April 8, 2010

Seventh Annual Warranty Report,
Totals & Averages:

Claims are down. But accruals are down by more, and it looks like they're down by more than they should be. Ten charts provide a snapshot of the warranty landscape as manufacturers enter the recovery phase.

Product warranty financing was savagely stressed in 2009 by sales reductions and profit shortfalls. Many companies saw claims rise but cut their accruals anyway.

Before we resume our tour of the service contract industry, we need to take one more look at some product warranty trends for 2009. The final numbers are in, and they aren't pretty at all.

U.S.-based manufacturers paid out $25.5 billion to satisfy warranty claims worldwide, a 12.6% reduction from 2008. But they set aside only $21.4 billion to finance future warranty claims, a 22.5% reduction. And as a result, they saw their collective warranty reserves shrink from $38.4 billion at the end of 2008 to $34.3 billion at the end of 2009.

Welcome Back GM

These figures once again include annual totals for General Motors, thanks to a surprise filing the company made with the U.S. Securities and Exchange Commission on April 7. The company, now owned by the U.S. Treasury Department and others, remains the largest warranty provider based in the U.S., paying out a reported $4.1 billion for claims in 2009.

As an illustration of how drastically the problems of the U.S. auto industry manifested themselves in warranty financing, consider that GM had $9.6 billion in its warranty reserve at the end of 2007. At the end of last year, that balance was down to $7.0 billion. In 2007, Ford paid out $4 billion in claims. Last year it paid out $2.5 billion. Some of that cost reduction comes thanks to better quality, but much of it comes from fewer sales.

Grouped By Industry

In Figures 1, 2 and 3, we are grouping the claims, accruals, and reserves totals, respectively, for 14 different industries, with each of some 800 different companies counted in one and only one industry. Despite the industry border-crossing of firms such as United Technologies, General Electric, Motorola, Apple and others, we assigned each to the industry in which they derive the bulk of their warranty-covered revenue.

In Figure 1, the 2009 drop-off in claims is extremely obvious. In fact, it's the first year in which claims fell, at least since manufacturers began filing warranty expense reports with the SEC in 2003. Claims fell by the greatest percentages in the new home (-35%), consumer electronics (-24%), semiconductor (-22%), and telecom equipment (-20%) industries, but they fell in almost every other sector as well.

Strangely, the only one of the 14 to see an increase was the sector that holds manufacturers of building materials, fixtures, and furniture. These companies reported an 8% increase in claims, despite lower sales. And they somehow convinced their auditors to allow a 9% reduction in accruals.


Figure 1
Worldwide Warranty Claims
of U.S.-based Companies
(claims paid in US$ millions, 2003-2009)

Figure 1


Legend


The "market share" of each of these sectors is detailed below in Figure 5. For the equivalent "market shares" in 2008, take a look back at the May 7, 2009 issue of Warranty Week.

The story in terms of warranty accruals was only slightly different. Notably, 2009 was the second year in a row that accruals declined considerably, although the reduction last year was much greater than anything seen in past years. We suspect that claims are declining less quickly than accruals because of the lag time between sales and repairs. But as we shall see in Figure 4, accruals are being reduced more precipitously than ever.

The sales reduction really shows its effect in Figure 2, though, with accruals for autos and computers taking particularly large downturns. But the eye deceives; the reduction was proportionally larger for the new home category (-38%) than for either auto (-34%) or computers (-20%).


Figure 2
Worldwide Warranty Accruals
of U.S.-based Companies
(accruals made in US$ millions, 2003-2009)

Figure 2


Legend


If one imagines the warranty reserve as a savings account, where accruals are the deposits and claims are the withdrawals, then the inevitable result when accruals are cut faster than claims is a reduction in the balance. And in Figure 3, that predictable result is in full view, with the year-end balance falling from $41.6 billion in December 2007 to $38.4 billion in December 2008 and $34.3 billion in December 2009.


Figure 3
Worldwide Warranty Reserves
of U.S.-based Companies
(reserves held in US$ millions, 2003-2009)

Figure 3


Legend


Proportionally, the largest warranty reserve balance reductions were seen in consumer electronics (-31%), telecom equipment (-24%), semiconductors (-22%), autos (-16%), and building materials (-11%). The overall reduction was 11%, so all the other industries were below average, if there is such a thing. Only the aerospace companies reported a rising warranty reserve balance, and that increase was a barely noticeable 0.5%.

