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July 23, 2009

Worldwide Auto Warranties, Part Two:

It turns out that Volkswagen, BMW, and Fiat do disclose their warranty data, if one knows where to look and what to look for. And thanks to the help of a reader who's fluent in five languages, we now have hard numbers for the warranty costs of more than half the world's vehicles.

After publishing our annual Fourth of July holiday look at the warranty expenses of companies based outside of America, we heard from longtime reader Stephan Jegl, director of AWM Conseil & Management, regarding some additional research he was conducting on European automotive OEMs.

What, he asked, was the comparable cost of warranty at Volkswagen, Renault, and some of the other top European OEMs? Unfortunately, we replied, while some of those companies occasionally mention a warranty-related fact or figure here or there, Daimler AG was the only one consistently publishing the equivalent of a FIN 45 warranty table in its financial reports.

Within a few days, Jegl was back with more questions. First, he said, could he somehow contribute his language skills in a hunt for additional data? "I'm highly passionate about warranty management," he said, "so don't hesitate to 'abuse' me as a free translator. I'm fluent in German, English, French and even Italian."

Warranty Background

Stephan Jegl

Jegl has been heavily involved with warranty since 2004, first as a manager at the European offices of ArvinMeritor and then as a volunteer negotiator at the Fédération des Industries des Équipements pour Véhicules (FIEV), the French industry association for auto parts manufacturers. He left ArvinMeritor last year and formed his own consultancy group, AWM Conseil & Management Sarl, based two hours west of Paris. The AWM in the name, by the way, stands for Automotive Warranty Management.

Jegl said AWM is a consultancy for A) global automotive system suppliers who want to improve and standardize their warranty process and organization, with support of smart and efficient tools, B) mid-sized auto parts suppliers, especially those located in Germany, who don't have the budget to pay a full-time warranty expert. He said AWM also is the European contact for Ubiquiti Inc., an Ann Arbor, Michigan-based warranty claims analysis and early warning solutions company.

So we put him to work. As a starting point, we pointed him to the FIN 45 warranty table in the English version of the Daimler annual report. He found the corresponding table in the German version. Then he found something similar in the Volkswagen, Fiat and BMW annual reports. Voilà! We had enough new European OEM warranty data to merit a follow-up report.

Despite the French address, Jegl is native German. After working for French and American companies for 15 years, he is fluent in numerous languages. "I studied mechanical engineering in Germany, then moved to Belgium, then France," Jegl explained. "During my studies I learned Italian and Spanish. My first job after school included a lot of travel to Italian injection tool makers. I loved speaking Italian with them and it still is my favorite language, but I must admit that I needed some help out of google.it to translate the Fiat annual report."

Gewährleistungsverpflichtungenwoche?

Jegl said that despite his extensive language skills, the German, French, and Italian terms for warranty claims were still somewhat difficult to find. "I mean, there is translation from purely linguistic aspect, but there are also local vocabulary and cultural influences," he said.

"The German OEMs use 'Regress' or 'Regressierung von Gewährleistungskosten,' which means 'Charge-back of warranty cost.' In the annual reports I also read 'Gewährleistungsverpflichtungen,' which means 'Obligations from warranty.' Germans also use the term 'Reklamation,' which means 'complain,'" Jegl said.

For many years, both during and after the Chrysler era, Daimler has reported its warranty expenses to the U.S. Securities and Exchange Commission in English. Volkswagen and BMW did not, though they did send annual reports to their shareholders. And those annual reports contained warranty data, if one knew where to look and what to look for. So Jegl may be among the first to dig out that data and translate it into English. And Warranty Week, we suspect, is the first to publish it in any language.

Fiat also used to report to the SEC, but stopped doing so for some reason in 2007. We had Fiat's warranty data for the years 2002 to 2006. Jegl was able to translate additional data for the years 2007 and 2008. "Fiat shows the provisions for warranty and technical assistance as 'Fondo per garanzia ed assistenza technica' or as 'interventi in garanzia,'" Jegl said, "which means dealer repair actions during the warranty period."

