Warranty and goodwill rarely get board-level attention, yet they quietly cost automotive OEMs billions each year. Across passenger cars and commercial vehicles, these costs have risen sharply in recent years, in some cases by more than 40 percent. They can represent 2 to 3 percent of sales for many manufacturers. Top performers operate at nearly half that level. Much of the opportunity lies not in large-scale recalls but in everyday failure points, such as software, electronics, engines, transmissions, and brakes, as well as in how warranty and goodwill processes are managed. A significant share of these costs can be addressed, with tangible profit-and-loss (P&L) and cash impact achievable within 12 to 24 months.
In this Voices on episode of McKinsey Talks Operations, host Daphne Luchtenberg is joined by Andreas Haunreiter, an associate partner in McKinsey’s Munich office, to dig deeper into how automotive manufacturers can transform their warranty and goodwill performance.
The following conversation has been edited for length and clarity.
Daphne Luchtenberg: Andreas, let’s start with why the OEM executive should treat warranty and goodwill as a strategic priority right now.
Andreas Haunreiter: It’s an overlooked topic, but it costs automotive and commercial vehicle OEMs billions of euros. In the market, warranty and goodwill costs range from 1 percent to 4 percent of sales, with significant differences among OEMs. We see that these costs have increased by 40 percent or even more in recent years. If you manage these costs, there will be an immediate P&L and cash effect for many of the actions you can take in the field.
Historically, this topic has been overlooked because priorities were different and because it’s highly cross-functional. You might not have a clear owner in the company, since after-sales, quality, R&D, and production are all involved in this process. Now it’s regaining momentum because of the cost pressures automotive OEMs across the globe are facing, and that’s where we are helping them.
Daphne Luchtenberg: If you look at the baseline, how much of it is realistically addressable?
Andreas Haunreiter: Looking at the baseline, usually you can address all non-recall-related warranty and goodwill spend. Over the course of a two-year program, the reduction we see is usually 10 to 15 percent, and in some cases up to 20 percent. Many of the cash savings will flow directly into your P&L, and some will flow into the P&L in the subsequent year.
There are five major points you can address in your warranty and goodwill spend. First is dealer monitoring. This is about anomalies in exchanges: Although a claim might be correct and go through the system check, it might not be best for a dealer to exchange window wipers and car key batteries on a regular basis. Second is optimizing the repair procedures. Sometimes this requires exchanging many parts to access the part you need to repair, and this can be optimized in collaboration with R&D. Third is supplier chargeback. Usually, we see that only a small portion can be recovered from suppliers, and many cases remain idle because too much effort is required from legal and other functions to evaluate them. This can also be targeted.
The fourth lever is predictive maintenance. With over-the-air updates and advancing connectivity, you’re able, in some use cases, to not only get remote access to the vehicle when a part needs repair but also to suggest parts maintenance when something is out of range. For example, there are sensors in the transmission, and based on the vibration, you could suggest whether something isn’t right and is likely to fail, and recommend a repair up front.
The fifth pillar is buybacks. In the US, you have a lemon law, so if the dealership and the OEM aren’t able to repair a vehicle within a specified time frame and number of attempts, the manufacturer is required to take the product back. This process needs to be managed because if you say, “I don’t want to have any buybacks,” you’re liable and will face high litigation costs. Sometimes voluntary buybacks will be cheaper than those litigation costs.
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Daphne Luchtenberg: Can you give some examples?
Andreas 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 of warranty and goodwill costs can be attributed to the engine and transmission. This differs per OEM, but that is roughly the range we see.
With software issues, the engine and transmission parts, and other parts of the vehicle, have controllers that sit in the component and communicate with the central computing system in the car. For example, the controllers make sure the engine performs its function or the transmission changes gears correctly. If there’s a software issue, it might not be evident, and the dealership might think it’s a hardware issue and exchange the hardware, but the problem remains. They don’t find the problem, but they want to give the customer a remedy. That’s a common issue we see in the field, and I think it’s related to this complexity increase.
Daphne Luchtenberg: So, is it a management gap that needs to be closed?
Andreas Haunreiter: Across regions, it’s similar, although the extent of those challenges varies. For one, the data situation isn’t very advanced at most OEMs. They’re picking up on this now, but usually they start with very fragmented systems. There’s no single data lake for after-sales data, R&D data, and production data, so the connection between what’s going wrong in the field and what happened in the value chain beforehand isn’t good. I think that’s a prerequisite for managing this well. But we also see things in the management of warranty and goodwill that can be improved.
