January 5, 2005
sponsored by Assurant
ISSN 1550-9214         

Product Warranty Providers:

Gateway holds onto the title of most improved for 2003-2004, but almost three-quarters of the top 50 manufacturers are seeing their warranty claims rates decline year over year.

If most people's Christmas bonuses weren't figured out based on warranty cost reduction metrics, then perhaps next time they will be. Yes, sales are up and costs are down, but the great unheralded manufacturing story of 2004 is that for numerous companies, increased quality is cutting warranty costs in both dollar terms and as a percentage of sales.

Tell your boss you increased sales by a million dollars and you'll get the parking space next to his. But tell him you cut warranty costs by a tenth as much and you've probably had a bigger impact on profitability. What do you get? Not even a slap on the back.

Like the dearly departed Rodney Dangerfield, warranty gets no respect. Until manufacturers began including statistics for claims and accruals in their quarterly and annual reports, warranty also got little notice. It used to be -- way back in the 20th Century -- that manufacturers would estimate their warranty costs at around 2%. Now we know it's closer to 1.8%. And we can track changes in the hundredths of a percent. But still, few people outside of warranty professionals understand the central role of warranty.

Before we get too deep into the new year, we thought it was time to publish some product warranty metrics for the first nine months of 2004. The annual reports will begin arriving in just a few weeks, so time is running out. So before concluding the series of extended warranty articles we began back in September, we'll take a short detour through the latest in manufacturer's product warranty metrics.

The Top 50 Warranty Providers

What follows are statistics for the 50 largest U.S.-based providers of warranty, measured by the net amount in dollars they spent honoring warranty claims during the first nine months of 2004. Not included are major European and Japanese manufacturers such as DaimlerChrysler AG, Nokia Corp., Toyota Motor Corp., and Honda Motor Co. Ltd., who spend sizeable sums in the U.S. on warranty claims but who are not bound by U.S. disclosure requirements. We'd estimate that between 12 and 15 non-U.S. manufacturers are among the world's top 50 warranty providers, especially with the recent appreciation of the yen and euro. But without the same detail of warranty metrics, it would prove troublesome to include them here.

It's not that their warranty expenses are all that different than their American competitors. It's just that it's already difficult to compare two companies that are both following American accounting standards. For instance, let's say two companies display a 2% claims rate (warranty claims as a percentage of product sales). One company includes the cost of its call centers while the other does not. Or perhaps one includes the cost of freight and postage for returned parts while the other does not. It would not be wise to conclude that both companies have the same warranty cost structure based solely upon their identical 2% claims rates.

Fortunately, after some long discussions with numerous Warranty Week readers, we have found a way to compare companies to themselves, and to then compare them to each other. What we'll do is take a look at a company's warranty cost structure this year and last year, and measure the rate of change. Then we'll make a list of most improved and least improved.

Therefore, this list is not saying that 2% is better than 3%. In fact, if significant warranty cost items have been left out of a company's disclosures, the opposite may be true. But what this list is saying is that a 3% reduction in warranty cost is better than a 2% cut. Unless a company has slashed its warranty costs by denying valid claims or moving customer care to an undisclosed location, a 2 or 3% reduction in warranty costs implies either a significant increase in product quality or a notable reduction in claims processing overhead.

Likewise, unless a company has gone from 90-day warranties to three-year plans or has replaced mail-in repairs with house calls, a 2 or 3% increase in warranty claims rates is a sign that manufacturing processes are no longer under control. The biggest increases noted in this top 50 are measured in tenths of a percent, which are still large enough to impact profitability.

America's Top Warranty Providers
Claims in Dollars and as a Percent of Sales
9 Mo. 2004 vs. 9 Mo. 2003
Figures in $US millions and Percent

