for 2022 fleet allocations. The result is vehicles that age out or mile out of their lease, leaving owners exposed to repair costs.
Wayne Rose, Senior Vice President of Sales – Fleet Services at Jim Pattison Lease, is not an advocate for extended warranties, and says his position hasn’t changed even with this new paradigm.
“Depending on normal cycling times and with longer manufacturer warranties on components, we don’t encourage people to buy these products,” Rose says. “If they want to get one that’s fine, and we do have one customer who has big trucks taking on extended warranties. I’m talking about Freightliners here, not half-tonne pick-ups, that’s a different segment, and that might make more sense in that world.
“But in the light-duty world, with the standard warranties that we have and the preventative maintenance schedules that we encourage our customers to follow, as well as the ability to negotiate goodwill with the manufacturers that we have when a vehicle has been properly taken care of, in my opinion it doesn’t make sense for a fleet to take on an extended warranty.”
The opinion isn’t universal, and some customers are looking to protect their vehicles in the wake of delayed replacement periods.
Paul Donofrio is the CEO of Canada Truck Warranty; he says he’s seen about a 10 percent jump in warranty sales over recent months. “We have dealers and customers calling us saying, “can we please get a warranty?” where traditionally you’re the one picking up the phone and doing cold calls to dealerships,” he says.
The driving force for this is expanding order to delivery (OTD) times, caused by the ongoing chip shortage as well as Covid-19-related shipping and manufacturing delays. One survey shows that delivery times are pushing out as much as 20 weeks, and that waiting period is only growing as supply challenges continue.
Truck and van manufacturers don’t expect a return to normal production levels until deep into 2022, and the situation is even worse for vehicle upfitters, who aren’t getting the allotment of bare chassis vehicles they need to fulfil upfitting requirements. Jim Pattison Lease is seeing those delays firsthand.
“It’s a major issue,” says Rose. “The microchip and semiconductor shortage has dramatically reduced the ability to get vehicles. Just drive around any dealer’s lot. I was at a dealer this morning, they had two cars in the showroom.
“There have been all kinds of plant shutdowns, originally because of Covid and then the microchip shortage which will continue into next year. Manufacturers are building 2021 model-year vehicles into November, which has never happened before. The result is that 2022 model year production will start later, and we were just advised this morning that one manufacturer is already oversubscribed in the heavy-duty trucks and vans, which are our bread and butter.
“They’re idling plants because they can’t produce vehicles, or they’re building them minus components and they’re sitting outside waiting until they can get components. Manufacturers are building their most popular models, which in many, if not all cases are their most profitable ones. So, they’re robbing Peter to pay Paul to get pick-ups and vans out the door. And the demand is so great they still can’t manage it.”
Rose says it’s important for fleet owners to plan ahead. “We’ve been asking customers for a few months now to please place a factory order, because we have negotiated pricing for that. It’s going to take six to nine months, so work a year ahead of time and figure out what you need for your business, factor in that lead time, and understand that the window is going to close much earlier than we anticipate for 2022 models. Some of the windows only just opened and they’re already oversubscribed.”
Over at Canada Truck Warranty, though, Donofrio is fielding calls from anxious fleet owners. “We have fleet owners calling us now saying, 'I can’t get my new trucks, even if I get them, they [OEMs] are suggesting May 2023. My inventory is aging, I have no warranty, can I get a warranty, please?'” Donofrio says.
As an extended warranty provider, Canada Truck Warranty is used to being asked to tailor their programs to trail along with leasing or financing terms, but that’s a bigger challenge in the current climate. “We’re seeing longer lease programs, but also anyone who is able to purchase a truck wants to hold onto that truck for as long as possible,” says Donofrio. “The fact of the matter is there’s not much new inventory at all out there. As a matter of fact, in some cases it’s zero. I feel sorry for our dealer partners. Some of them have three or four trucks on the lot, if that. Some of the other brands can’t even get inventory. But for us as a warranty company it’s greatly increased sales.”
Anecdotally this approach makes sense. Automotive fleet trends in 2021 show that the increased replacement times are pushing up both preventive and unscheduled maintenance costs.
The margin for fixing or replacing has changed too. The used car market is seeing record high prices, but that doesn’t help fleet owners when they can’t acquire a replacement for that vehicle. So, while it might have been an option to shunt a vehicle that’s begun to show its wear and tear into the marketplace, now fleet managers have no choice but to get their rigs repaired.
Rose acknowledges that this will cost some fleet owners more money, but still doesn’t believe the math on extra warranty coverage adds up, “To me it’s a question of math. Let’s say an extended warranty costs $1,000 – then the question is what does it cover? What is the frequency [of those issues]? If you’re a fleet customer with 50 vehicles, that’s $50,000 that you’re spending on a form of insurance.
“You can’t get the new vehicle in the time frame you want. You’re going to pay much more if we can find one in stock. So, if the vehicle is relatively new and the service history has been reliable, you’ll extend.
“And yeah, it’ll cost you more in brakes and tires, but we’re still not at the point where we recommend extended warranties.”
Meanwhile companies like Canada Truck Warranty reap the rewards of a fleet climate that pushes their products into sharper focus. “It’s been an eye-opener for us at the office,” says Donofrio. “Considering the pandemic, we’ve really had to ramp up and think of creative ways to make sure that every customer is covered and that coverage is there for them.”