While the top Detroit-based makers of passenger cars are now suffering from soaring warranty and recall costs, some of the truck makers and their suppliers who were going through manufacturing crises a couple of years ago are now on the mend.

This year, as part of our 12th annual research report on every major industry's product warranty expenses, we're going to divide the automotive market into two groups: large trucks/heavy equipment and passenger cars/light trucks/small vehicles. Automotive usually accounts for almost half of all warranty activity, and this year the sector is even larger.

Now that Chrysler and Fiat have rearranged their company so there is a unit reporting their U.S.-based warranty expenses, the automotive industry totals need to be revised upwards by several billion dollars. We could only guess what Chrysler's warranty costs were like when they were part of Daimler and when they were privately-held. But now we have exact data stretching back to 2009 that needs to be included.

The data for past years has always included the worldwide spending of multinational U.S.-based OEMs such as GM and Ford. And it has not included the U.S. warranty expenses of top OEMs such as Toyota and Honda, even though many of the vehicles they sell in the U.S. are made in the U.S. The U.S.-based expenses of international suppliers such as Autoliv and Robert Bosch are not included, but the worldwide warranty expenses of Delphi and Visteon are.

In the truck category, we're not including the expenses of Mack or Detroit Diesel, because they are owned by European-based companies. In the bus category, we're not including the expenses of British and Canadian manufacturers, but we are including the worldwide warranty costs of Navistar International Corp. In other words, it's still an incomplete and imperfect picture of the U.S.-based automotive market.

Trucks vs. Cars

With that in mind, what we've done this week is to take the 218 U.S.-based automotive manufacturers and divide them into two groups. But rather than splitting them into OEMs and suppliers, what we've done this time is to separate them based upon the size of the vehicles they manufacture.

The large vehicle category includes 67 companies that make everything from dump trucks to fire engines. At the top of the list are off-road vehicle makers such as Caterpillar Inc. and Deere & Co., followed by on-highway truck, bus, and recreational vehicle makers such as Navistar and Paccar Inc. Then there are truck suppliers such as Cummins Inc., Allison Transmission, and Eaton Corp. And there are many others making some kind of construction equipment, mining vehicles, vocational vehicles, emergency vehicles, diesel engines, drivetrains, and other truck, bus or RV components.

The passenger car and small vehicle category includes pickup trucks, SUVs, and everything smaller, including the component suppliers, repair tools, aftermarket parts makers, automotive retailers, and even some dealerships that retain their own additional warranty liabilities (e.g. on used car sales). All together, there are 151 companies included under this heading.

General Motors, Ford, and Chrysler are the leaders here, but there are also other on-road OEMs such as Harley-Davidson and Tesla Motors, and off-road OEMs such as Polaris Industries Inc., Arctic Cat Inc., Hyster-Yale Materials Handling Inc., and Toro Co. And then there are all their suppliers.

Parts makers such as Standard Motor Products Inc., LKQ Corp., Delphi Automotive, and Visteon Corp. are in this category, as are retailers such as Advance Auto Parts and Pep Boys who cover some of their battery and tire sales with additional warranties.

Overall, in most years, large vehicles comprise about 20% to 25% of the total automotive warranty expenses tabulated, while the passenger cars and small vehicles comprise the remainder. In 2014, large vehicles comprised 28% of $15.65 billion in claims, 26% of $16.64 billion in accruals, and 26% of $29.76 billion in warranty accruals. Small vehicles comprised the balance.

Top Seven OEMs

In Figures 1, 2 and 3, we're detailing the reported warranty metrics of the top three passenger car makers, the top four large vehicle makers, and all the others in this group of 218 companies. Figure 1 shows the 12-year totals for warranty claims paid. All three of the Detroit carmakers saw massive increases in claims paid, with Ford up 24%, Chrysler up 32%, and GM up 41%. This, in turn, drove the small car portion up from $9.0 billion in 2013 to $11.3 billion in 2014. For Chrysler, rather than pretending they had no warranty expense during the years 2003 to 2008 and leaving it blank, we're inserting a placeholder estimate that simply repeats their 2009 totals retroactively across the missing years. If we ever get better data, we will substitute it for our estimates.

Meanwhile, among the large vehicle OEMs, Cat and Deere saw claims grow modestly; Paccar was up massively, and Navistar was actually down by 21%. Overall, the large vehicle companies saw claims rise by about seven percent to $4.3 billion.

Overall, automotive claims were up 20% in 2014, hitting a new record high of $15.65 billion. It was both the biggest annual increase and the highest total we've recorded since 2003. From the looks of the chart above, the big three carmakers and their widespread recalls seem to be the culprits.

The annual increases are even more massive in the chart below, which tracks warranty accruals made by the automotive manufacturers. The small vehicle makers saw a 34% jump to $12.3 billion in accruals made, while the large vehicle makers saw only a 10% jump to $4.4 billion. General Motors alone, however, boosted its accruals from $3.2 billion to $5.5 billion -- a 71% increase.

Then again, some of the other accrual increases were also quite large. Cat was up 36%. Chrysler was up 35%. And Paccar was up 89%. Then again, in the other direction, Navistar was down by 36%, and Deere showed a slight decrease in accruals as well.