For example, for many vehicles across different OEMs, the end of the warranty period is when warranties go up. Of course, that can be natural, but sometimes dealers use the warranty to get good customer feedback and exchange a part that might need repair, or exchange a part that might actually be OK, just to satisfy the customer.
Second, which is especially important for premium OEMs, is goodwill periods. The warranty has passed, but they still want to satisfy customers. This can happen in up to 10 percent of cases, which is significant. So dealer management is one aspect, but there are also other factors, like supplier recovery, which is very limited. Usually, only a small portion is recovered or claimed from a supplier. If they claim it, then they have a high portion of recovery. But often there is a bias toward inaction because the liability was unclear. Many of those cases, if managed right, can actually be claimed.
Another area is improving repair processes. For example, the repair process for an engine part usually requires removing the axle, which takes several hours. We improved it so that, by turning the steering wheel to the maximum right-hand extension, you could access the part without removing the axle at all.
Daphne Luchtenberg: Are you saying that this information, these hints and tips to do these things quickly and efficiently, are generally not well understood?
Andreas Haunreiter: People understand that processes aren’t ideal. The major thing that has been missing is the transformation process: the rigor of having a project team accountable for savings targets, the need to identify optimization points in components across the vehicle lineup, improve them, and then push the improvements out to repair shops. With the current cost pressure, we have the chance to do that and make it a sustainable change. When you begin a transformation, you can eventually migrate it into a standard process with a small warranty and goodwill organization that handles these cases and ensures continuous improvement.
Daphne Luchtenberg: So, 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?
Andreas Haunreiter: That’s correct. A European OEM has this kind of organization, with a specific annual savings target, and that’s how they finance themselves, with a good investment ROI for the OEM.
Daphne Luchtenberg: How do you start a conversation like this at the OEM? There will be lots of people listening to this thinking, “This is exactly what’s going on in our organization.” What would you advise as the opening move to mobilize this?
Andreas Haunreiter: In a situation that requires cost savings, you can set these targets and motivate the organization to drive toward them. What also needs to be in place is alignment at a senior level, across functions, that this is the right way to do it. Third, and this is a big enabler, is working on your data backbone and thinking about new ways of integrating gen AI or AI platforms into your IT infrastructure. That’s a great way to help the organization manage warranty and goodwill better in the future.
Daphne Luchtenberg: Are you already seeing the top performers doing that, with the infusion of technology?
Andreas Haunreiter: The top performers have begun integrating this into their processes. You can introduce those new technologies at different levels. It can be at a dealership where claims processing begins. When the customer comes to the counter, and you need to collect their personal data, it can be handled by a machine rather than manually. Then, throughout the claim review process, technology can check for accuracy and suggest repair procedures.
You can use technology for repair optimization suggestions. That will not be a 100 percent solution, but if you have to change a hundred R&D procedures for how to exchange a part, it’s a huge help to have an 80 percent version that the machine suggests, which you then iterate until it’s ready to implement in the field.
Daphne Luchtenberg: Once the new way of working is embedded, the organization will operate in a much more productive and efficient way.
Andreas Haunreiter: You will see that, for example, with preauthorization of high-cost repairs, you have better control of what was done in the field. The second thing is optimization of repair procedures and labor time allowances. If you have control over these, you don’t have dealers claiming ten hours for a repair that should actually take 30 minutes. Having certain boundaries and standards in place, and thinking about this process end to end, making sure you target all the warranty and goodwill categories, is essential to achieving the full effect.
Daphne Luchtenberg: To close out, what are three things an organization can do to start this journey?
Andreas Haunreiter: Start by forming the team and setting it up. All the functions need to be on board and take full accountability. Then you typically run a top-down diagnostic approach to ensure you have full transparency into the baseline, the root causes, and the leakage points.
You then define what you think can be achieved in a given time frame, such as 12 to 24 months, which is typical for this kind of exercise. You subsequently work on bottom-up execution: going into the functions, speaking with the experts, and working on concrete measures across categories, dealers, suppliers, repair standards, and litigation.
You also need to make sure that the IT infrastructure and data backbone are ready to support it in the best possible way. That is an area where an upgrade makes sense for most OEMs.
Daphne Luchtenberg: With 2 to 3 percent of your sales bill at stake, it’s really worth focusing on, right?
Andreas Haunreiter: Exactly. For example, I’m working with an OEM with a cost baseline of €2.5 billion. If you achieve savings of 10 to 15 percent, you’re looking at between €250 million and nearly €400 million in savings, which is quite substantial when margins are eroding, and you’re looking for cost savings across every part of the company.
Daphne Luchtenberg: Thanks, Andreas. 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 undermanaged value pool for OEMs. We’ve heard how costs have surged 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, 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.
