Why count accruals instead of claims? It's a more current and concise number. Accruals are what you set aside at the time of sale in anticipation of future warranty claims. Since we're talking about units produced in 2005, it makes sense to talk about accruals made in 2005 for those vehicles, even if the money's not spent until a year or two later (or longer, with some powertrain warranties now extending for up to 10 years).

In contrast, claims represent what was spent on vehicles produced and sold in the past. Some 2005 vehicles may have generated warranty claims in 2005, but it's more likely the bulk of the spending came from vehicles produced in 2004 and 2003. So those amounts spent in 2005 don't correlate as well as accruals do to the number of vehicles produced in 2005.

Accrue at the Time of Sale

Using accruals also makes it much easier to calculate a per-vehicle figure. In theory, a manufacturer is supposed to estimate the amount they expect to spend on claims over the life of the warranty, and they are to put that amount aside in a warranty reserve at the time a vehicle is sold. In practice, the estimates of future spending are never exactly right, so manufacturers must periodically add or remove funds from the warranty reserve as their predictions turn into actual facts with the passing of time.

Therefore, if we know the number of vehicles and the amount of accruals, we can calculate an amount per vehicle using simple division. But not so fast. The accrual rate is different for each type of product. Trucks and buses cost a lot more than passenger cars, and 2% of $200,000 is a lot more than 2% of $25,000. So to make our estimates as accurate as possible, we first have to chop up the accruals by vehicle type.

What we did in Table 4 is list the 11 manufacturers we believe accrued $1 billion or more for warranties issued during 2005. All the estimates are in U.S. dollars, which required some currency conversions. The rates we used were $1.24 to the euro and 117 yen to the dollar, plus a host of other currencies for manufacturers further down the list.

First, we created an estimate for trucks and buses. Both Navistar and Paccar were conveniently accruing close to $1,800 per vehicle in 2005, so we used this as our industry benchmark. We pegged some companies a little above that rate per vehicle, and others a little below. And interestingly, we found that truck and bus makers based in markets such as China and India were accruing at much lower rates than their European and North American counterparts. This, we believe, is due in part to shorter warranties and lower labor rates.

Top Auto Warranty Providers

Once we had good estimates for truck and bus accruals, we worked backwards to derive estimates for passenger cars and light trucks. For some we already knew the company-wide totals, while others were best guesses. Readers should consider all the data in Table 4 to be estimated, however. Even the currency conversions render the known data from DaimlerChrysler, Toyota, and Honda to be speculative, because the rates change from day to day and month to month.