Extended Warranties are like insurance: You pay some money to avoid an expense you might not otherwise be able to easily afford. Consumer Reports often argues that extended warranties aren’t a good deal for electronics, because the lack of moving parts and the short service life in that class of product makes the likelihood of a covered event low and the expense of the warranty unnecessary. However, the more complex the device or product, the more likely there will be a major repair. And, modern cars, unlike electronics, can’t just be tossed out when the bill gets excessive because cars cost tens of thousands of dollars rather than hundreds.
Cars Have Become Complex and Costly
A few decades ago, extended warranties were not available. Cars were simpler then, and there just wasn’t a market for extended warranties. After the manufacturer’s warranty expired, drivers could usually fix most things themselves. At worst, they could take the car over to a local mechanic who could do the fix for what seemed to be, at least by today’s standards, a trivial amount.
But today’s cars are created with complex technology and very expensive parts. For instance, Audi A3 (Audi’s value car) offers adaptive headlights (which turn with the steering wheel) as an option. Although it is a very desirable option, the parts cost for each headlight is over $600, and if the system fails you’ll need to replace both or the car will look funny.
A lot of the expense isn’t the parts though, it is the labor to get them in and out. For instance, to replace those adaptive headlights the bumper has to be removed first in order to access the mounting points and actually remove the headlights. That’s 2 hours charged for removing the bumper at $150 an hour and finally the car’s computer has to be adjusted so the headlights will function, an additional $100. Even if you did the work yourself, and pulling a bumper isn’t that hard, you’d be out over a grand for just the parts, and if you don’t do the work it is more like $2,000 just to fix a function on otherwise working headlights.
Some cars have overlapping internal networks which can fail. For example, we had an Audi TT that had a failed sensor network, a critical part of the advanced suspension system in the car, and the cost to fix was $3,500.
Oftentimes, the riskiest cars to buy are the first runs of any new design. For instance, the 1997 Jaguar XK8 (this was after Ford bought the company and reliability had improved) had a huge number of problems. The vehicle used a very interesting cylinder lining technology called Nikasil which was developed for race cars. It made for an incredibly powerful engine, but unfortunately chemicals in some countries ate the stuff for lunch. This resulted in engines needing to be rebuilt and sleeved for thousands of dollars. When this happens out of warranty, it is the owner’s cost. This was only one of nearly 500 different expensive systems that were eventually modified in later models to address design issues.
The first generation Mercedes Benz 320 SUV had a wonderful body on frame design, but the transmission tended to have about a 50,000 mile life. Right after the warranty expired, owners would often get hit with a $10K repair bill. Both the Mercedes and the Jaguar models mentioned were massively changed over the following years and became far more reliable. The Audi TT was also a first year car, and while it was really beautiful the endemic problems made the vehicle nearly legendary and not in a good way. Generally if you are buying a vehicle within the first two years of of a new car’s introduction, an extended warranty should almost be a requirement. In the case of the Jaguar XK8 mentioned previously, the manufacturer took almost 6 years to fully refine the design and correct nearly all of the problems. One remaining issue, a tendency to blow out convertible top hydraulic lines, wasn’t fixed until the next version of the car was released nearly a decade later.
Lots of Gadgets
Some buyers purchase cars with different sets of options, while others buy pretty much everything offered having discovered that is it nearly impossible to add options after the car has been assembled. This means there are a lot of options that only a few people buy. The issue with a low run option is that even if it has an endemic problem, the in-warranty pain is often not big enough to fix it during the entire run of the car.
The adaptive speed control on a Jaguar XK8 is an example of a rare option. Although drivers reported endemic failures throughout the run of the car, there were apparently not enough total issues with the vehicle to warrant correcting the problems. The adaptive speed system costs thousands to replace, and there is no certainty that the replacement part itself won’t fail over the same time period because it is basically an unchanged component.
One additional problem with optioning out a car is that problems associated with different components working in combination aren’t always fully vetted. Often these components are built by different subcontractors, even for the same part, and as you layer these on top of each other you can have conflicts and communications issues that are expensive and often intermittent and difficult to diagnose let alone fix.
In these instances, you want someone else paying to diagnose and correct the problem otherwise it can become a financial nightmare.
In the end, extended warranties for either cars or other products are most critical for newer designs and more complex and unique offerings. A solid state product that is the same for everyone like an iPad probably doesn’t need an extended warranty unless it covers dropping the device and breaking the screen. But a complex, first year car, with every bell and whistle is probably going to have expensive issues making an extended warranty a critical protection to both your checkbook and your peace of mind.
A Note From CARCHEX On Extended Warranties
An extended auto warranty can help mitigate unforeseen repair costs and can protect you against unplanned vehicle problems long after your standard warranty is expired. The right extended warranty can be customized to fit your needs and can help organize the repair process down to helping you choose a convenient repair dealer and making the claims process run smoothly. CARCHEX is one of the largest providers of Extended Auto Warranty coverage on the web with over a decade of protecting customers. Visit CARCHEX and get a fast, free online extended vehicle protection quote today.
About The Author
Rob Enderle is President and Principal Analyst of the Enderle Group, a forward looking emerging technology advisory firm. With over 30 years’ experience in emerging technologies, he has provided regional and global companies with guidance in how to better target customer needs; create new business opportunities; anticipate technology changes; select technology vendors and products; and for technology vendors to present their products in the best possible light. Rob covers emerging technology in business, consumer, automotive, and public transportation segments. Before founding the Enderle Group Rob was the Senior Research Fellow for Forrester Research and the Giga Information Group, and held senior positions at IBM and ROLM. You can find Rob on Twitter, Facebook, and Google+, and learn more about Rob and the publications he writes for at www.enderlegroup.com.