Yesterday, as I was writing my latest piece for the Hoover Institution’s on-line publication Defining Ideas, I was telling a friend that when my wife and I shop for cars, we pretty much shop for only cars made by Japanese companies. In our experience, and in the data we’ve looked at over the years in Consumer Reports and elsewhere, cars made by Japanese companies* are much more reliable than those made by U.S. companies.
One set of data I’ve looked at that confirms that is on resale prices. Japanese cars tend to maintain their value much better than American cars.
He told me some other data that also confirm this. Last year he shopped for a used car and wanted a reliable 2012 model. Because he wanted it to be reliable, he priced an extended warranty. For U.S. cars, he didn’t find the kind of warranty he wanted for under $5,000. For the car he ended up buying, a 2012 Nissan Versa with 34,000 miles on it, he was able to get a 5-year, 100,000-mile bumper-to-bumper warranty with a $50 deductible for only $1,400. And if he took it for repairs to CarMax, the seller, the deductible would be zero.
Nice market evidence.
*”Cars made by Japanese companies” and “cars made by U.S. companies” are wordy terms, so henceforth I’ll use the term “Japanese cars” and “American cars” even though I’m aware that many Japanese cars are made in the United States. Indeed, there really is no such thing as an American or Japanese car that is mass-produced; they’re really world cars.
READER COMMENTS
Armin Chosnama
Sep 3 2019 at 6:53pm
Very interesting take.
Since our health insurance is basically a healthcare warranty, the same would apply to the reliability of humans, no? (Tongue slightly in cheek here).
robc
Sep 4 2019 at 11:18am
Actually yes.
In a free market health care system, unreliable humans would require a larger payment.
Robert EV
Sep 6 2019 at 1:36am
Cars are completely understood. A person with the right technical specifications, fabrication equipment, and software can build one of any model from the ground up, regardless of make or model.
Humans aren’t nearly as simple, and unfortunately particular makes (ethnic heritage) and models (sexes), are more or less studied than others.
And this really depends on what you’re ensuring (health care, life insurance, long-term care, pension insurance). A massively obese, very unhealthy eating person may statistically be dead before they cost the insurer as much as a normal-weight person who doesn’t exercise and eats a typical diet. And both of those people may be better than an alcoholic in terms of health care costs.
Dylan
Sep 3 2019 at 7:10pm
Had this experience a few years back buying a refrigerator from Sears, the extended warranty was nearly the cost of the fridge brand new, so I declined, but sure enough we started having problems before the 2 year mark, and had to replace it entirely by year 4 or 5 I think. Replacement was a more expensive model (which according to the experts actually tends to be worse for reliability) but the extended warranty was much more reasonable, so we ended up buying it (and hoping I’ll never have to use it).
Experience with the first one wasn’t a total loss though, as I ended up learning a lot more about how refrigerators work and was able to do the troubleshooting and repairs myself (thanks Youtube videos!)
speedmaster
Sep 3 2019 at 8:16pm
Great post. All cars are soooo much better than they were just 15-20 years ago. Even the “worst” car is a huge improvement. But Japanese cars in particular seem to be even at the top of that. When I was a kid circa 1980, if you were at a family gathering and you heard that some uncle had reached 100,000 miles on a car it was a lively discussion. Now 100,000 miles is table stakes for even the cheapest new car.
Alan Goldhammer
Sep 4 2019 at 7:45am
I agree with this post. We have only had Hondas since 1992 and other than an occasional dead battery or a flat tire have had no mechanical issues. Cars are usually kept for 12 or so years before trading in (which is mainly done because of enhanced safety features on newer models).
Vivian Darkbloom
Sep 4 2019 at 1:27pm
I understand that the cost of an extended warranty might be a good indicator of reliability and I was with you and your friend right up until you stated that he actually bought the extended warranty.
Perhaps this person could not afford the possible repairs (above and beyond the *certain* $1,400 cost of the warranty). This might have been a good car purchase, but it probably was not a smart financial bet. The car was likely worth $6-8K. If sellers are making good returns on extended warranties (and they are–most often the margins are higher than on the product itself) why not take those odds yourself if you can afford the risk? Every time I’m offered an extended warranty, I ask the salesperson whether they are trained to push the product. Once they know you are not going to buy they are usually quite frank–“yes, because that’s where we make the most money”.
Freemark
Sep 5 2019 at 9:46am
Buying the warranty can be a good idea and a financially good decision. First, the argument that you should’t buy it because the company makes money on it is ridiculous. By that argument you shouldn’t buy anything including the car. Second, one way they make money on that warranty is that the warranty company pays at much less per repair than you do because they have a fuxed contract with dealership. On average they probably pay 30% less per repair. So the fact the warranty company makes money isn’t a good indicator of it being a poor value. Third, the warranty is usually financed with the car making it much easier to budget. For most people $50 a month is much easier to budget fir than a surprise $2000 repair. As most adults have experienced those large surprise payments often come in threes. Having at least one of those paid for can be a godsend if you don’t have $10,000 in ready savings. Fourth, the cost of the warranty can be negotiated or it can even bought at another dealer to get a better price making it a better value. They don’t have to be a ‘big money maker’ for the dealer.
I’m not saying you should always buy the warranty, but there are plenty of good financial reasons to do so. It depends on the persons situation, and of course, on the price of the warranty.
Vivian Darkbloom
Sep 6 2019 at 1:52pm
” First, the argument that you should’t buy it because the company makes money on it is ridiculous. By that argument you shouldn’t buy anything including the car. ”
It is not at all “ridiculous” because the difference is that most people need a car and don’t have the means to make one(!) but that does not mean that they need an extended warranty and can’t self insure. One of the advantages of having a reasonable level of savings is that one does not need to worry about budgeting a $2,000 repair. Self-insuring relatively small amounts such as this is a pretty good bet on a better return on one’s money than the warranty. It may be true that “most people find it easier to budget $50 per month” (times how many such extended warranties? Apple computer, telephone, etc. a refrigerator, etc? ) but that is exactly the financial problem.
Billy Kaubashine
Sep 4 2019 at 1:49pm
I assume that lease payments would be a reflection of depreciation expectations, in the same way warranty payment would be a reflection of reliability expectations.
Robin Pejsa
Sep 4 2019 at 3:05pm
The higher the residual percentage, the higher the estimated value. Lower payments on nicer cars pricing being the same.
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