ElI5 How do car manufacturers offer powertrain warranties without losing money?
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If your tests show that your powertrain will reliably last 11 years, you can essentially offer a 10 year warranty for free.
Obviously there will be some outliers that get repaired under warranty, but that’s the gist.
I work in auto parts manufacturing. There is a lot of quality testing to ensure that the parts will survive longer than the warranty period. The parts are made to last longer than the warranty period and if they don’t last through their endurance testing then it is determined why, and steps will be taken to fix the problems.
when a manufacturer sells a car, they set aside a pile of cash called the “warranty reserve”. This money is essentially a rainy-day fund that is meant to cover the warranty charges that car is likely to incur over its lifetime. That money set aside is collected from the buyer of the vehicle, but the company does NOT get to recognize this as revenue. It’s a sort of fiscal insurance policy self-funded by the manufacturer to cover future warranty claims.
On a quarterly basis, the company’s finance department will evaluate the rate of warranty expenditures by factoring in
1. the total population of other vehicles sold running on similar powertrains
2. a run-rate analysis of older vehicles in the fleet (sold cars) to gather information on general reliability as a way of projecting future failure rates using an assumption that no quality problems have crept into the manufacturing process
3. perform some analytical wizardry to project whether the warranty reserves that were set aside will over/under cover the expected long term costs
Once these analyses have been performed, the finance team will assert that warranty reserves can be trued-up / down. In an ideal situation, warranty reserves exceed anticipated costs and any overage in the reserve can be reclaimed and recognized as revenue (yay). Generally speaking, companies will try to minimize warranty reserves (safely) so that they can recognize that revenue immediately at sale.
There’s lots of data on long-term reliability of powertrain components, failure rate, repair costs, etc. It’s become trivial to put that data into a model and determine how much it will cost to have a warranty in place for whatever period of time you select. It’s equally trivial to determine the present value of these projected costs, and the anticipated rate of return on reserves set aside to pay these costs over the years. Once you have that information, you know with a fair degree of reliability what you need to charge per car sold to make sure the warranty more or less washes out. In other words, if a car manufacturer knows it will cost them on average $300 in today’s dollars per car sold today, they’ll want to get that $300 (or more) when selling the car. It’s like any other expense that goes into making cars and running a car company – the price of the car has to cover all the costs of the parts, the assembly process (including workers wages), advertising costs, a small share of factory building/tooling/retooling costs, etc. They don’t always get it right, but the successful car companies tend to get it right more often than they get it wrong.
Like anything else, you look at breakdown statistics and offer a warranty where a large majority of units will not fail during the warranty period.
In theory, the customer never uses the warranty. You’ll have some cases where an engine or something may need replaced before the warranty period is over, but that number is hopefully small enough that the manufacturer is still making plenty of money from vehicle sales to be able to cover the cost.
The warranty is designed to match the tested lifetime of the components. So they design it to not cost too much money, they get a curve of expected failures , marketing determines the optimal years to expected cars sold, then boom you have a plan
They trust their engineering enough so that they only really have to cover a tiny minority of defective powertrains while for the vast majority the warranty expires without ever being used. Secondly, they have a lot of stipulations about the coverage. Someone can’t just abuse the car, modify it, or generally do things that are detrimental to the car, and then go claim a warranty. It is voided under various circumstances which cuts down the number of people who can claim warranty even further. Lastly, repairing a powertrain costs a lot less to them than it does to you.
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