May 15, 2007
sponsored by Tavant
ISSN 1550-9214         

Automotive Warranties:

Thanks to reduced warranty expenses at GM, claims were up only slightly for the auto industry in 2006. With four years of data in hand, it's now possible to calculate typical claims rates by product or vehicle type. And while warranty expenses for some are on a downward trend, others have seen costs rise.

US-based automotive manufacturers spent almost $12.8 billion on warranty claims in 2006, up a slim 1.6% over year-before levels. Of the 153 automotive manufacturers tracked by Warranty Week, 94 paid out more dollars in claims in 2006 than they did in 2005, while 57 paid out less, and two paid out the same amount in both years.

As a percentage of product sales, the results were more evenly split. Of the 153 manufacturers, 78 saw their claims rate rise while 75 saw it fall. Taken together, all 153 manufacturers paid out 1.68% of their product revenue in warranty claims in 2006, up a slim 0.01% from 2005 levels. What this means is that claims grew a bit faster than sales.

OEMs continue to pay the vast majority of the total outlay, but there's been a slight change in the ratio between the OEMs and their suppliers. From 2003 to 2005, the OEMs always paid out around 87% of the total, while their suppliers paid out only 13%. But in 2006, that ratio changed a bit to 86%/14%, because the suppliers' total grew by $130 million while the OEMs grew by only $67 million.

Slowdown in Warranty Cost Increases?

In Figure 1, we've detailed the outlays for the OEMs (in dark blue) and their suppliers (in light blue) for the past four years. Even with eyeballs alone, it's clear there's been something of a slowdown in the rate at which warranty spending increased last year. From 2004 to 2005, total claims grew by 7.9%. From 2003 to 2004, total claims grew by 4.8%.

Figure 1
All US-Based Automotive Manufacturers:
Warranty Claims per Year, 2003 to 2006
(in $ Billions per Year)

Automotive Manufacturers

As mentioned, sales also grew in the past year, but claims grew a bit faster, causing the overall claims rate to notch up to 1.68% by the end of 2006. But that's the same claims rate measured at the end of 2003, so in reality the claims rate for the industry as a whole has changed little in the past four years. In fact, as detailed by the middle line in Figure 2, the overall industry claims rate has always started out the year low and ended it high -- a pattern broken only in 2003 when the third quarter was a bit higher than the fourth.

As Figure 2 also details, the gap between the claims rate seen by OEMs and their suppliers is now beginning to narrow. At the end of 2006, OEMs paid out 2.44% and suppliers 0.85%, for a gap of 1.59%. A year ago, the gap stood at 1.73% and historically it's been closer to 1.8% or 1.9%. So this may be a sign that supplier recovery efforts are finally beginning to register.

Figure 2
All US-Based Automotive Manufacturers:
Warranty Claims Rates, 2003 to 2006
(As a % of Product Sales)

Automotive Manufacturers

Let's not get carried away, though. General Motors paid out $233 million less in 2006 than in 2005, and this alone took almost 2% off the top of the industry's increase. GM's claims rate fell from 2.9% to 2.6%, while Ford Motor's grew from 2.6% to 2.9%. But just these two companies comprise more than two-thirds of the whole US-based auto sector, so anything that happens to either one of them is going to have a big impact on the totals.

Readers who can't view these charts because their companies use email filters should go to to see the Online Edition of this article.

By the way, the Chrysler Group is not part of these totals because it is technically part of a German company. And even if it is acquired by Cerberus Capital Management, it will still not be part of these totals, because it will be a privately-held company. Neither foreign-based nor privately-held companies are required to report their warranty expenditures to the US Securities and Exchange Commission.

Warranty Claims Rates by Product

The other 151 US-based automotive companies that are reporting their warranty expenditures to the SEC vary tremendously in size. It makes little sense to go into detail how much each pays in claims, because it varies all the way from $8,075 for Puradyn Filter Technologies Inc. to $745 million for Caterpillar Inc.

It makes more sense to look at each company's claims rate -- the percentage of product sales each pays out in claims. Puradyn is at 0.3% of sales while Cat is at 1.9%. In fact, the median is just under 0.7%, while the average is at 1.6%, which goes to show how heavily the latter number is weighted by the large OEMs.