Unfortunately, the French OEMs didn't seem to want to say much about their warranty expenses in any language. Renault just occasionally mentions the word "garantie," Jegl said, and it doesn't provide any actual warranty cost figures. Neither does PSA Peugeot Citroën, though its annual report tells the story of how former PSA president Christian Streiff (who recently retired) put so much recent effort into reducing the company's warranty spending. Evidently, it worked, because PSA wrote in its latest annual report that it reduced warranty payments to dealers by €500,000 last year. But it doesn't reveal what the old or the new claims rate might be, and it doesn't include a FIN 45-style warranty table.

Half the World's Auto Warranties?

In the ten charts that follow, we will attempt to enhance the story told in the July 2 newsletter, adding in the fresh data for VW, BMW and Fiat, and including the corresponding data for GM and Ford, as well as repeating the data for Daimler, Toyota, and Honda. These eight OEMs easily control more than half of the world's passenger car and light truck production, and probably also pay most of the industry's warranty claims.

Let's start with BMW. Officially called the Bayerische Motoren Werke AG, the German company is known throughout the world for its luxury passenger cars. But as we shall see, last year it apparently set aside the lowest proportion of revenue among its peers to finance future warranty claims, and made the second-lowest amount of warranty accruals per vehicle.

In Figure 1, we're tracking the total amount of claims and accruals for BMW, or in European accounting terminology, its utilizations and additions. Claims are in red and accruals are in green. We've left the data denominated in its original reported euro, so that it reflects exactly what the company itself reports it spent, rather than what we think that amount might be in another currency.


Figure 1
BMW AG
Warranty Claims & Accruals, 2002-2008
(in millions of euro per year)

Figure 1


As can be seen in Figure 1, there appears to be a downward trend in at least BMW's accruals, with claims remaining closer to the €1.2 million per year mark. But be careful. In a declining market, accruals would naturally fall faster than claims, because of the lag time involved. In 2008 one is accruing for repairs expected in 2009 and 2010, while paying claims for cars sold in 2007 and 2006.

If we could skip ahead briefly to Figures 5 and 6, which take the accrual totals of Figures 1 to 4 and recalculate them as A) a percentage of revenue and B) per vehicle, it is clear that BMW also enjoyed a downward trend for those metrics from 2003 to 2006. But since 2006, warranty costs seem to have crept back up a bit, although they're still far below the levels of 2005.

Using the Manufacturers' Own Reports

The BMW statistics also include the Mini and Rolls-Royce brands. The Volkswagen statistics also include Audi, SEAT, Skoda, Bentley, Scania, Lamborghini, and several other nameplates. If the proposed merger with Porsche Automobil Holding SE comes to pass, that company's luxury hot rods may soon be included as well. Daimler used to include Chrysler, Jeep, and Dodge vehicles with their own. Basically, we're relying on the manufacturers to decide how many vehicles they made per year, and how to classify and account for vehicles made by their joint ventures, investments, acquisitions, and divestitures.

The Volkswagen statistics in Figure 2 reveal rising claims and accruals. But again, just the amounts don't tell the whole story. Thanks to somewhat proportionally rising sales totals, warranty costs both as a percentage of revenue and on a per-vehicle basis have been relatively unchanged over the past six years. Those trends can be seen in Figures 5 and 6.


Figure 2
Volkswagen Group
Warranty Claims & Accruals, 2003-2008
(in millions of euro per year)

Figure 2


As far as we know, the VW warranty metrics in Figures 2, 5 and 6 has never before been published in a newsletter. However, it has been published -- one year at a time -- by the company itself in its annual reports. It's just never been published in a time series. Our thanks once again to Stephan Jegl for alerting us to the discovery of this data's existence, and for enabling us to include the world's third-largest car company in the industry statistics from now on. So who out there can help us with Hyundai, Suzuki and Nissan?

What's Included in Warranty Provisions?

There is, however, a bit of a complication. We're not sure if VW is revealing its warranty cost data in a way that makes it comparable to what its peers publish. VW wrote in its annual report: "Cost of sales includes the costs incurred to generate the sales revenue and the cost of goods purchased for resale. This item also includes the costs of additions to warranty provisions."

VW's warranty table is actually labeled "Obligations arising from Sales," rather than as "warranty obligations," which we suspect is why nobody found it until Jegl did. However, in the text below the table, VW explains that while the "obligations arising from sales ... primarily comprise warranty claims," it may also include bonuses, sales incentives, and profit sharing. VW does not break out each of these separately.

