MONEY COMMENT
The £500m New-Car Swindle

By Cliff D'Arcy
December 18, 2003

Britain's trading standards watchdog, the Office of Fair Trading, has warned UK motorists to beware of new-car warranties that come with sneaky strings attached. We Brits buy over 2½ million new cars a year, at a cost of around £33 billion – and one piece of good news is that new-car prices have fallen by a seventh (14%) in the last five years.

All new cars come with a manufacturer's warranty that covers 'component failure' (iffy parts), which usually runs for between one and three years. In addition, three-fifths of all new cars (60%) are sold with extra 'dealer-based extended warranties' that extend manufacturers' guarantees but include restrictions on where vehicles can be serviced. It's this lack of 'freedom of choice' that the OFT is determined to tackle.

Thanks to restrictive clauses in dealer warranties, many new-car owners have no choice but to have their vehicles serviced within a single dealer franchise. Indeed, over two out of three motorists assume that their warranty would be invalidated if they used an independent garage, even where this isn't necessarily true.

Moreover, car servicing is big business: after-sales costs represent about two-fifths (40%) of the lifetime cost of a car. In fact, we spend around £10 billion pounds a year on car servicing and repairs, of which about £1.4 billion is spent on cars up to three years old.

The OFT estimates that franchised dealers (those that are part of a manufacturer's network) currently undertake about nine-tenths (90%) of servicing of cars up to three years old. The big problem is that these garages have a near-monopoly on nearly-new car servicing, despite being far more expensive than independent garages.

Lack of market competition means that the typical servicing bill at a franchised garage is around £83 higher than that charged at a typical independent outlet - £199 versus £116 per visit. Another way of putting this is that servicing bills from independent garages are around 40% lower, without any quality gap!

The OFT reckons the upshot is that we are over-paying for new-car servicing to the tune of £500m a year! However, it can now challenge this practice, thanks to a European law that came into effect in October, which forced dealer networks to open themselves up to greater competition from roughly 16,000 independent garages. Learn more here.

Some manufacturers have already removed these servicing restrictions, and the OFT is urging the others to follow suit. If carmakers don't play ball, the OFT may launch a formal investigation next May. Furthermore, the OFT will launch a consumer awareness campaign next spring to explain servicing options to consumers.

So, the next time you go to get your car serviced, call a few local independent dealers. You might be surprised at how much you could save.

You can download the OFT's report here (400k PDF file, 37 pages).

More on cheaper motoring: Terrific Tips For Motorists! | The Fool's Car-Buying Guide.