What we've done in Figures 3 and 4 is to group some of these OEMs and suppliers by the type of product they make. There are ten groupings all together, so we fit five onto each chart. Hopefully, that makes it a bit easier to notice some of the patterns.

At the top of Figure 3 is a group with only two members: GM and Ford. At the bottom of Figure 4 are the tire manufacturers, comprised of four large and three small companies. In between are eight other groupings for everything from RVs to drivetrains.

Figure 3
Automotive Manufacturers by Type:
Warranty Claims Rates, 2003 to 2006
(As a % of Product Sales)

Automotive Manufacturers

Some manufacturers are members of more than one group, depending on their product lines. For instance, we have Caterpillar in the groupings for both farm equipment and drivetrains, because they manufacture both earth-moving equipment and diesel truck engines. Navistar we have in both the truck and bus category as well as in drivetrains, because they most famously are supplying Ford with diesel engines.

However, because Navistar hasn't filed a financial statement with the SEC for more than a year, we don't have any warranty data for them for the past five quarters. That absence can most clearly be seen in the truck category, where the claims rate dove below 1.5% as soon as Navistar dropped out of the average. So we've marked that with a dotted line, to alert readers that the change is not real. It's simply a reflection of the fact that Navistar traditionally reports a higher claims rate than competitors such as Paccar or Oshkosh Truck Corp.

Figure 4
Automotive Manufacturers by Type:
Warranty Claims Rates, 2003 to 2006
(As a % of Product Sales)

Automotive Manufacturers

Notice in both Figures 3 and 4 that the lines for the most part are stable. Yes, they vary over time, but they do so within a fairly narrow range. RVs and farm equipment seem to follow a seasonal pattern, while buses show a bit of true volatility.

Therefore, except in the case of buses, one could almost say that these lines represent the "natural" rate of warranty for these types of vehicles or parts. If you're making tires, your product type has a "natural" rate of warranty around 0.3% of revenue. So if you sell $100 million worth of tires, you should expect to pay out $300,000 in warranty claims. That doesn't tell you how many tires will fail or how often, but it does give you a clue as to how much should be set aside in accruals. For every $1,000 in tire revenue, you should put aside $3 to fund future warranty claims.

Notice also how the lines for drivetrains and emergency vehicles are virtually on top of each other. We don't want to make too much of this, but isn't it curious that engines, axles and transmissions have the same warranty ratios as fire engines and ambulances? And isn't it also curious that emergency vehicles have the lowest warranty ratios of all the vehicle types -- even motorcycles?

Warranty Claims by Company

While product-by-product averages are useful, we don't want to suggest that one type of product is more reliable than another. We don't know if motorcycles are not more or less reliable than buses. All we can say is that bus manufacturers pay out a higher percentage of their sales revenue in warranty claims. Is it because buses break down more often or is it because buses have more parts? Or perhaps buses cost more to fix? We can't tell from these numbers.

We also don't want to compare one company against another, especially across industries, because we can never be sure that each company is counting the exact same list of cost components in the exact same way. Although in the automotive industry, most of the manufacturers seem to report only their direct costs -- what they pay to others -- and not indirect costs such as publishing manuals or operating call centers.

In the four charts that follow, we're just going to shine a spotlight on the warranty costs of four of the largest OEMs besides GM and Ford. Since each is a leading manufacturer within some of these groupings, what happens to them has a heavy bearing on what happens to the averages in Figures 3 and 4.

Paccar is the second largest truck manufacturer, behind only DaimlerChrysler's own Freightliner nameplate. Its brands include Peterbilt, Kenworth, DAF, and Foden. As can be seen in Figure 5, the company has seem a slow but steady decline in its warranty claims rate, although there's been a slight rise during the second half of 2006.

Figure 5
Paccar Inc.
Warranty Claims & Accruals, 2003 to 2006
(in $m and % of Product Sales)


Notice that accruals have always been close but slightly above claims, and notice also that 11 of the past 16 quarters have come in between $50 and $60 million in claims paid. In 2006, Paccar paid out $43 million more in claims than in 2005, but its claims rate was little changed. That's a sure sign that claims are growing in proportion to sales.

