VW adjusts warranty, adds money for ads

Volkswagen will scale back its industry-best 6-year/72,000-mile bumper- to-bumper warranty program to 4 years/50,000 miles, but throw in two years of factory-covered maintenance beginning with its 2020 model-year vehicles, Automotive News has learned.

And to help its profit-struggling dealers, the German automaker is starting a new Tier 3 advertising program that will pay dealers up to $200 per vehicle to better "develop their local markets." The program is set to begin in the first quarter of 2020.

Volkswagen informed its dealers of the changes late last week.

Both are direct efforts by the German brand's new North American leadership team to address lingering issues with two different but equally important constituencies: consumers and its long-suffering dealer network.

For consumers, the amended warranty and maintenance program is a way to take on lingering doubts about Volkswagen's cost of ownership, while the new marketing help is a way to address lagging dealer profitability, said Duncan Movassaghi, senior vice president of sales and marketing with the Volkswagen brand's North American region. The move comes after Volkswagen conducted an internal evaluation of the costs and benefits of its current warranty, and determined that a change in strategy was in order.

"We felt that a combination of a strong warranty with a service and maintenance package and the co-op program for our dealers, which is where we netted out, was the best way forward," Movassaghi said. While the two-year maintenance program may cost some dealers lost service contract sales, Movassaghi said dealers would make up the revenue because the included maintenance would be paid at full warranty rate.

Volkswagen started its 6-year/ 72,000-mile transferable bumper-to-bumper warranty program in 2017 as the brand was launching its Atlas crossover and trying to emerge from its diesel emissions crisis. At the time,

the warranty was viewed as a way to restore consumer confidence in the brand. However, despite heavy advertising, the boosted warranty offering never became a major "why buy" for Volkswagen customers, Movassaghi explained.

"It was a good package, but we felt that there was a better way to use the resource," Movassaghi said.

For example, most lease customers would never realize the full benefit of the additional warranty, blunting its effectiveness as a sales consideration.

Another concern: Customers arrived at the dealership but hadn't heard about the warranty. "More than half our Atlas customers became aware of it in the dealership," Movassaghi said.

By cutting the warranty coverage while adding two years of free scheduled maintenance, Movassaghi said, Volkswagen hopes to better encourage leasing and purchasing customers to choose its vehicles over competitors, especially those who cite overall cost of ownership as a critical factor in their purchase decision. The 4-year/50,000-mile warranty will still be transferable to subsequent owners.

While the warranty and maintenance package may help dealers sell move vehicles, the added Tier 3 co-op program is likely to add more to their bottom lines.

Movassaghi said Volkswagen would begin covering the costs of half of its dealers' Tier 3 marketing efforts, up to $200 per vehicle. Right now, the automaker doesn't have a dedicated Tier 3 program, but does leave dealer margin dedicated to Tier 3 efforts in its sticker prices.

The additional Tier 3 program is intended "to be relatively flexible, to allow dealers to develop their local markets," and won't be restrictive, Movassaghi said.

"This is designed to be a genuinely helpful program to support costs, of course, because a lot of the dealers are spending this sort of money anyway. So this will support their costs, but it will also encourage a good level of Tier 3 investment."

Volkswagen dealers have some of the lowest profit margins among mass-market brands, according to annual surveys from NADA and buy/sell agents, with many stores operating at a 1 or 2 percent margin. Movassaghi said the brand has walked its National Dealer Advisory Council through the amended program.

John Luciano, general manager of Street Volkswagen in Amarillo, Texas, and chairman of the dealer council, said that "more than anything, the program is an offset of expenses. It gives us an opportunity to make some money in the service department and in finance" as well as better develop their local markets with new Tier 3 efforts. Luciano said service and extended warranty contract sales had fallen under the 6/72 warranty.

As for the Tier 3 reimbursement, "all of my success comes from what I do in the community," Luciano said. "We do roughly 60 to 70 new cars a month; even on the low end, that's $12,000 a month more that I can invest in my community. And VW dealers haven't had that money to invest like that in a while."