Product Warranty Providers:

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.

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:

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.