Voices on Quality: Unlocking warranty value in consumer automotive

0:09Daphne Luchtenberg: Welcome to McKinsey Operations Voices On series. This is where we dig deeper into specific aspects and challenges in the world of operations. We will look at how operational excellence combined with tech and AI can unlock the next level of value. Today, we're talking about a topic that rarely gets board-level attention, but quietly costs automotive OEMs billions every year, warranty and goodwill. Across passenger cars and commercial vehicles, warranty and goodwill costs have increased sharply in recent years, and in some cases by more than 40%. For many OEMs, this now represents between 2 % and 3 % of total sales.

0:50Daphne Luchtenberg: Yet the top performers operate at almost half that level. And the interesting part, most of these costs are driven not by large-scale recalls. They come from everyday failure points, like the software issues, electronics, engines, transmissions, brakes, and just as importantly, from how the administration of warranty and goodwill is managed. The good news, a significant share of these costs can be addressed, often with tangible cash impact that can be delivered back to the business within 12 to 24 months. To unpack what's really driving this and what concrete steps OEMs can take, I'm joined by Andreas Houndreiter, an associate partner from McKinsey's Munich office.

1:34Daphne Luchtenberg: He's been helping manufacturers extensively on transforming their warranty and goodwill performance. Andreas, great to have you here.

1:42Andreas Haunreiter: Daphne, thanks for having me for this talk.

1:44Daphne Luchtenberg: Andreas, let's start with why should the OEM executive treat warranty and goodwill as a strategic priority right now?

1:52Andreas Haunreiter: First of all, as you've already said in the intro, it's an overlooked topic, but costs billions of euros to automotive OEMs. And not only automotive OEMs, but also commercial vehicle OEMs for their part. What we see in the market is that those warranty and goodwill costs usually are between 1 % and 4 % of sales, which is a great difference between OEMs. We see that these costs have increased by 40 % or even more percent in the recent years. If you manage these costs, then you will have an immediate P &L and cash effect for many of the actions you can do in the field. And historically, it has been overlooked because on the one hand, priorities were different or on different topics.

2:47Andreas Haunreiter: And on the other hand, it is also a very cross-functional topic. So you might not have the clear owner in the company, but after sales, quality, R &D, production, all of them are involved in this process. And now it's regaining momentum because of the cost pressure that automotive OEMs across the globe are in. And that's where we are helping them.

3:12Daphne Luchtenberg: So if you look at the baseline, how much of it is realistically addressable, Andreas?

3:17Andreas Haunreiter: So when we look at the baseline, usually you can address all non-recall related warranty and goodwill spend. In the reduction that we see over the course of a program of around two years is usually 10 to 15 percent, in some cases up to 20 percent. Many of the cash savings will flow into your P &L directly. Some of them will flow into the P &L in the subsequent year. I think there are five major points that you can address in your warranty and goodwill spend. First of all, it is the dealer monitoring. This is a topic around the anomalies of exchanges. Although a claim might be correct and might go through the system check, it might not be right for a dealer to exchange window wipers and car key batteries on a very, very regular basis.

4:14Andreas Haunreiter: And second thing is repair optimization. So optimizing the repair procedures. Sometimes you need to exchange many other parts to get access to the parts you actually want to repair. And that can be optimized together with R &D. Third thing is supplier chargeback. Usually what we see is that only a small portion will actually be recovered from suppliers. with many cases being in somehow an idle mode, not enough attention, not clear enough, much effort required by legal and other functions to evaluate this. This can also be targeted. The fourth lever is predictive maintenance. So with over-the-air updates and with advancing technologies and connectivity, you are able in some use cases to not only get remote access to the vehicle if a part needs to be repaired but also get use cases where parts maintenance can be suggested when you see that there's something out of out of range for example there are sensors in the transmission and based on the vibration in the transmission you could actually suggest is there something in the transmission not right will fail in the in the new future and can then suggest a repair up front the fifth pillar would be buybacks in the u.s you have a lemon law so if the if the dealership and if the oem is not able to repair a vehicle within a given time frame and within a given number of attempts you are actually required as a manufacturer to get the product back this is a process that also needs to be managed because if you say, I don't want to have any buybacks, then you are liable and you will have high litigation costs.

