Tenth Annual Warranty Report,
Totals & Averages:
The automotive manufacturers are cutting their warranty expenses while the computer makers are seeing higher costs. But put them together, and they're paying the smallest percentage of their revenue ever for warranty work on their products.
The vast majority of U.S.-based manufacturers have now filed their annual reports for 2012, including their disclosures of warranty spending during the year. And while most of the totals fell, sales rose, which means the percentage of revenue spent on warranty work is still going down.
This week, we aim to detail the industry totals and averages for the past 10 years, providing a baseline for the next few weeks of additional analysis. First of all, the 2012 worldwide total for claims payments by U.S.-based companies was just shy of $24 billion, which was down about 3.1% from the 2011 total of $24.75 billion. However, the 2012 total was up slightly from the 2010 total of $23.66 billion, which looks like it will turn out to have been the lowest annual total of the past decade.
In the chart below, in which the overall claims payment total is broken down into 14 color-coded industry sectors, it's clear that from 2003 to 2008 the annual total rose each year. Then it fell significantly as the recession took hold in 2009, and fell a bit further in 2010. There was a slight rise in 2011, then a decline again in 2012.
Worldwide Warranty Claims
of U.S.-based Companies
(claims paid in US$ millions, 2003-2012)
Sales of warranted products actually rose by four percent in 2011-2012, so don't for a minute think there's a new recession beginning. Instead, what we're seeing is manufacturers working smarter, by using current warranty data to reduce future warranty expenses, by automating and streamlining their claims processing operations, and by generally making better products that are lasting longer, breaking less often, and costing less to fix.
We'll see that plainly in Figure 4, but let's not jump ahead so quickly. In Figure 1, it's also clear that not everything is growing or contracting at the same pace. Of the 14 industry sectors reporting claims payments, three actually grew in size from 2011 to 2012: aerospace (+3); computer OEMs (+13%); and data storage (+19).
The other 11 sectors all reduced their claims payment totals, led by consumer electronics (-34%); telecom equipment (-18%); and power generation equipment (-15%). However, keep in mind that two of those massive declines can be traced to the good fortunes of single companies: Microsoft in CE and General Electric in power generation. As they reduced their claims by incredible amounts, their industry sectors contracted by incredible percentages.
Warranty accruals are a little different from warranty claims in a few respects. First, claims are looking backwards, at what you sold years ago and had to fix last year. Accruals are forward-looking, in that you set money aside now to fund what you believe your warranties will cost you in the future.
Second, claims rise and fall on their own schedule, while accruals rise and fall in proportion to sales. In fact, as companies entered the recession, claims rose as end users kept their equipment longer and took better care of it, always making sure to get the free repairs. And when a manufacturer looked like it was in trouble, or worse, looked to be headed towards bankruptcy, end users rushed in their claims while the going was still good.
Therefore, in 2009, manufacturers were still paying claims on products they sold in 2008 or before, reflecting that lag time between when a product is made and when it needs repairs. So the claims total fell by -13% from 2008 to 2009, as the recession took hold. But the accrual total fell a much larger -22%, as manufacturers more quickly adjusted their accruals to reflect the decline in sales.
In Figure 2 below, we see a much greater drop in the 2009 totals, and then a much greater rise in the 2010 and 2011 totals. The 2012 accrual total of $24.73 billion is about $42 million less than the 2011 total, however. And since sales were up 4% over the same period, that decline in accruals must have been caused by gains in product reliability, repair cost control, and claims processing efficiency.
One can see the difference in response rates by comparing Figures 1 and 2. In Figure 1, claims hit their trough in 2010 -- well after the recession began. But in Figure 2, accruals are adjusted down in 2009 -- a full year before claims. That's because of the lag time between when a product is sold, and when it needs warranty work.
Worldwide Warranty Accruals
of U.S.-based Companies
(accruals made in US$ millions, 2003-2012)
It's a little hard to see at this screen size, but the 2012 total is actually a little below the 2003 total ($14 million below the decade-ago figure). It's the same case with claims, but the $175 million difference between 2003 and 2012 is a little easier to see. The conclusion is that while we're recovering from the recession, we're not all the way back. And because manufacturers are now working smarter with warranty, they'll never pay as much in expenses even after sales hit a new peak.
Of the 14 industry sectors, six saw accrual declines from 2011 to 2012, while eight saw increases. Again, the Microsoft and GE declines powered those sectors to big percentage declines in 2011-12. But there was also a -19% decline in accruals made by the semiconductor and printed circuit board manufacturers, and a -17% decline by the makers of telecom equipment.