   2003  2004  Current  2003-04
  9 Mo. 9 Mo. Claims Claims Rate
  Company Claims Claims  Rate (1) % Change
  Gateway Inc. $129 $50 2.1% -3.6%
  Lucent Technologies Inc. $146 $78 1.3% -2.2%
  Beckman Coulter Inc. $51 $44 3.5% -1.1%
  Applied Materials Inc. $111 $105 1.7% -1.1%
  Cummins Inc. $140 $122 2.0% -1.1%
  Novellus Systems Inc. $38 $49 4.6% -0.8%
  IBM Corp. $637 $590 2.7% -0.6%
  Rockwell Collins Inc. $44 $42 2.1% -0.5%
  Paccar Inc. $141 $161 2.1% -0.4%
  Caterpillar Inc. $353 $389 1.9% -0.4%
  Brunswick Corp. $69 $73 1.9% -0.4 %
  Hewlett-Packard Co. $1,790 $1,786 3.8% -0.4%
  Seagate Technology $109 $100 2.2% -0.3%
  Cisco Systems Inc. $245 $262 1.8% -0.3%
  Navistar International $130 $141 2.2% -0.3%
  Sun Microsystems Inc. $287 $257 5.1% -0.3%
  Exide Technologies $41 $44 2.1% -0.3%
  Textron Inc. (2) $113 $113 1.5% -0.3%
  Agilent Technologies Inc. $56 $58 1.2% -0.3%
  EMC Corp. $56 $61 1.4% -0.2%
  Deere & Co. $205 $274 1.8% -0.2%
  Eaton Corp. (2) $62 $62 0.8% -0.2%
  Black & Decker Corp. (2) $64 $64 1.7% -0.2%
  Motorola Inc. (2) $134 $134 0.5% -0.1%
  Ford Motor Co. $2,594 $2,701 2.5% -0.1%
  Tyco International Ltd. $129 $103 0.4% -0.1%
  Maxtor Corp. $139 $147 4.5% -0.1%
  General Motors Corp. $3,338 $3,378 2.9% -0.1%
  United Technologies Corp. $287 $324 1.7% -0.1%
  American Standard Companies $92 $96 1.8% -0.1%
  Pulte Homes Inc. $54 $65 0.9% -0.1%
  Lexmark International Inc. $123 $122 8.3% -0.1%
  Fleetwood Enterprises Inc. $58 $60 3.1% -0.05%
  Western Digital Corp. $38 $43 1.5% -0.02%
  Dell Inc. $681 $814 2.7% -0.01%
  ArvinMeritor Inc. $43 $48 0.8% -0.002%
  Nortel Networks Corp. (3) $127 $125 2.3% na
  Delphi Corp. (3) $63 $84 0.3% na
  Terex Corp. (3) $45 $52 1.6% na
  Honeywell International Inc. $134 $151 0.9% +0.003%
  York International Corp. $47 $55 1.9% +0.003%
  AGCO Corp. $48 $69 2.0% +0.03%
  Maytag Corp. $89 $91 2.9% +0.05%
  Ingersoll-Rand Co. Ltd. $62 $63 1.0% +0.1%
  Boeing Co. $193 $195 1.2% +0.1%
  General Electric Co. (2) $562 $562 4.6% +0.1%
  Danaher Corp. $37 $54 1.1% +0.2%
  Apple Computer Inc. $53 $84 1.5% +0.2%
  Whirlpool Corp. $181 $226 2.6% +0.3%
  Lennar Corp. $69 $108 2.0% +0.8%
  All U.S. Mfg. $17.7 B   $18.1 B 1.85% +0.02%

Source: SEC Form 10-Q & Form 10-K

Note (1) -- Companies did not disclose service revenue separately, so estimates were used.

Note (2) -- Because these companies report only annual data, all 2004 percentages are estimates.

Note (3) -- Companies have missed their SEC filing deadlines, so older data was used.


(1) Manufacturers such as Dell, Gateway, Whirlpool, Maytag, American Standard, Lexmark, and Brunswick do not provide useful revenue segmentation data. Therefore, to compute claims rates, Warranty Week constructed estimates for warranted product revenue vs. non-warranted service, finance, investment, and other income.

(2) Despite the accounting standards board's mandate that warranty figures be provided in all annual and interim reports, General Electric, Eaton, Textron, Black & Decker, and Motorola have chosen to fully report upon their warranty expenditures only once a year, in their Form 10-K annual reports. To construct Warranty Week estimates, the amounts they reported for warranty claims and accruals in 2003 were broken into four equal parts. These quarterly estimates were used for the four quarters of 2003, and until better information arrives at the end of 2004, as placeholder estimates for the first three quarters of 2004. Motorola, it should be noted, has additionally chosen to provide opening and closing balances for their warranty reserve fund on a quarterly basis, but not the required figures for aggregate claims and accruals.