Cutting Accruals Too Much?

In Figure 4, we're spotlighting a disturbing trend, which we hope is temporary. In plain language, claims are up and accruals are down. They used to move together, more or less, but in early 2008 they began to diverge. We hope it's entirely recession-related, but we fear that a few companies who were coming up a little short decided they could do with a little less accruals, no matter what the actuaries predicted.


Figure 4
All U.S.-based Companies
Average Warranty Claims & Accrual Rates
(as a % of product sales, 2003-2009)

Figure 4


For instance, in the building materials sector, claims rose 8% while accruals declined 9%. Automakers saw claims fall 17%, but they cut accruals by 34%. And computer makers saw claims fall 10%, while cutting accruals 20%. The result is the divergence seen in Figure 4.

Warranty Pie Charts

Now, let's switch to warranty "market shares," based on the percentage of all claims, accruals, and warranty reserves found in each of 14 industries (plus a 15th category for all the others). We'll tell you about the year-to-year changes, but to see it in pictured you'll need to also call up the May 7, 2009 newsletter.

In Figure 5, the faster pace of claims declines helped to reduce the size of the auto OEM slice from 39% in 2008 to 37% in 2009. Other slices to shrink by relatively large amounts included new homes and telecom equipment. Conversely, those that gained the most (which really means they shrank the least) were auto parts, appliances, and building materials.


Figure 5
All U.S. Manufacturers
Claims Paid per Industry, 2009
(as a % of $25.5 billion total)

Figure 5


Legend


In terms of accruals, the auto OEM share fell from 35% to 30% while the computer OEM share actually grew slightly, from 20.8% to 21.4%. What that really means, however, is that computer manufacturers cut their accruals by less than the automakers. Others that saw their accruals fall the least included the makers of auto parts, appliances, and aerospace companies.


Figure 6
All U.S. Manufacturers
Accruals Made per Industry, 2009
(as a % of $21.4 billion total)

Figure 6


Legend


The interplay between claims and accruals, plus one additional factor, can be seen in Figure 7. Industries that make products with longer warranties typically hold more funds in their reserves, to cover claims for more years. So when we speak of warranty reserve "market shares," the size of the slices for autos, appliances and airplanes is enhanced, while the slices for slices for most of the high-tech categories are diminished.


Figure 7
All U.S. Manufacturers
Reserves Held per Industry, 2009
(as a % of $34.3 billion total)

Figure 7


Legend


Figures 8, 9 and 10 show claims totals for all 14 industry categories for each of the past seven years. It's basically the same information as is presented in Figure 1, broken into three major sectors. Figure 8 details the "vehicle" sectors. Figure 9 details the "high-tech" sectors. And Figure 10 details the building trades.

In the vehicle sector, one can see only slight declines in claims for the aerospace and auto parts makers, and massive declines for Ford, GM, and the other auto OEMs (such as the makers of trucks, motorcycles, etc.). The passenger car makers based outside the U.S. are not included in this tabulation.


Figure 8
Warranty Claims in Automotive & Aerospace
Claims Paid by U.S.-based Companies
(in US$ millions, 2003-2009)

Figure 8


In the high-tech sector, the declines were more evenly distributed. Six industries saw declines between 10% and 24%, and the data storage industry saw a small increase in claims (from $591.3 to $592.2 million).


Figure 9
Warranty Claims in the High-Tech Industries
Claims Paid by U.S.-based Companies
(in US$ millions, 2003-2009)

Figure 9


In the building trades, the massive decline in claims reported by homebuilders is entirely predictable, given market conditions. But the increase for building materials is entirely unexpected. The power generation category, which includes General Electric and a few others, showed a 14% drop, which is almost entirely linked to the $123 million drop in claims reported by GE.


Figure 10
Warranty Claims in the Building Trades
Claims Paid by U.S.-based Companies
(in US$ millions, 2003-2009)

Figure 10


So that's the end of our ten-chart market report. There's still much to say about the individual companies, but we'll save that for the mid-year report, which is scheduled for publication in late August or early September. Can't wait that long? Send your questions or comments to the editor at earnum(at)warrantyweek.com.





AMT Warranty Corp.
Fulcrum Analytics
Sign up for a free subscription to Warranty Week:
     subscribe     change of address     unsubscribe