May 30, 2007

Worldwide Automotive Warranties:

Sure there are good numbers for the U.S.-based automakers, but what about the rest of the world? With a few educated guesses, we're able to estimate the worldwide auto warranty number to be $36.9 billion, roughly 3.4 times U.S. figures alone. But it's different for every size of vehicle, and exchange rate and warranty duration also have an effect.

The question was asked: how much is spent on warranties worldwide? The answer, in round numbers, is something on the order of three times the $28.1 billion total spent by U.S.-based manufacturers.

But round numbers will never do. In just the automotive OEM sector, we believe the multiplier is around 3.4, meaning that all auto OEMs worldwide spend about 3.4 times as much as just the U.S.-based OEMs do. Those U.S.-based automotive OEMs reported $11 billion in warranty claims last year, up slightly from $10.9 billion in 2005. But most of that was reported by General Motors and Ford -- surely there are other auto manufacturers in the world?

It depends what you mean by automotive. In the expansive definition used by Warranty Week, automotive means anything with wheels that can move under its own power (except airplanes). That includes everything from motorcycles to fire engines as well as recreational vehicles and some farm and construction equipment. But some people restrict their definition to passenger cars, trucks, and buses, and they exclude all the off-road vehicles.

For this exercise, we're going to stick with the restrictive definition of automotive, and take what we know and use it to extrapolate a worldwide number for automotive warranty. So what do we know? There are good warranty numbers available for both passenger car makers such as Ford and GM, as well as for truck and bus makers such as Navistar and Paccar. There are also some good estimates available for Toyota, Honda, and DaimlerChrysler, but their warranty numbers are somewhat inflated by the currently low exchange rate of the U.S. dollar.

Auto Production Numbers

It turns out that those companies make just under half the world's vehicles, according to 2005 statistics published by the Organisation Internationale des Constructeurs d'Automobiles (OICA), a Paris-based trade group that tracks vehicle production by both company and by country.

According to the OICA, there were 65,318,744 vehicles manufactured worldwide in 2005, of which 45,855,503 were passenger cars, 16,657,683 were light trucks, 2,467,985 were heavy trucks, and 337,573 were buses. General Motors was in the lead with a 13.9% market share, followed by Toyota at 11.2% and Ford at 9.9%.

But keep in mind that every vehicle counts as one, whether it's a bus or a sedan. GM's share of passenger cars and light trucks was 14.5%, followed by Toyota at 11.4% and Ford at 10.3%. Let's take a closer look at just those numbers.

Table 1
Automakers Worldwide
Top Car & Light Truck Producers, 2005
(in units)

   Total   Cars &  
  Company Vehicles Light Trucks
  General Motors 9.1m 9.0m
  Toyota 7.3m 7.1m
  Ford 6.5m 6.4m
  Volkswagen 5.2m 5.2m
  DaimlerChrysler 4.8m 4.3m
  PSA Peugeot Citroën 3.4m 3.4m
  Honda 3.4m 3.4m
  Nissan 3.5m 3.3m
  Hyundai 3.1m 2.9m
  Renault 2.6m 2.6m
  Other 16.3m 14.9m
  Total 65.3m 62.5m

Source: Organisation Internationale des Constructeurs d'Automobiles (OICA)   

These figures include all brands owned by the parent company, so GM includes not only Buick and Saturn, but also Opel and Holden. Ford included Jaguar and Volvo cars. Toyota includes Lexus and VW includes Audi. And so on. Suffice it to say that the ten manufacturers on the chart had a collective 76% share while the 38 others listed by OICA had a 24% share of the worldwide market in 2005.

In the heavy truck and bus segments, the major players are a little different. GM and Ford don't even make the top ten based on units produced, though Toyota, Hyundai, and Nissan do. And the market leader is DaimlerChrysler, with a 17.7% share of the 2.81 million unit market.

Table 2
Automakers Worldwide
Top Heavy Truck & Bus Producers, 2005
(in units)

   Total   Buses &  
  Company Vehicles Heavy Trucks
  DaimlerChrysler 4.8m 496k
  Isuzu 510k 285k
  Toyota 7.3m 238k
  Hyundai 3.1m 238k
  Volvo 215k 206k
  Dongfeng 593k 190k
  Paccar 150k 150k
  Nissan 3.5m 146k
  Tata 419k 126k
  Navistar 122k 122k
  Other 44.6m 608k
  Total 65.3m 2.81m

Source: Organisation Internationale des Constructeurs d'Automobiles (OICA)   

The ten companies in Table 2 together hold a 78% share of the heavy truck and bus market. The 38 others listed by OICA hold a 22% share, although only 17 of them actually make heavy trucks and/or buses. But the point is that these are the market leaders in a fairly consolidated industry worldwide. Now let's take a look at their warranty numbers.

Warranty Estimates

Based upon the facts and figures included with 2005 annual reports, we're fairly confident of roughly $20.8 billion in warranty accruals worldwide, which we're chopping up into $18.2 billion for passenger cars and light trucks and $2.5 billion for heavy trucks and buses (numbers may not add due to rounding). The rest are estimates, accounting for about 44% of the total we present in Table 3 as representing the worldwide accruals made in 2005 by the automotive industry: $36.9 billion.