We are therefore left with the impression that some of the money in Figure 2 may not be warranty at all, and that the percentages in Figure 5 and the per-vehicle amounts in Figure 6 may also be overstated.

Is this pattern repeated by the other OEMs? BMW writes: "Like all enterprises, the BMW Group is exposed to the risk of warranty claims." Some lines later, it adds: "The high quality of BMW Group products, additionally ensured by regular quality audits and ongoing improvement measures, helps to reduce this risk."

BMW's warranty table is included in a section entitled "Other Provisions," and is labeled as "Obligations for ongoing operational expenses." Those provisions, BMW states, "comprise primarily warranty obligations." But the company does not say what else they might include.

Is Daimler's Data Warranty Only?

Daimler, in contrast, seems to explicitly separate warranty costs from non-warranty after-sales obligations. In one section, Daimler explains that "The provisions for product warranties cover, for example, our various contractual warranty programs, 'goodwill' coverage, recall campaigns and buybacks which could result from regulatory requirements." In another section, it explains how its accrual estimates are made.

Daimler's warranty table is actually just one column within a broader "Provisions for other risks" table that also details amounts spent on "sales incentives," "personnel and social costs," and the ubiquitous "other" in additional columns. So we get the distinct impression that what VW and BMW may be bundling together to some degree is being counted separately by Daimler (which is what GM and Ford do).

In Figure 3, the drop-off following the Chrysler divestiture is dramatic. However, keep in mind that both Daimler's revenue and unit sales also fell dramatically. In 2006, the Chrysler brands comprised more than half the parent company's unit sales and almost a third of its revenue. So of course its sale to a private equity firm two years ago caused warranty totals to plummet. By the way, in regards to nothing, did you know that Cerberus was the mythological name of the three-headed dog that guarded the gates of Hades?


Figure 3
Daimler AG
Warranty Claims & Accruals, 2002-2008
(in millions of euro per year)

Figure 3


Chrysler, until it merged with Daimler-Benz AG in 1998, had been filing quarterly financial reports with the SEC. From 1998 until the 80% divestiture in August 2007, DaimlerChrysler AG was also reporting quarterly. But in 2007 and 2008, Daimler AG has chosen to file just once a year with the SEC.

Chrysler, having gone private, has revealed nothing about its warranty costs since August 2007, except the occasional anecdote about falling costs. However, some 2007 and 2008 warranty data is rumored to be part of Chrysler's bankruptcy court paperwork, and anyone who can translate some of that data into English for us is encouraged to contact the editor. And though a 20% investment is far from total ownership, we can't see how Fiat can avoid resuming the SEC filings it unilaterally discontinued making in 2007.

Diverse Product Mix

Speaking of Fiat, the data in Figure 4 includes not only the Fiat brand, but also the Maserati and Ferrari luxury sports cars, the Iveco truck brand, and the CNH Global construction and farm equipment company, in which Fiat holds a 90% stake. But only the passenger cars are included in Figure 6 calculations. This somewhat complicates the per-vehicle data, though it does not affect the percentage-of-revenue calculations in Figure 5.


Figure 4
Fiat S.p.A.
Warranty Claims & Accruals, 2002-2008
(in millions of euro per year)

Figure 4


The Fiat data shows a steady rise in both claims and accrual amounts, but keep in mind that both are rising from unrealistically low levels. For although we realize that the ratios in Figure 5 and 6 are just uncertain approximations, we can also definitively say that a 1.5% accrual rate is too low for a passenger car company. And just as it is unreasonable and unsustainable for one OEM to accrue as much as €1,554 per vehicle for warranty costs, it is equally unreasonable for another to accrue only €163 per vehicle.

As can be seen in Figure 5, Fiat's unusually low warranty accrual rates from the years 2002 to 2004 have risen to a more reasonable level in 2005 through 2008. Thanks again to Stephan Jegl and his Italian reading skills for providing the 2007 and 2008 data points. Although we don't know the composition of what is and isn't a warranty cost at Fiat, we can conclude from the apparent continuity of the 2005 through 2008 data that the definition hasn't much changed over time.