6:15Andreas Haunreiter: Sometimes voluntary buybacks will be even cheaper than those litigation costs.

6:20Daphne Luchtenberg: And can you give some examples, Andreas?

6:22Andreas Haunreiter: Despite all the software content, the engine and transmission are still the main contributors to warranty and goodwill from what we see in the field. For passenger cars, 30 to 40 percent can be attributed to engine and transmission. This is different per OEM, but that is a little bit the range of what we see. Now, with software issues, we see that usually those engine and transmission parts, but also other parts of the vehicles, they have controllers. Controllers meaning little, you could call them computers. sitting in the component that communicate from component to the central computing system in the car to, for example, make sure that the engine uses the functions that it's there for or transmissions do their function in changing gears and so on.

7:23Andreas Haunreiter: If there is a software issue, it might not be so evident. And the dealership might think it is a hardware issue and exchange the hardware. then you still will have the problem. So they don't find the trouble, but they want to help the customer in getting some remedy. That is a common issue that we see in the field that I think is related to this complexity increase.

7:44Daphne Luchtenberg: So is it typically a management gap then that needs to be closed, Andreas?

7:50Andreas Haunreiter: Across regions, it's similar. So there are some difference in the level, but for one, the data situation is not very advanced at OEMs usually. they are picking up on this right now, but usually they now start with very fragmented systems. There's no one data lake for after sales data, R &D data, production data. So the connection between what is going wrong in the field and what has happened in the value chain beforehand is not so good. And I think that's a prerequisite of managing that very well. But also in the management of warranty and goodwill, we see that there are things that can be improved.

8:35Andreas Haunreiter: For example, we see that for many vehicles from different OEMs, that the end of warranty period is something where warranties go up. Of course, that can be natural, but also that can be something where dealers, you know, they use the warranty to get good customer feedback and exchange a part might be to be repaired or might be a part that was actually okay, but wanted to satisfy the customer. And the second thing is also after the warranty period, and that is especially important for premium OEMs, they have goodwill periods. So warranty is gone, but they want to satisfy customers. And this can be up to 10 % of cases, what we have seen.

9:22Andreas Haunreiter: And 10 % is already a significant number. So I think one part is the dealer management, but there are also other parts like supplier recovery. We see that this is very limited. Usually you have a very small portion that is actually to be recovered or claimed with a supplier. If they claim it, then they have a high portion of recovery. But there are many cases where they bias towards not doing anything because the liability was not so clear. And many of those cases, if you manage them right, can be actually claimed. Another thing is that you can also improve repair processes. So I give you one example.

10:03Andreas Haunreiter: We have seen a repair process of an engine part, which in the beginning required that the axle is taken out, which is a procedure that takes several hours. And we could improve it to, you need to put the steering wheel into the maximum right-hand side extension. And then you could access that part without taking out the axle.

10:27Daphne Luchtenberg: Are you saying that this information, these kinds of hints and tips to actually do these things quickly and efficiently are not generally well understood?

10:36Andreas Haunreiter: I think they understand that processes are not ideal. The major thing that has been missing usually is that transformation process or that rigor of having a project team that is accountable for savings targets then need to find the optimization points of the components across the vehicle lineup, actually improve them, and then pushing these improvements out to the fields, to the repair shops. And I think that is a thing that needs to be done. And with the current cost pressure, we have the chance to actually do that and to also make it a sustainable change. Because when you begin with a transformation, in the end, you can also migrate that to a standard process with a small, I'd say warranty and goodwill organization that is handling exactly these cases and makes sure that you have continuous improvement.

11:39Daphne Luchtenberg: Understood. So what you're saying is there are already top performers who have started to do this and are seeing these impacts that you were talking about at the beginning of the program.

11:48Andreas Haunreiter: That's correct. So I have seen a European OEM who have this kind of organization. They have a specific savings target per year, which they need to bring. And And that is how they actually finance themselves with a good investment ROI for the OEM.

12:05Daphne Luchtenberg: So, you know, how do you start a conversation like this, Andreas, at the OEM? There will be lots of people listening to this going, this is exactly what's going on in our organization. What would you advise as the opening conversation starter to address this and start to have this mobilized?