At Caterpillar, the product mix is a bit different, with engines for on-highway trucks and lots of off-road vehicles. Both Cat and Paccar have significant finance operations, but we've subtracted all of that revenue out from our calculations.

In terms of claims rates, Cat has seen more ups and downs than Paccar, but the general direction over time has been downward. The company is now enjoying its third consecutive quarter below 2% -- a feat it achieved in 2004 but could not in 2003 nor 2005. Notice how the claims and accrual rates have bonded so closely in recent quarters, after diverging significantly in earlier years. This we take as a sign that the company is not only more efficient with its spending, but also more accurate with its estimations.

Figure 6
Caterpillar Inc.
Warranty Claims & Accruals, 2003 to 2006
(in $m and % of Product Sales)


John Deere and Toro have always shown a highly seasonal pattern when it comes to warranty expense, which is no surprise given their lineups of farm and lawn equipment. Both see peaks in the first calendar quarter of each year, though the trough comes a bit later in the year for Deere than for Toro. This seems to have more to do with seasonal sales patterns at Deere, because there's no seasonality to the dollar amount of claims paid per quarter.

Figure 7
Deere & Co.
Warranty Claims & Accruals, 2003 to 2006
(in $m and % of Product Sales)


At Toro, the amount of claims paid during the fourth quarter of each year is greater than any of the three preceding quarters, which suggests that many customers put off their repairs until after the first frost (or that the most breakdowns occur late in the growing season). By the same measure, the fewest repairs are made in the second quarter of each year, just as sales begin to rev up.

Figure 8
Toro Co.
Warranty Claims & Accruals, 2003 to 2006
(in $m and % of Product Sales)


The seasonality seen in Harley-Davidson's warranty numbers also have something to do with the seasons, but one must also consider the timing of the beginning and end of model years. Customers who buy a new bike as soon as they're available will get in more months of riding before the cold weather sets in, but typically their one-year warranties are halfway to expiration by the time spring rolls around. So it's no surprise to see a spike in late spring and early summer, as customers see that deadline fast approaching.

Figure 9
Harley-Davidson Inc.
Warranty Claims & Accruals, 2003 to 2006
(in $m and % of Product Sales)


What's a little disturbing about the data in Figure 9 is the upward trend of the past two years. Claims rates have risen from 0.5% to 1.1% in that time frame. However, keep in mind that even 1.1% is below average for the small vehicle group that Harley is a major part of, and that 2.5% is more typical for vehicles in general. So in this case, things aren't so bad in comparison to others.

Back to Part Six   Go to Part Eight



This Week’s Warranty Week Headlines

N.Y. attorney general sues Dell, alleging fraud, false advertising and deceptive practices.
Associated Press, May 15, 2007
Saturn ads say "Rethink American," tout longer powertrain warranties.
AdWeek, May 15, 2007
MaintenanceNet Inc. launches new service contract management portal for government solution provider.
Press Release, May 15, 2007
Kia combines inexpensive cars and a long warranty to lure former VW buyers.
BrandWeek, May 14, 2007
Wedding warranty? Insurance policies can now cover everything from hurricanes to cold feet.
Associated Press, May 14, 2007

More Warranty Headlines below

Mize Warranty Connect


Warranty Headlines (cont’d)

White box PC buyers should ask the dealer who will warranty the components in their system.
Small Business Computing, May 14, 2007
CompUSA says customer abuse damaged laptop, but Toshiba finds room for a compromise settlement.
Buffalo News, May 13, 2007
Sweepstakes Clearinghouse to replace customer's defective computer as a goodwill gesture.
Louisville Courier-Journal, May 13, 2007
Warranty should be a factor when deciding on a retailer for electronics or computer purchases.
Toronto Star, May 12, 2007
Attorney Paul Wojcicki launches as a forum to discuss warranty law.
Welcome Message, May 11, 2007

More Warranty Headlines below

PCMI - Your technology partner


Warranty Headlines (cont’d)