Comparing Companies to Themselves Over Time

Which leads us to a central point of this exercise. While we caution readers from making anything more than general comparisons between companies (not knowing, for instance, whether their "warranty" data include recalls, how they account for parts costs, or even whether rebates or sales incentives are included), we encourage readers to instead compare just a single company to itself over time.

Therefore, as is evident in Figures 5 and 6, BMW is reducing warranty costs while Fiat is increasing warranty costs. That's not necessarily a good or a bad thing. Increases could be caused by a company denying less claims, allowing more goodwill, issuing longer-lasting warranties, or any of several other theoretically beneficial policy changes. Decreases could be caused by a failure to pay dealers adequately for warranty work, tightened or shortened terms and conditions, accidents, floods and thefts that take vehicles off the road prematurely, or any number of other negative trends.


Figure 5
Four European OEMs
Warranty Accrual Rates, 2002-2008
(as a percentage of auto sales)

Figure 5


However, they say a picture's worth a thousand words. And in Figure 5 it's pretty obvious that the accrual rates of Fiat, BMW and Daimler were almost the same in both 2005 and 2008. If we assume that VW's warranty numbers are overweight thanks to non-warranty costs, perhaps if this was an exact Apfel zum Apfel comparison they might also be in the same vicinity? In other words, could it be that the 2.4% to 3.7% band is something of a natural home for European carmakers? Could it be that anything falling within this range is simply business as usual?

Accruals Per Vehicle

Now we step into an area sure to cause some controversy. But because we now have warranty data for the top five automakers in the world, and eight of the top 20 OEMs, we couldn't resist. Despite their use of euro, yen and dollars, despite the different tax systems and accounting principles, and despite the different ways they count warranty, we think the major OEMs have a lot in common. So how much does each OEM set aside per vehicle sold to finance future warranty work? Is there also a natural range for that metric?

In Figures 6 through 10, we have grouped the major OEMs of Europe, the United States, and Japan, using the same scale for each and basically the same time span. We should note that Volkswagen did not make any warranty disclosures in 2002, which is why that data point is left blank. And we should also note that the Japanese companies traditionally end their fiscal years on March 31, so the data for 2009 is for the year beginning April 1, 2008 and ending March 31, 2009. But except for VW, each time series is for seven complete years.

Figure 6 shows that at least three of the four European OEMs are also more or less in agreement as to the appropriate amount to set aside in terms of accruals per vehicle, despite wide differences in unit prices. In 2008, BMW accrued €762.90 per vehicle, while VW accrued €812.66 and Daimler accrued €883.39 per vehicle. With the dollar trading at around 0.72 for the year, that's a spread of roughly US$1,062 to US$1,230 per vehicle.


Figure 6
Four European OEMs
Warranty Accruals per Car, 2002-2008
(euro per vehicle)

Figure 6


It wasn't always so cozy at the €800 level. BMW used to accrue substantially more per vehicle, while the spike in the Daimler data suggests that the company had one very bad year in 2007 (was it the Mercedes E-Class?). Over time, VW has been the most consistent. And as mentioned, Fiat has increased its accruals from unrealistically low levels in the past to what is at least comparable to the others now.

With Fiat, we excluded both the Iveco and CNH units to calculate the number of passenger cars sold, though we included both Maserati and Ferrari (they are, after all, passenger cars). We also excluded Daimler's trucks, and Honda's motorcycles and generators, in an effort to isolate just how much each company might be accruing per passenger car.

Of course, these assumptions change the results, because there's no doubt that your typical heavy truck requires a larger accrual than a Fiat 500. However, we're also estimating that a typical Maserati GranTurismo sports car carries four times the accrual of an Iveco box truck, and roughly 18 times as much as a Cinquecento. So even though Maserati sells significantly fewer units than Fiat, it still raises the company's average accrual a little bit. And still Fiat comes out low. Go figure.

Figures 7 through 10 are included here purely for reference purposes. Note that the Americans are accruing less than half as much per vehicle as the Germans, and are setting aside a considerably lower percentage of revenue to pay for warranty work. Although, if sales incentives were included in the GM and Ford numbers, that statement might not be true.