On the rising side, there were five small increases and then three large ones: +11% by the homebuilders; +12% by the data storage companies; and +43% by the aerospace companies. However, that latter jump was almost entirely caused by Boeing, which increased its accruals from $232 million in 2011 to $678 million in 2012.
In last week's newsletter, we highlighted some of the largest increases and decreases by individual companies. Now, this week, we're seeing how some of those biggest movers that also happen to dominate their industries are responsible for most of the rises and falls of their own sectors. Microsoft, GE and Boeing are the best examples of this effect.
Next, let's take a look at warranty reserves. When claims fall by three percent but accruals fall by just a tiny bit, one would assume that the balance left in the warranty reserve would also fall. But there are also companies such as General Motors, Navistar and Boeing that are adding hundreds of millions of dollars to their warranty reserves to correct for severe underestimates in the past. And that tends to offset some of the cutting elsewhere.
So it's no surprise to find that all U.S.-based warranty providers actually raised their year-ending warranty reserve balances to $37.3 billion as of December 31, 2012, a 1.5% increase since the end of 2011. It's also higher than the year-ending balance in either 2009 or 2010, though it's more than a billion dollars below the balance seen on December 31, 2008.
Worldwide Warranty Reserves
of U.S.-based Companies
(year-end balance in US$ millions, 2003-2012)
Of the 14 industry sectors, nine reduced their reserves while five increased their reserves. Some of the biggest reductions were the telecom equipment companies (-33%); the appliance and HVAC manufacturers (-17%); and the power generation equipment companies (-16%). The biggest increase was in the aerospace sector (+14%), and that was caused primarily by Boeing's decision to increase reserves by more than $500 million through a combination of increased accruals and an extra $163 million change of estimate.
Out of approximately 450 companies reporting warranty expenses in 2012, about 40 have yet to file their annual reports for the year ending December 31, 2012. Most will probably do so in the next two weeks. Some may take a bit longer, if they file for extensions past the usual deadline. And when their data comes in, that may move the numbers up or down a slight bit in these charts.
However, the only sizeable warranty providers that have yet to report are Associated Materials; Cybex International Inc.; Dixie Group Inc.; Easton-Bell Sports Inc.; and Powerwave Technologies Inc. Of them, only Associated Materials held more than $10 million in warranty reserves at the end of September 2012, and only Powerwave was on track to report more than $10 million in either claims or accruals for the full year. In other words, the numbers will probably move only a few hundredths of a point once the latecomers arrive.
While Figures 1 through 3 counted the annual totals reported for warranty claims, accruals, and reserves, they left out any consideration of a fourth and very important metric: warranted product sales. If a company's warranty claims double, that could be seen as a problem. But if sales triple, then the rate at which claims are paid, as a percentage of sales, will plummet. And that would be seen as a very good thing. So while the totals are nice to know, it's the comparison with sales that really shows the trends.
As was mentioned, product sales were up by about 4% in 2012. And none of the other three metrics rose at that rate. Claims were down 3.1%. Accruals were down 0.2%. And reserves were up only 1.5%. Therefore, when the warranty metrics are divided by the sales metric, both the claims and accrual rate, as a percentage of revenue, fell over the past year.
Slashing Expense Rates
In Figure 4, we've taken the claims and accrual totals reported for the last 40 quarters and divided each metric by the amount reported for product sales. As can be seen, the rates for both have been falling rather steadily for the past decade, except for the excursion taken by the claims rate during the worst days of the recession in 2009. However, that was caused primarily by falling sales, not by rising claims. When claims fall a little but sales fall a lot, as happened in 2009, the percentage rate shoots up -- to a 1.87% peak in the spring of that year. And then it fell back, as sales rates recovered.
All U.S.-based Companies
Average Warranty Claims & Accrual Rates
(as a % of product sales, 2003-2012)
Notice also that the lowest point on the chart in Figure 4 came in the first half of 2012, when both the claims and accrual rates fell to what may be an all-time low (we don't have data going back before 2003, however). In other words, American manufacturers could have made their most reliable products ever during late 2011 and early 2012, could have run their warranty claims payment system the most efficiently way ever, and could have paid the least amount ever for warranty work during the period. These are all very good bits of news, unless one makes his living from warranty repair service revenue.
However, notice also that the trend line is going back up for the accrual rate, though not by much. And the claims rate, while remaining just above 1.3%, is also no longer falling. Have we hit bottom? Have American manufacturers squeezed the most cost they can out of the system? Only time will tell.