The increases are not positive developments, because as readers are well aware, accruals are what you make now in anticipation of the claims you expect to pay later. So what these top automotive companies are signaling is their expectation that claims are going to rise yet again in 2015.

Flat Accruals for Three Years

Note that from 2011 to 2013, accruals hardly changed at all. Navistar suffered and Cat reduced, but overall the total remained very close to $13 billion. And that was because the passenger car makers kept their accruals almost the same for three years in a row. And it was only after they increased their accruals that the industry total also shot up.

Once again, this suggests that the recent passenger car recalls are the probable cause for the radical change in the trend seen in 2014. It's simply the weight they have in the averages. While the passenger cars and small vehicles account for 75% to 80% of the overall automotive warranty expenses, the Detroit Three account for 75% to 80% of the small vehicle expenses. In contrast, the top four large vehicle OEMs account for only about 50% to 60% of their category's total expenses.

Our third metric is the ending balance in the collective warranty reserve funds of these 218 automotive companies. As can be seen in Figure 3, they once again set a record in 2014, and once again the culprit seems to be the top three Detroit carmakers.

General Motors actually had an even higher warranty reserve balance at midyear, with the June 30 total topping $10.5 billion. This was right after it began to financially prepare for the massive cost of its recalls, in part by adding almost $4.7 billion in accruals to its fund during the first half of the year.

Chrysler and Ford each boosted their reserves by more than 20% last year, as did Paccar. Deere and Cat allowed for small increases, while Navistar cut its balance by $152 million. Overall, there was only a 3.9% increase in reserves held by the large vehicle makers, as opposed to a 24% jump by the small vehicle companies.

Warranty Expense Rates

The results in Figure 4 should come as no surprise, given the increases seen in Figures 1 through 3. Thanks in part to GM's massive boost in accruals, the average accrual rate of the 151 small vehicle companies rose to its highest point in June 2014. The average claims rate was back up to almost 1.7%.

Another reason for the increasing expense rates is the slight decrease that GM and Ford saw in their product sales totals last year. Since the expense rates are calculated by dividing claims and accruals by sales, any decrease in the latter magnifies the effect of increases in the former. However, even Chrysler, which reported a 15% boost in sales, couldn't overcome the effects of a 32% jump in claims and a 35% jump in accruals.

Overall, sales growth was higher for the small vehicle makers than for the big vehicle makers. Also, sales growth was higher for the suppliers than for the OEMs. And it was highest of all for the small vehicle suppliers, which saw product sales advance by 5.6% from 2013 to 2014. In contrast, the large vehicle OEMs saw sales decline by 1.3%, with the sales of agricultural-oriented companies such as Deere and AGCO Corp. declining even faster.

Among the small vehicle manufacturers, Polaris saw an 18% sales gain, and both Toro and Harley-Davidson were up by 6.5%. Hyster-Yale Materials Handling Inc., a spin-off of NACCO Industries Inc., saw product sales rise by 3.8%.

Narrow Range of Readings

Note, however, that despite the massive impact of the recent recalls, and despite the massive impact that the Great Recession had on sales, almost all the expense rate data in Figure 4 is between 1.1% and 2.1%. This is a rather narrow range, especially over 12 years. Had we expanded the vertical axis, these lines would look even flatter.

Keep in mind that the customer-facing OEMs in this small vehicle category almost always have higher warranty expense rates than their suppliers. But this is the true average warranty expense rate of the group as a whole. In other words, when all the payments and reimbursements are taken into account, the cost of warranty for small vehicles is generally between one and two percent of the product sales revenue generated by all the industry players, including both OEMs and suppliers.

Surprisingly, it turns out to be much the same in the trucking industry. It's a surprise because frequently the different components of a truck -- chassis, engine, cab, etc. -- are covered by separate warranties from different companies. The engine might be Cummins while the transmission might be Allison. And it's a Kenworth truck so that part of the warranty is covered by Paccar.

But in Figure 5, we once again see that except in unusual times, the cost of warranty for large vehicles is generally between one and two percent of product sales. In fact, except for that recessionary bump in 2009 and a handful of low data points in 2010-2012, the 12-year baseline is in an even tighter range of 1.5% to 2.0%.

What this means is that both large and small vehicles end up costing around two percent or less in warranty costs. And this is true whether the OEM issues a bumper-to-bumper warranty or the OEM and the major component suppliers each issue their warranties separately to the customer.

Inefficient Supplier Recoveries?

In other words, perhaps the fact that passenger car OEMs see higher expense rates while their suppliers see lower rates has more to do with the inefficiencies of the supplier recovery process and less to do with the inherent warranty cost of the product? And then with the larger vehicles, where this inefficient middleman is not present, each OEM/supplier ends up paying its fair share of the warranty cost?

That's the surprising conclusion: when you add up all the claims and accrual totals of the U.S.-based passenger car and truck industries, and all the revenue totals of all the manufacturers in those industries, the cost of warranty in both cases ends up being roughly one to two percent, except when sales are soaring or plummeting, and are therefore distorting the calculations.

Taken a step further, if truck component suppliers such as Cummins and Eaton were issuing their product warranties to Navistar and Paccar instead of directly to their customers, then Navistar and Paccar would probably have higher warranty costs, and Cummins and Paccar would have lower warranty costs, because of the inefficiency of having an OEM act as the intermediary.