(3) For various reasons, Nortel Networks, Delphi, and Terex have not yet filed financial statements covering the third calendar quarter of 2004. Nortel, in fact, is now four quarters behind schedule, having not filed a financial statement with the SEC since the third calendar quarter of 2003. Estimates based on past records were used for 2004 claims in dollars, while 2003 data was re-used for claims rates. Therefore, comparisons between 2003 and 2004 data are not meaningful.

Warranty in the News

Notice how several of the facts and figures mirror recent headlines. Problems with your iBook? Issues with your iPod's battery life? It's no shock to see Apple Computer third from the bottom. But notice also how a 58% increase in warranty dollars spent translates into only a 0.2% boost in the corresponding claims rate. The reason is a parallel increase in sales revenue. For the year ended Sep. 30, Apple's Macintosh sales were up 10%, while iPod sales were up 279%. Total net sales were up 33%.

Seagate, which over the summer boosted its OEM hard drive warranties to five years, actually saw its claims total fall by 8% in dollar terms during the first nine months of calendar 2004. But its revenue is in decline, so this translated into only a 0.3% reduction in the warranty claims rate. Still, this is a case where declining claims facilitated lengthened warranties. If those lengthened warranties now translate into additional sales, Seagate may find itself becoming the Hyundai of the computer industry, using warranty as a promotional tool.

Conversely, sales increases can help a company cover its increased warranty costs. This seems to be the case in the truck and heavy equipment sector. Paccar, Caterpillar, and Deere each saw warranty costs increase but saw sales increase at a faster rate. Therefore, for each the warranty claims rate (claims divided by sales) fell. Noticeably bucking the trend was Cummins, which saw warranty claims decline in both dollar and percentage terms (sales are up too).

Then there are the headlines that find absolutely no support in the statistics above. For instance, 2004 was the record setter in terms of passenger car recalls. Yet both Ford and General Motors saw their claims rates decrease (while claims spending rose by only 4% and 1%, respectively). It's been suggested that the automakers use separate accounts for warranty and recalls, so it's no surprise to see such little change here.

Room for Improvement

It's also worth noting that IBM's claims rate is down 0.6%. It may not sound like much until you think about what it takes to drive warranty costs down at a huge company like IBM or HP. It's not as good as Gateway, but it's significantly better than Dell. That's what we mean about comparing companies to themselves rather than each other. We're not saying IBM's 2.7% is the same as Dell's 2.7%. We're saying IBM's is better, not only because it represents more of an improvement, but also in light of the disclosures that accompanied IBM's recent sale of its PC division to the Lenovo Group. Who knew they were losing money and spending so much on PC warranty? After the sale is completed, IBM's warranty costs are likely to fall even further, while Dell's cost-cutting seems to have now run its course.

Among the 50 companies who reported between $20 and $40 million in warranty claims for the first nine months of 2004 (and who therefore would rank 51 through 100 on this list were it to double in size), the highest claims rates were seen for Axcelis Technologies Inc. (7.9%); Standard Motor Products Inc. (7.5%); Applica Inc. (6.0%); Quantum Corp. (5.6%); 3Com Corp. (5.6%); Champion Enterprises Inc. (5.4%); and PalmOne Inc. (5.0%). Each of these seven also saw its claims rate rise in 2004.

Fifteen of the companies ranked 51 through 100 reported claims rates below one percent of sales. Interestingly, thirteen of them also managed to cut their claims rates, and one -- Sherwin Williams Co. -- was also under one percent a year ago. Altogether, roughly 600 or so companies have made complete FASB FIN 45-compliant warranty disclosures while an additional 200 or so have made partial disclosures.

Those claims rates are important because anything over 5% implies trouble, except in unusual markets such as PC printers, where low hardware revenue is compensated by aftermarket sales of highly profitable consumables. For instance, IBM's PC division, were it not shielded by the diversity of IBM's entire product line, would have shown claims rates around 6% or 7% over the past two years. Few manufacturers can make money at those levels.