HP launches remote tech support service Instant Care globally in nine languages for PCs, cameras, TVs and printers.
Press Release, May 11, 2007
Chrysler recalls minivans to fix corroded airbag sensors in states that use road salt heavily.
Reuters, May 11, 2007
SEC wrapping up 2-1/2-year investigation of GM's relationship and transactions with Delphi.
Detroit News, May 10, 2007
Businesswoman wins lawsuit against Isuzu over commercial use exclusions in its warranty.
KAIT-TV Jonesboro, May 11, 2007
Housing Minister in Sabah, Malaysia proposes longer statutory warranties on new homes.
Bernama, May 11, 2007

More Warranty Headlines below

After Warranty Analytics


Warranty Headlines (cont’d)

Survey finds warranty is top priority for Malaysian buyers of second-hand IT equipment.
Computerworld Malaysia, May 2007
Diebold Inc. gets SEC subpoena in probe of service contracts and recognized revenue practices.
Associated Press, May 10, 2007
Dell tells editor's daughter in college to re-install Windows rather than replace the hard drive.
InfoWorld, May 10, 2007
Consumer Electronic Lemon Law advances in New Jersey Assembly Consumer Affairs Committee.
Politics NJ, May 10, 2007
UK Home Office sees higher costs for biometric passports; warranty remains at two years.
IT Pro, May 10, 2007

More Warranty Headlines below

Sign up for a free subscription to Warranty Week:
     subscribe     change of address     unsubscribe


Warranty Headlines (cont’d)

ThermoGenesis says lower margins due to cost of design improvements, product testing, and warranty claims.
Sacramento Business Journal, May 10, 2007
Onex Corp. revenue up 37% but net earnings fall 78%
Press Release, May 10, 2007
Forestry Division of Blount Inc. deploys 4CS iWarranty software.
Press Release, May 9, 2007
Toyota profits fall 2.8%, caused by increased sales costs and "the early booking of spending on warranty reserves."
Reuters, May 9, 2007
Gateway E-475M and E-265M notebooks feature three-year warranties.
Press Release, May 9, 2007

More Warranty Headlines below



Warranty Headlines (cont’d)