12:22Andreas Haunreiter: You need the situation that costs need to be saved and that you can actually set these targets and motivate the organization to drive towards these targets. The second thing I think needs to be in place is on very senior level, you need alignment between the functions that this is the right way to do. And then the third thing I would say is, because that's a very big enabler, is working on your data backbone and also thinking about there are new ways of integrating Gen.AI or AI platforms into your IT infrastructure. I think that is a great way to enable the organization to have more or better managed warranty and goodwill in the future.

13:14Daphne Luchtenberg: And are you already seeing the top performers do exactly that with the infusion of technology?

13:20Andreas Haunreiter: The top performers, they have started to integrate this into their processes. And what I mean with this is you can introduce those new technologies at very different levels. It can be at a dealership where you start the claims processing when the customer comes to the counter and you need to get the personal data from the customer. This can be done by a machine and not taken manually again. Then throughout the process of reviewing the claim, making sure that the claim is correct, also suggesting repair procedures, that is also something where technology can help. You can also use technology when you work on repair optimization so that you get suggestions on what can you optimize.

14:11Andreas Haunreiter: That will not be the 100 % solution. But if you have to change 100 R &D procedures of how to actually exchange a part, it can be of great help. if you have a 80 % version that the machine is suggesting you and then you iterate it to a status where you'd say, okay, this is ready for integrating that or implementing that in the field.

14:37Daphne Luchtenberg: And then once the new way of working has been embedded, then you're going to just be operating in a much more productive and efficient way.

14:44Andreas Haunreiter: You will see that usually with, for example, pre-authorization of high-cost repairs, you will see that you have better control of what is actually been done in the field and the second thing is optimization of repair procedures and labor time allowances if you have control over these you don't have have dealers that that claim i need a 10 hour for a repair that actually took should take you 30 minutes so i think having certain boundaries certain standards that are not always in place and thinking this process end-to-end and making sure that you target all of the warranty and goodwill parts or warranty and goodwill categories, that is very essential to then also get the effect.

15:42Great.

15:43Daphne Luchtenberg: I'm going to finish by asking you three things that can start you off on this journey? What would they be, Andreas? I would start with forming the team, of course,

15:53Andreas Haunreiter: and setting it up. All the functions need to be on board. They need to take full accountability of what you have in front of you. Then what you typically do is a top-down diagnostic approach. So you would make sure that you have full transparency on the baseline. You understand the root causes. You understand the leakage points. and you then define what do you think will you be able to achieve in that certain timeframe? You mentioned 12 to 24 months, which is the usual timeframe of such an exercise. And then subsequently would work on the bottom-up execution. So you would go into the functions, you would speak with the experts and you would work on concrete measures across categories, dealers, suppliers, repair standards, and even litigation.

16:46Andreas Haunreiter: The third thing that I would do is I would make sure that the IT infrastructure and data backbone is ready to support that in the best possible way. So that is also something where an upgrade makes sense for most of the OEMs.

17:02Daphne Luchtenberg: But with, you know, two to three percent of your sales bill being at stake, it's actually really worth focusing on, right?

17:09Andreas Haunreiter: Exactly. So, for example, I'm working with an OEM who has a cost baseline of two and a half billion. So if you have 10 to 15 percent savings, that means that you are between 250 and 400 millions of savings, which is quite substantial if you think about that margins are eroding and you're looking for cost savings in all parts of the company.

17:35Daphne Luchtenberg: Thanks, Andreas. us, if there's one takeaway from today's conversation, it's that while warranty and goodwill sit quietly in the background, they represent a significant and often under-managed value pool for OEMs. We've heard how costs have surge in recent years, driven not just by increasing product complexity, but also by gaps in how these topics are managed across functions. The encouraging part is that a significant share of this spend is actually addressable, often with tangible impact on both P &L and cash within a relatively short time frame. What really stands out is the shift in mindset that's required.

18:13Daphne Luchtenberg: From treating warranty and goodwill as a reactive cost center to managing it as a strategic lever. That means greater transparency, stronger cross-functional ownership, smarter dealer and supplier management, and increasingly the use of advanced analytics and AI to prevent issues before they occur. For OEMs willing to act now, the opportunity is clear. Reduce costs, improve customer experience, and build a more resilient, forward-looking operation. Thanks again for joining us.