If there really is a correlation between reliability and warranty costs, then why do some of the most expensive warranties seem to belong to the most well-regarded brands? Can it have more to do with tax and labor rates and less to do with the frequency of repairs?

We now have warranty data for 13 of the world's top passenger car and light truck manufacturers, representing roughly two-thirds of global production and three-fourths of U.S. sales. That means we now have something approaching the entire industry's warranty expense profile.

But that also means there's now too much data to detail and explain in just a single newsletter, which is why we took a deep dive on just the Honda Motor Company Ltd. warranty data in last week's newsletter. And it means that we really need to split the world in two, and cover Europe first and the rest of the world next week.

This week, therefore, we will look at the warranty data of just the top five European OEMs: Daimler AG; the Volkswagen Group; Fiat S.p.A.; BMW AG; and PSA Peugeot Citroen. Next week, we will look at both Honda and Toyota Motor Corp., as well as at Hyundai Motor Co. and Tata Motors Ltd., and at the four American OEMs: General Motors Co.; Ford Motor Co.; FCA US LLC (formerly Chrysler); and Tesla Motors Inc.

The OEMs still missing from our list include Nissan, Renault, Suzuki, Mazda, Mitsubishi, and Volvo Car Corp., among others. They simply do not report their warranty expenses to the public, nor are they required to. But it's possible some warranty data has made its way into the public domain at some point. Readers who have seen it are invited to alert us of its existence. That's how we discovered the Hyundai and VW warranty data, for instance.

Making Comparisons

The most important thing to remember when looking at this data is that you compare companies at your own risk. There are enough differences in accounting standards, tax rates, labor rates, and parts cost to make the claims and accrual expenses of any two companies difficult to compare against each other. In addition, the geography of their sales patterns matters greatly, because not every buyer in every country gets the same warranty duration or scope.

Another good reason for splitting up the OEMs into Part 1 and Part 2 is the fact that the five we're looking at this week all share a common currency. Three share the same government, and several of these OEMs compete vigorously for the same luxury customers. Some could be called arch-rivals. But still, we caution readers against drawing conclusions about whose cars are best, based upon the cost of their warranties.

In Figures 1 and 2 we'll look at the three German OEMs. First we'll look at their warranty claims rates, and then we'll look at their warranty accrual rates. In a format that we'll carry through to Part 2, we'll look at claims as a percentage of product sales revenue, and we'll look at accruals per vehicle sold.

In this way, we're measuring the impact of warranty expenses from two different directions. First, we're looking at the amount of cash going out to pay the bills for warranty work, and comparing it to the amount of cash coming in from product sales. And then second, we're looking at the amount a manufacturer sets aside when a vehicle is sold, reflecting their best estimate of the future cost of its product warranty.

Trucks Going Downhill

Rather than comparing companies, we encourage readers to compare a single company to itself over time, by looking at the direction of its data. In all these charts, uphill is bad and downhill is good. So the slope matters. We want to see flat or declining slopes over time. We don't want to see an uphill trend. The steeper the incline, the more pain it causes.

Fortunately, in Figure 1 we have three downhill slopes. If these companies were highway trucks, they'd have to switch to low gears. For instance, Daimler and BMW had similar claims rates back in 2004, and in 2014 they were once again close together at 1.9% and 1.7%, respectively. The cost-cutting at BMW was more constant over the past decade, while at Daimler there were literally some bumps along the way, followed by a swift decline. Volkswagen, meanwhile, continues to hover around four percent, with a slightly downhill slope. All that's needed is light braking.

Someday someone will do a business case comparison of Daimler and BMW, debating whether the slow-but-deliberate warranty cost reduction effort of BMW was better than the undulating journey of Daimler: selling Chrysler in 2007, weathering a few years of recession, then quickly cutting costs in half from 2009 to 2014. And perhaps that same author will reconcile the sentiments driving the "German engineering" slogans with the facts causing VW's warranty expense rates to be so high. Especially given their success in China, their worldwide average should be much lower.

Luxury Product Line

The claims rates above compare the cost of warranty work to sales revenue. Therefore, all else being equal, the same amount of warranty work on a luxury brand gets a lower claims rate, because the cars are more expensive. For instance, let's say a Ford Focus and a Chevrolet Corvette both get $1,000 worth of warranty work. For the $18,000 Focus, that's a 5.6% claims rate. But for the $55,000 Corvette, that's only a 1.8% claims rate.