The distribution of product warranty claims rates among the top 100 warranty issuers was as follows:

Claims Rate     No.
under 1% 23
1% to 2% 37
2% to 3% 23
3% to 4% 4
4% to 5% 4
over 5% 9

Keep in mind that these 100 companies together account for almost 90% of all warranty claims, so it's no surprise their bell curve peaks close to the 1.8% average for all manufacturers. The surprise is that such a high number of companies are in the danger zone. In the next report we'll delve a little deeper into the list of the 900 or so U.S.-based manufacturers who report warranty expenses, chopping them up by industry and by size. We'll also once again solicit advice from readers as to what aspects, areas, or attributes they'd like to see analyzed in more detail.

    Go to Part Two



This Week’s Warranty Week Headlines

Finbarr O'Neill resigns as CEO of Mitsubishi Motors North America to become CEO of Reynolds and Reynolds.
USA Today, Jan. 5, 2005
Yamaha Motor Corp. provides five-year service plan free of charge to buyers of its outboard motors until April 30; coverage kicks in after product warranty expires.
Press Release, Jan. 5, 2005
The Millau viaduct in France, now the worldÂ’s tallest road bridge, features a 120-year warranty.
Innovations Report, Jan. 5, 2005
New study from the Service Support Professionals Association and Tech Strategy Partners looks at the high cost of customer support.
Destination CRM, Jan. 4, 2005
Visionary Vehicles LLC, started by the man who brought the Yugo to America, plans to import Chinese automobiles backed by a 10-year/100,000 mile warranty.
Reuters, Jan. 3, 2005

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4CS iWarranty


Warranty Headlines (cont’d)

4CS Inc. licenses its iWarranty application software to construction equipment company Takeuchi Mfg. (US) Ltd.
Press Release, Jan. 3, 2005
The University of Pittsburgh and the Pennsylvania Department of General Services file a lawsuit over leaks in new basketball stadium's roof after the manufacturer voids its warranty.
Pittsburgh Post-Gazette, Jan. 3, 2005
Home Depot to sell appliances over the Web, but extended warranties will be sold via follow-up phone calls to the customer.
InformationWeek, Dec. 31, 2004
Platinum Warranty Corp. to make a play for the Hispanic marketplace, opening http://www.garantiaauto.com Web site.
Hispanic PR Wire, Dec. 29, 2004
Samsung to offer a Zero-Pixel-Defect warranty for LCD monitors, replacing units for free if customer finds a single bad pixel within six months of purchase.
Yonhap News Service, Dec. 30, 2004

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SAS Institute


Warranty Headlines (cont’d)

Dell advertises a Dimension 3000 desktop and an Inspiron 1000 notebook with only a 90-day warranty in Parade magazine.
The Inquirer, Dec. 27, 2005
Sleepy's Inc. and 1-800-Sleepy's Inc. agree to pay $750,000 to settle lawsuit brought by the New Jersey Division of Consumer Affairs.
Associated Press, Dec. 23, 2004
Maxtor increases hard disk drive warranties to five years.
ChannelTimes, Dec. 23, 2004
The warranty windfall: Service contracts are cash cows, but retailers Best Buy and Circuit City are mum about their importance.
Business Week, Dec. 20, 2004
When service contracts make sense: Consumer Reports lists treadmills, elliptical trainers, plasma TVs, and laptop PCs as likely candidates.
Business Week, Dec. 20, 2004

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ServiceBench for Service Administrators


Warranty Headlines (cont’d)

Fidelity National Financial Inc. repurchases 2.5 million shares of common stock issued earlier in 2004 to investors in Aurum Technology Inc., a company it acquired in March.
Press Release, Dec. 14, 2004
Sears, Roebuck and Co. launches a ServiceBench-enabled Web site for automated online warranty claims activities and the related claims recovery process for more than 10,000 repair technicians.
Press Release, Dec. 13, 2004
Hybrid auto sales accelerate; customers are reassured by long warranties on batteries; LA, DC, and Bay Area lead U.S. sales.
Oakland Tribune, Dec. 12, 2004
Ford Motor Co. recalls 400,000 Escape SUVs, spokeswoman says accelerator defect was discovered through field reports and warranty information.
Dec. 10, 2004

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Warranty Headlines (cont’d)


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AMT Warranty Corp.


Warranty Headlines (cont’d)


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