Economic Highlights

New Delhi, 16 April 2010

Extended Warranty

BE WARY, DON’T GET DUPED

By Shivaji Sarkar

Extendedwarranty is a cause for happiness. The only catch is it brings a smile to the manufacturersbut bleeds the consumers. The automobile and electronics industry is estimatedto earn trillions of dollars across the world this way. And so does the Indianindustry, a couple of thousands of crores. However, it never comes out with astatement.

Thecompanies make stupendous profit on selling of extended warranties as a verysmall percentage of consumers really need to make such claims. The companypockets the money supposed to have been spent on labour and spare parts. Theconsumer is lured to have an extended warranty on a product telling him that itwould save him future cost of repairs and some replacement if they break undernormal use after the initial manufacturer’s warranty has expired. Accidentaldamages are not covered by it. The terms of this extension may be different,often more expensive, than original warranties.

This is sometimes also called aservice contract. Price on extended warranties, especially for appliancesvaries between 10 to 30 per cent of the purchase price. Reading the detailsabout what is covered may help the consumer decide if he could afford one, oractually need it. Some extended warranties may not cover enough to really makethem worthwhile. Even promised replacements often would not cost more than thewarranty cost.

The companies also cheat thecustomer by starting the warranty even before the actual delivery of a car or anyother product to the consumer. They have made it a policy to start a warrantyeven before the customer has laid his hands on the product. Almost all carmanufacturers do it in this country. This way the companies save a minimum offour days in warranty time – in economic terms it amounts to several croresworth.

The companies resort to deviousmethods to dupe the customer. In some cases, despite realising the full amountthey do not give the warranty book as a car purchaser, Sudarshan Goswami of Meerut, found. He wasreportedly given the warranty book only after forcing him to pay an additionalpayment of Rs 3,200.

The refrigerator and washing machinemanufacturers lure the consumers with “many additional” features and tempt themto settle for a bigger sized fridge, though he may not require it. The biggera product, the higher would be the so-called warranty cost. Besides, each feature adds to the base price.Most of the features cost the company a minimum, in many cases may not costeven a hundred rupees. But the consumer is charged 10 to 30 times of that. Overand above this he is saddled with an “extended” warranty of two years, which hewould possibly never use, for Rs 2500.

The companies aver that it satisfiesthe customer and creates a strong bond with the customer. Why not? The company’sservice man would charge only Rs 250 to attend a complaint. This means aconsumer would be able to recover the warranty amount if his refrigerator breaksdown ten times in two years. If it is that “good” a product, the consumershould rue it. In actuality, that does not happen and the company has all thereasons to smile at the cost of the consumer.

According to a recent US consumerreport study not more than eight per cent of refrigerators require repairs inthe first three years, a washing machine not more than 22 per cent and amicrowave 12 per cent and a mobile phone 5 per cent.

Even for cars there are not manyoccasions when one could claim the warranty. Many complaints are routine andattended during the periodical servicing. Some years back, car companies weretempting the buyers to go for a plastic coating of the engine and some parts ofthe body. For an average car the cost was Rs 6,000 to 10,000. The buyersrealized that certain wear and tear was routine and the coating was a mere giftto the dealers or manufacturers.

The best US and European adage isthat if the manufacturers has not given some facility or protection then thevehicle does not require it. The consumer would be happier without it. But mostbuyers feel insecure without the “perceived security” added to the product. Thesellers induce this sense of insecurity and exploit.

Similarly, there is not much savingsin the so-called Bureau of Energy Efficiency (BEE) stars. It has only turnedout to be a money guzzler for the manufacturers. The cost of a five-star ratedair conditioner is almost Rs 2000 more than a four-star one. The consumers,however, do not realize that this also compromises on its wattage and affectsits output. A 5-star air conditioner has 1.72 KW and a four-star 1.78 KW.  

The 5-star AC on an average use of1200 hours a year would consume 2064KW/hour and four star 2136 KW/hour. Ifelectricity cost is taken at Rs 4 a unit, the total power cost for the 5-starAC would be Rs 8256 and the 4-star Rs 8544 – a difference of Rs 288 a year. Itwould take seven years to recover the extra amount. If the buyer pays for anadditional warranty, he would be losing at least another Rs 2,500 at the least.As against this, the seller earns an additional Rs 5500 for virtually giving noextra benefit.

How much do these pseudo promises tothe consumers earn the manufacturers? It is only a wild guess. If a car makersells one lakh car a year, it earns, assuming it charges extra on an average ofRs 3000 per car, Rs 30 crore on which it has no liability. If the interestearned on it is added, even at a modest 8 per cent, it raises the profit byanother Rs 2.4 crore. If various other companies’ earnings on this score arecalculated, even at a modest scale it would add to a minimum of Rs 1000 crorein company profits in India.

The time has come to educate theconsumer in a systematic way to say no to most “perceived benefits” and“additional features”. It is now also incumbent on the Ministry for Consumer Affairsto draft a suitable Bill to end this fleecing. --- INFA

(Copyright,India News and Feature Alliance)