Ford tackles warranty costs in bid to boost profit

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DETROIT — New Ford CEO Jim Farley wants to rein in rising warranty repair costs that are a key reason why the automaker’s financial performance in North America has lagged behind rival General Motors.

As part of its new effort to cut warranty costs, Ford has told suppliers it will charge them upfront for half the cost of a warranty problem. Suppliers might get some of the money back if they resolve problems more quickly.

“What we are striving for is to fix the issues as fast as possible so that those adjustments are as small as possible,” Kumar Galhotra, president of the automaker’s Americas and International Markets group, told Reuters. “They’re more incentivized to work with us.”

Ford North America’s COO Lisa Drake, who is responsible for quality and vehicle launches, said in the same interview supplier contracts have always allowed such debits.

“We were never doing it and frankly, it was probably one of the reasons that we became a bit more uncompetitive,” she said.

The move to charge parts makers upfront has some supplier executives worried.

“They push their suppliers so, so hard that it causes the supply base to be weak in the knees,” said one executive, who asked not to be identified.

But for Ford investors, action to shrink the U.S. automaker’s outlays for vehicle defects is overdue. Ford’s warranty costs for the first nine months of 2020 were more than $2 billion higher than those of GM.

Industry officials blame the automaker’s higher costs on the introduction of several major vehicle platforms and powertrains, as well as the fallout from the Takata airbag recall that has now also hit GM.

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

“Warranty recovery is increasingly seen as a revenue source” by the automakers, said Ann Marie Uetz, a Foley & Lardner attorney who works with auto suppliers. “Often times, it can feel like a bit of a grab.”

To attack internal quality problems, Ford has reconstituted teams that track the quality of inbound parts at its plants. These teams were previously disbanded as cost-cutting moves. Farley is pushing executives to resolve quality issues that linger beyond 30 days.

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Saurabh Shukla

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