Table 3
Automakers Worldwide
Warranty Accruals in 2005
(in millions of US dollars)

   Warranty   Cars &    Trucks &  
   Accruals Light Trucks Buses
  Reported by Co. $20,754 $18,238 $2,517
  Estimates by WW $16,194 $13,442 $2,752
  Total Worldwide $36,948 $31,680 $5,269

Source: Warranty Week   

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.

Table 4
Automakers Worldwide
Warranty Accrual Estimates in 2005
(in millions of US dollars)

   Warranty   Cars &    Trucks &  
   Accruals Light Trucks Buses
  DaimlerChrysler $6,215 $5,223 $992
  General Motors $5,159 $5,055 $104
  Ford $3,949 $3,806 $143
  Volkswagen $3,011 $2,943 $68
  Toyota $2,543 $2,113 $430
  PSA Peugeot Citroën $1,964 $1,964 $0
  Nissan $1,893 $1,631 $262
  Hyundai $1,565 $1,139 $426
  Renault $1,454 $1,454 $0
  Fiat $1,281 $1,061 $220
  Honda $1,070 $956 $114
  Other $6,843 $4,335 $2,509
  Total $36,948 $31,680 $5,269

Source: Warranty Week   

The manufacturers named in Table 4, by our estimates, accounted for roughly 86% of the passenger car and light truck accruals and 56% of the heavy truck and bus accruals. Together, they represented about 81% of the worldwide total of $36.948 billion in accruals that we estimate were made for vehicles sold in 2005.

Notice how the numbers are chopped up differently for each manufacturer. Accruals for PSA Peugeot Citroën and Renault are completely in the passenger car column. For GM, Ford, and Volkswagen, 96% or more is on the passenger car side. And these shares are different from the units listed in Tables 1 and 2, because the accruals per unit are much larger for heavy trucks and buses, even if the percentages per sales dollar are similar.

By our estimates, DaimlerChrysler accounts for the largest share of warranty accruals worldwide, accounting for 16.8% of the total. Of course, its share would be much lower if it weren't for the strength of the euro, and if its subsidiaries made fewer heavy trucks and buses. And we don't think the sale of Chrysler is going to change this much, because neither of those problems is U.S.-centric (although it would be nice to see some standalone warranty numbers from Detroit Diesel and Freightliner).

GM is second on the list with a 14% share of the total (but a 16% share of just the passenger car and light truck total). Ford had a 10.7% share of the accruals, which is very close to its share of the units. This means that Ford is only slightly above the industry average for accruals per unit. But again, keep in mind that a unit can be anything from a Ford Focus to a Freightliner Columbia. And since Ford makes so few heavy trucks, its company-wide accruals are actually somewhat above the average for passenger cars only.

It Table 5, we'll summarize some of the key numbers for these top warranty providers. The accrual rate is a simple percentage of automotive revenue that each company puts aside each year to finance future warranty claims. The accrual per vehicle is a simple division of the accrual totals by the OICA numbers for vehicle production.

Table 5
Automakers Worldwide
Warranty Accrual Rate per Vehicle in 2005
(estimates in US dollars and percent)

   Auto   Accrual   Per 
   Revenue Rate Vehicle
  DaimlerChrysler $166.6b 3.7% $1,291
  Toyota $164.6b 1.5% $347
  General Motors $160.2b 3.2% $567
  Ford $153.5b 2.6% $608
  Volkswagen $112.8b 2.7% $578
  Honda $81.7b 1.3% $311
  Nissan $80.6b 2.3% $542
  PSA Peugeot Citroën $66.6b 2.9% $582
  BMW $64.6b 1.4% $660
  Hyundai $57.6b 2.7% $506

Source: Warranty Week   

Again, DaimlerChrysler is at the top of the chart, with the highest accrual rate and the highest accrual per vehicle. We're estimating that the company sets aside $2,000 per truck and $1,200 per car, which averages out to the $1,291 figure listed in Table 5. In comparison, the accrual for GM's passenger cars is around $559 and for Ford's cars it's $593. For Toyota, it's around $300 for cars and $1,800 for trucks.

Reasons for Differences in Rates

One should not take these figures as evidence of quality, however. It's not that simple. First, each company has a different product mix, and these totals blend cars with trucks, even though their warranty accrual rates are different. Second, there's the assumptions we made about currency conversions, which might be accurate over the course of a whole year but are constantly changing from day to day. And third, keep in mind that North American warranties are generally longer and therefore more costly than Asian or European warranties -- even for Ford and GM, which have subsidiaries all over the world.

For instance, a Toyota passenger car manufactured and sold in the U.S. might require accruals significantly above the $300 level per vehicle, because the warranty is longer and the cost of repairs is higher. In Europe, the typical warranty might be only two years, but it's currently more expensive to do business in the euro zone. So take these as worldwide averages and totals, and nothing more.

AMT Warranty Corp.
Fulcrum Analytics
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