Director of says a lifetime warranty is only as good as the people who back it.
Press Release, May 9, 2007
SEC makes LCA-Vision Inc. restate results to change revenue recognition for extended warranties.
Press Release, May 8, 2007
Consumer Reports survey finds customers prefer retailers' tech support services to manufacturers' own.
Press Release, May 8, 2007
AMR Research says 25% of U.S. manufacturers to move some production overseas if current conditions persist.
Press Release, May 8, 2007
Electronics Boutique Holdings Corp. settles service plan sales tax class action lawsuit.
Press Release, May 8, 2007
Microsoft's Peter Moore can't comment on Xbox 360 failure rates being higher than 3%.
San Jose Mercury News, May 7, 2007
IBM's one-country-only product warranties impede its global sales strategy.
CRN, May 7, 2007
Salesman takes $10 off price of DVD player if customer buys extended warranty for $10.
Washington Post, May 6, 2007
Responding to lawsuit, Carrier says warranty repair rate for secondary heat exchangers is under 0.5%
Press Release, May 4, 2007
Fort Worth Better Business Bureau fields puppy warranty complaints against
Fort Worth Star-Telegram, May 4, 2007
High Tech Pet agrees to investigate outstanding warranty claims and either repair or refund purchases.
Consumer Affairs, May 3, 2007
Navistar files counter-suit against Ford, seeks $2 billion in damages.
Associated Press, May 3, 2007
Soldertec Global launches audit service to test compliance with RoHS.
Press Release, May 3, 2007
AA Warranty hires Golley Slater PR to promote the launch of its extended warranty service in the UK.
How Do, May 3, 2007
Demand for longer battery life leads to safety disasters, such as the Sony battery recall in 2006.
CNET, May 2, 2007
GM North America VP touts turnaround, says longer warranties provide more value to his customers.
The Crescent News, May 2, 2007
Modine Manufacturing blames fourth quarter loss in part on higher warranty costs.
Business Journal of Milwaukee, May 2, 2007
Six Sigma projects improve quality, reduce warranty costs and increase customer satisfaction.
Disclosures magazine, May 1, 2007
Anyware Computer Accessories lengthens warranty on TP-Link networking gear to three years.
Computerworld Australia, May 1, 2007
Ricoh offers two-year on-site warranties on new gel-based color printers.
IT Week, May 1, 2007
New bathrooms at Tallil Military Base in Iraq were failing even during the warranty period.
Chartered Institute of Building, May 1, 2007
Circuit City increases frequency of extended warranty pricing reviews from quarterly to monthly.
Dealerscope, May 1, 2007
Netgear ProSafe networking solutions now carry a lifetime hardware warranty.
Press Release, May 1, 2007
Colorado lobbyists accused of making false claims about a tax hike to oppose home warranty bill.
Denver Post, May 1, 2007
Reuters to acquire ClearForest Ltd., makers of text analytics software.
Press Release, April 30, 2007
All Subaru Tribeca 4x4s sold in UK from May to July to carry promotional five-year warranty.
What Car? April 30, 2007
Apple Inc. says some MacBook batteries may have performance problems and need replacing.
Reuters, April 30, 2007
IBM business partners say lack of international warranties impedes their global growth.
CRN, April 30, 2007
MyThings Web site records serial numbers and purchase dates, smoothing warranty claims.
New York Times, April 30, 2007
New York's MTA won't fix some of its own failure-prone elevators for fear of voiding warranties.
New York Sun, April 30, 2007
All Mazdas sold by Towell Auto Centre in Oman this summer get promotional five-year warranty.
Press Release, April 29, 2007
Homebuilder sues RipOffReport and Google for posting negative comments about his business.
Newark Star-Ledger, April 27, 2007
Tidewater Builders Association's home warranties have loss ratio of 5%, vs. 40% for competitor.
Hampton Roads Virginian-Pilot, April 29, 2007
Mustang Shelby Super Snake engine can be tuned up to 725 horsepower, but that voids the warranty.
Motor Trend, April 27, 2007
JP Morgan analyst sees lower warranty costs at Ford North America during first quarter.
Reuters, April 26, 2007
Monaco Coach says quality improvements helped it cut warranty expense in the first quarter.
Press Release, April 26, 2007
Microsoft reports increased Xbox 360 console warranty expenses; division's losses continue.
Ars Technica, April 26, 2007
BorgWarner profit falls 5% after first quarter warranty charge.
Associated Press, April 26, 2007
Fujitsu Siemens Computers opens new call center in the UAE.
Press Release, April 26, 2007
New Staten Island Ferry boats have generator and cooling system problems, but they're covered under warranty.
WABC-TV New York, April 26, 2007
Jim Moran, automotive pioneer and founder of JM Family Enterprises, dies at age 88.
Press Release, April 24, 2007
Lennox International reports lower profits, higher parts costs, increased warranty costs.
Press Release, April 24, 2007
Asus adds third year to notebook warranties in Singapore.
Hardware Zone, April 24, 2007
Cell-phone lemon law sought by Illinois legislator who replaced handset three times.
Chicago Tribune, April 23, 2007
Assurant pays wrong service provider and consumer pays the right one for refrigerator.
KUTV Salt Lake City, April 23, 2007
Intel denies processors secretly record overclocking attempts, which voids its warranty., April 23, 2007
QAD Enterprise Applications 2007 includes warranty tracking in service and support module.
Press Release, April 23, 2007
The Warranty Group completes relocation of its headquarters to Chicago's financial district.
Press Release, April 23, 2007 (PDF file)
General Motors South Africa notices a pattern in shattered Opel Corsa Lite back windows.
Motoring & Independent Online, April 23, 2007
MTU Detroit Diesel Australia to give MBE 4000 and Series 60 engine buyers a five-year warranty.
Supply Chain Review, April 23, 2007
Business World survey ranks Tavant Technologies 17th best place to work in India.
Press Release, April 22, 2007
Former used car dealer Sam Irvin Jr. pleads not guilty to charges of extended warranty fraud.
Dayton Daily News, April 20, 2007
Mahindra & Mahindra to sell SUVs in U.S. backed by 4-yr./60,000-mile warranties.
Associated Press, April 19, 2007
GM's longer warranties get positive reviews from AutoPacific brand study's panelists.
Press Release, April 19, 2007

More Warranty Headlines