Warranty "Market Share"
The next three charts take the data from Figures 1 through 3 and display it in a different way. Rather than showing the ten-year trends, Figures 5 through 7 show the "market share" of each of the industry sectors for 2012.
In Figure 5, it's immediately obvious that the automotive and computer OEMs account for the majority of all warranty claims, followed by the auto parts suppliers, the appliance and HVAC manufacturers, and the aerospace companies. Those five sectors account for 78% of the $24 billion total for claims paid in 2012.
All U.S. Manufacturers
Claims Paid per Industry, 2012
(as a % of $24.0 billion total)
Within this group of five sectors, the claims-paying burden has shifted considerably. The automotive OEMs, now with 35% of the claims, used to pay 40-41% of the total. The computer OEMs, now paying 25%, used to account for 18-19%. Auto parts suppliers have also seen their share rise as OEMs get better at extracting reimbursements from them.
All together, though, these five sectors have never before accounted for as large a share as they do now. In 2011, they comprised 76% of the total. In 2008, they accounted for only 73% of the total. In fact, for seven of the past 10 years their share has been at or below 74%. So the recent increase is something of a puzzle.
In Figure 6, we're tracking the "market share" for warranty accruals in 2012. And the same trend can be seen there. In 2011, the share of those top five sectors reached 77%. In 2012 it passed 79%. Back in 2007-2009, it was around 72%. So the increase is recent.
All U.S. Manufacturers
Accruals Made per Industry, 2012
(as a % of $24.7 billion total)
The automotive OEMs used to account for as much as 41% of the accruals, and the computer OEMs used to account for as little as 17%. So as one reduces its outlays, the other increases its share of the total. Auto parts and appliance/HVAC have usually been close to 6%. Aerospace used to be closer to 3% to 4%.
In terms of warranty reserves, it's again the same five industry sectors in the lead: automotive and computer OEMs in the lead, followed by the auto parts suppliers, appliance and HVAC manufacturers, and aerospace companies. These are the industry sectors in which warranty matters the most.
All U.S. Manufacturers
Reserves Held per Industry, 2011
(as a % of $37.3 billion total)
Consumer electronics, we note, is not a major contributor to the total for two reasons. First, most consumer electronics items are manufactured by companies based in Asia or Europe, and so they are not part of the U.S.-based statistics. Second, of those that are based in the U.S., Microsoft was usually the largest warranty provider of all. But that's no longer true now that the Xbox 360 debacle is mostly over. At the end of 2012, CE accounted for 0.5% of the claims, 0.4% of the accruals, and 0.8% of the reserves.
Also fading are the homebuilders, but for very different reasons. Their share of claims stood at only 1.2% last year, down from 3% or 4% years ago. But that's not because they're building better houses than ever before. It's because they're building vastly fewer homes, and doing much less warranty work.
Three Giant Groups
Finally, we've color-coded the various industry sectors, and have arranged them so they would fit into one of three large groupings: the blue slices are the vehicles. The reddish slices are the high tech sectors. And the greenish slices are the building trades.
Historically, the vehicles have taken up half the pie, with high tech taking about a third and the rest going to the building trades. That's shifted in recent years, at least for claims and accruals. Now, the vehicles account for about 45%, high tech for 40%, and building trades for the shrinking remainder.
However, the vehicle makers are still at the top of the hill for warranty reserves. Perhaps because of their generally multi-year warranties, and perhaps because of how much warranty cost arises in that length of time, the vehicle makers account for almost 60% of the total. The high tech companies, with their year-long warranties, are usually a little above or a little below a quarter of the pie. And the building trades are usually close to 15%.
In future weeks, we will take a deeper dive into some of these industry sectors, as well as a look at the relationship between OEMs and suppliers in a couple of them. We'll also look at trends in warranty expenses per vehicle and per home over time, as well as which companies have had the best and worst decade in terms of warranty management metrics.
Tenth Annual Product Warranty Reports
As we begin to wrap up our annual survey of U.S.-based warranty providers, here are some links to the online editions of all the previous parts of this series:
- Top 100 Warranty Providers of 2012
- Tenth Annual Warranty Report, Totals & Averages
- Computer Warranty Report
- Automotive Warranty Report
- Supplier Recovery
- New Home Warranties
- Telecom Equipment Warranties
- Semiconductor Warranty Report
- Aerospace Warranty Report
- Appliance & HVAC Warranties
- Medical & Scientific Equipment Warranties
- Power Generation Equipment Warranties
- Security Equipment Warranties
- Food Service Equipment Warranties
- Farm & Lawn Equipment Warranties
- Mining Equipment Warranties