In other words, part of the reason that VW's claims rate has almost always been higher than either Daimler's or BMW's is the nature of their product lines. Sure, the Volkswagen Group owns luxury brands such as Porsche, Bugatti and Bentley. But the bulk of its production is closer to the Beetle, Golf and Jetta -- small, basic family cars. Meanwhile, yes Daimler makes taxicabs and BMW makes the Mini. But their dominant models are high-priced luxury sedans.

Nevertheless, as is clear in Figure 2, there's not a whole lot of difference in their warranty cost per vehicle. VW, BMW, and Daimler are each setting aside roughly US$1,400 every time they sell a car, to finance the cost of its warranty coverage. That's up a bit from 2013 levels for Daimler, up a lot for BMW, and down a bit for VW.

The way we calculated these warranty expense rates is as follows. First, we collected four essential metrics per manufacturer from their annual reports: the amount of claims paid per year, the amount of accruals made per year, the number of vehicles sold per year, and the amount of automotive revenue those sales generated. Figure 1 is calculated by dividing claims by sales. Figure 2 is calculated by dividing accruals by units sold.

Figure 2 works as a warranty metric because accruals are made at the time of sale. Essentially, we're measuring what a company itself believes will be the average cost of warranty. And that belief is based on a simple division of how much was accrued by how many vehicles were sold. If sales rise, accruals rise proportionally, unless there's been a change in the frequency of repairs or the cost of parts or labor. So if the accrual rate per vehicle changes, it reflects a change in the estimated future cost of warranty.

The amount of claims per vehicle is less meaningful, at least to an external observer. If we divided claims by units sold, what exactly would we be calculating? It would be the repair cost for last year's model compared to this year's sales. It would not be the cost of warranty, because it would not take into consideration the number of vehicles that lost their warranties because of heavy usage, sales to new owners, or accidental wreckage.

And if sales rates were rising or falling, it would reflect that as well. Because of the lag time between when a car is sold and when it needs warranty work, it takes a while for the claims rate to readjust. We're not saying the claims rate is useless. We're saying that it's pointless to calculate claims per unit when you don't really know how many units are under warranty.

High Warranty Costs per Vehicle

Still, it's remarkable that in 2007, Daimler set aside an average of 1,724 euro per vehicle sold. Because the euro was so strong that year, the conversion rate works out to an astonishing US$2,269 per vehicle, which as Figure 2 suggests, is a record for either luxury or low-born vehicles. We suspect some problem-plagued makes and models with specific trims have cost more. But this was the entire company's average, not its costliest mistake.

Last year, with the euro down to US$1.33, Daimler's average cost per vehicle was down to a more manageable $1,445 per vehicle sold. And with an average selling price of US$35,600 per vehicle, that entails an accrual rate of only 2.3%. Combined with the 1.9% claims rate seen in Figure 1, and you have the profile of a manufacturer of high-priced cars with low-cost warranties. That's a lot better than being called the world's largest warranty provider.

In Figure 3, we're adding two more European OEMs into the mix. The PSA Group is the Paris-based owner of the Peugeot and Citroen brands. It holds the distinction of having been partners with, partially owning, or being partially owned by GM, Ford, and Chrysler over the years, though its completely separate from all three American OEMs now. However, it also has focused on Europe, Asia, and South America moreso than on North America, so perhaps a conversion into U.S. dollars isn't quite so meaningful.

Fiat is an acronym for Fabbrica Italiana Automobili Torino, and is the owner of brands such as Fiat, Chrysler, Maserati, and Ferrari, as well as in the past such brands as CNH, Case, New Holland, and Iveco. But thanks to several reorganizations, spin-offs and mergers over the years, it is now a Dutch company headquartered in the UK, with a major car manufacturing subsidiary headquartered in the suburbs of Detroit. And the big trucks and farm equipment is now in a completely separate company called CNH Industrial N.V.

Fiat and FCA

Next week, we'll look at FCA US LLC, the North American corporate identity of Fiat and Chrysler. In the charts below, we're looking at Fiat S.p.A. from 2002 to 2011, and the European operations of Fiat Chrysler Automobiles N.V. from 2012 to 2014. That's because we need an entity to focus on for the latest figures for warranty expenses, revenue and unit sales, and we need comparable figures for previous years. And the latest annual report includes comparables for both 2012 and 2013.