Figure 7
Two American OEMs
Warranty Accrual Rates, 2002-2008
(as a percentage of auto sales)

Figure 7


In Figure 8, keep your eye on Ford. That 2008 drop is partly thanks to the divestiture of Jaguar Land Rover, and partly due to some quality-raising initiatives begun years ago that are finally bearing fruit. GM, on the other hand, has remained consistent at a level just above the US$500 mark per vehicle for multiple years. With lengthened warranties, that's also something to be proud of.


Figure 8
Two American OEMs
Warranty Accruals per Car, 2002-2008
(dollars per vehicle)

Figure 8


The reason we mention this is because of a previously undetected fact that pops out of a comparison of the American and Japanese data. Everyone believes that the Japanese make the highest-quality vehicles in the world with the lowest warranty costs, right? Well, quality is a subjective metric best left to market researchers who have learned how to count feelings and opinions. We're just counting the money. And while Honda still has the lowest accrual rates, Ford is now lower than Toyota. Yes, that's right: Ford has lower warranty costs than Toyota.

In Figure 9, for the year ended March 31, 2009, Toyota accrued ¥366.604 billion, roughly two percent of its automotive sales. But in Figure 7, for the year ended Dec. 31, 2008, Ford accrued US$2.242 billion, which was only 1.7% of its automotive sales. Meanwhile, Honda accrued ¥79.576 billion, equal to 0.9% of its product sales. So at least for 2008 and early 2009, Ford landed somewhere between Toyota and Honda in terms of the percentage of product sales set aside to finance future warranty work.


Figure 9
Two Japanese OEMs
Warranty Accrual Rates, 2003-2009
(as a percentage of auto sales)

Figure 9


Any accountant would know that accrual rates can be changed at will, so it's not really too significant if Daimler raises its rates to abnormally high levels one year, or if Ford and Honda reduce their accruals to historically low levels another year. They're discretionary. What matters is whether such a change is later confirmed by a change in actual claims rates, or is followed by an actual change in product quality or repair cost. In other words, time will tell if it's a trend, an anomaly, or an accounting gimmick.

In the same vein, the panic of '08 set off some curious exchange rate fluctuations, which are also skewing the data. The Japanese yen, for instance, was recently trading at only ¥98.2 = $1.00, down from ¥120.2 in the fiscal year 2002-03. Therefore, even by merely staying still, Toyota and Honda have seen their warranty costs rise by 20% when expressed in dollars, just from currency fluctuations.

We mention this because we want to deflate the impact of the data in Figure 10 ahead of time. However, if one assumes that ¥98.2 = $1.00, as Toyota does in its latest annual report, and if one assumes that Toyota sold 7.57 million units worldwide to Ford's 5.53 million units, then for the first time in recorded history, Ford last year accrued less money per vehicle than Toyota.


Figure 10
Two Japanese OEMs
Warranty Accruals per Car, 2003-2009
(yen per vehicle)

Figure 10


We checked and rechecked our math. Toyota's accrual per vehicle was ¥48,445 or $493.18. Ford's accrual was only $405.28 per unit in 2008. And while one could blame the apparent Honda decrease in fiscal 2009 on some unannounced change in either motorcycle or portable generator accruals, there's little in the Ford and Toyota product lines besides passenger cars and light trucks. Also, the multi-year trend for Ford has been down while the multi-year trend for Toyota has been up. So while this may be shocking, it's not unlikely.

The latest Honda accrual, by the way, was around ¥19,111 or only $194.55 per vehicle in fiscal 2009, by our estimates. That's lower than it's ever been for Honda passenger cars, though it's still not as low as Fiat was in 2002 (using an exchange rate of US$1.05 = EU€1.00 for that year). So will we see even higher product quality or lower repair cost from Honda in the near future? Only time will tell.

What matters more is how much an OEM calculates its warranties will cost in terms of its own currency or its own production statistics. And for that reason, as well as the slight difference in fiscal years, we've left the eight OEMs on three separate charts in Figures 6, 8, and 10, and left all three groupings in their native currencies. Nevertheless, readers who would still like to see all eight expressed on a single chart in yen, or all in dollars, or all in euro, are invited to contact the editor at earnum(at)warrantyweek.com.

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