Figure 3 follows the claims rate of the two Fiats from 2002 to 2014 and PSA from 2005 to 2014. Note that for the past four years the two rates have been close together. In fact, in 2012, 2012 and 2014 they were within a tenth of a percentage point of each other. But more importantly, given what we said about the Fiat data coming from essentially two different corporate entities, note that the company's 2011 and 2012 claims rates are almost exactly the same.

That sameness becomes even more apparent in Figure 4, which tracks the accruals made per vehicle sold. From 2006 to 2009, Fiat's accruals per vehicle remained extremely close to $400. From 2011 to 2013 the accrual rate remained very close to $550 per vehicle. This is the way accruals are supposed to work: once you figure out exactly what the warranty costs, that's the amount you set aside every time you sell a vehicle. Sales rates and selling prices may fluctuate, but the accruals made per vehicle depend not on them but on the predicted cost of warranty.

Missing Some Data

We don't have warranty data for PSA from 2002 to 2004. And, in case you missed it in Figures 1 and 2, we don't have any VW warranty data for 2002. It was simply never published. Given that most of these companies have either stopped or never sold stock in New York, they never were required to disclose their warranty expenses under U.S. accounting rules. So we should be grateful for any warranty data, even if they got a late start providing it.

In regards to the PSA warranty data that we do have, it's obvious from Figure 4 that the company's cost per unit is not the same as Fiat's. Yet their claims rates are somewhat comparable, as can be seen in Figure 3. How can that be?

As with the German manufacturers, the reason for the difference lies in the average selling price of the vehicles. Fiat is spending 2.3% of its product revenue on claims, with a product that sells for an average of 17,600 euro, while PSA is spending 2.2% on claims and sells a vehicle priced at 18,700 euro. And the Peugeot models are generally more expensive than that. So that's enough of a difference to produce a US$100 separation between their average accrual rates per vehicle in 2014, though that's way down from the $368 gap seen in 2012.

We keep referring back to U.S. dollars because next week we'll also be discussing two companies that work in Japanese yen, one that works in South Korean won, and one that uses Indian rupees. To make all these accrual-per-vehicle figures comparable, we need to decide on a common currency. The U.S. dollar is the most likely candidate.

Accruals in Euro

This week, however, we're talking about five companies that all work in euro. So why not compare apples to les pommes? In Figure 5, we've done that. Actually, the data in Figures 2 and 4 were converted into U.S. dollars after the fact, based on the prevailing dollar-euro exchange rates during those years. In Figure 5, as with Figures 1 and 3, no currency conversions were necessary. This is the raw data, taken straight from the annual reports and calculated by dividing warranty accruals by units sold.

Again, it shows that both Daimler and BMW have at times in the past set aside an unusually large amount of money per unit sold. Setting aside in excess of 1,200 euro per vehicle really is a bit excessive, even for luxury brands. Both are close to the 1,080 euro level now, which for Daimler is a slight rise from 2013 levels but for BMW is a big jump from 2013 levels.

With all the recent news about safety recalls and increasing warranty costs, it's no surprise to see both GM and Honda suffering from rapidly rising rates. But BMW? They've certainly done a good job keeping their rising warranty costs out of the press, despite an apparent 89% increase in accruals per vehicle since 2012 (from 573 to 1,081 euro in two years). And that can't be blamed on any of the usual excuses such as Lehman Brothers, Greece, or global warming.

Declining Warranty Costs?

Ironically, the only OEM in Figure 5 to see declining accruals per vehicle sold last year is Volkswagen, which saw its rate drop from 1,021 euro in 2013 to 951 euro in 2014. But it still accrued more per vehicle sold in those two years than it ever did before. In other words, 2013 holds the record and 2014 is in second place.

Meanwhile, among these five European OEMs, Daimler is the highest and Fiat is the lowest, as has been the pattern for the past three years. And even though they share a common currency and similar economies, there are still good reasons for that difference, given the nature of their respective product lines and their geographic reach outside Europe.

Nevertheless, the more meaningful comparison it to look at a single company's trend over time. And while Daimler's trend has been downhill from record highs, Fiat's has been uphill from record lows. And as we said from the outset, downhill is always better.