A subscriber asked a simple question for which there should be a simple answer: What is the average claims cost per vehicle for the major automotive manufacturers?

He had just come across an old article on claims cost per vehicle (Warranty Week, Jan. 27, 2004 ) that found the Detroit Three paying roughly twice as much in claims per vehicle as did the Japanese imports, and he wanted to know if that was still true.

Unfortunately, there is no simple answer. To derive figures for claims cost, first one has to estimate the different average warranty duration for vehicles sold in North America, Europe, Asia, and elsewhere. And then one has to combine those estimates with sales figures to estimate how many vehicles are under warranty at any given moment. One also has to estimate how many vehicle warranties expire on mileage versus time.

For manufacturers such as DaimlerChrysler AG and Honda Motor Co., one also needs to estimate the average warranty cost not only for passenger cars and light trucks, but also for heavy trucks, motorcycles, and even portable generators. That's the only way to figure out how much is being spent on cars, vans, SUVs and pick-up trucks. And then there's the added cost of longer powertrain warranties, which in some cases can last as long as the car is owned by the original buyer.

And finally, one has to make some choices regarding which exchange rate to use for dollars, euros, and yen. Should it be the annual average? Or should it be the rate at the end of each quarter? The year-end figure? With all the recent gyrations in currency values, the claims cost of an export over the three-or four-year life of its warranty could rise or fall significantly based on that factor alone.

Assumptions Built Into Their Estimates

The good news is that many of the automakers have done this work for us. We don't need to know how long their warranties are because they know this at the time they estimate their warranty accruals. Before they decide how much to set aside as a warranty accrual when they sell a given vehicle, they have to consider factors such as warranty duration, product quality, local repair costs, and how many warranties will expire on mileage before their time is up. They have to estimate the future claims cost per unit at the time of sale, and add that amount into their warranty reserve funds.

The figures the automakers report for warranty accruals each year are an amalgamation of all these estimates. Is one nameplate generating more warranty work than another? That difference will be built into the accruals. If SUV One is expected to generate $500 in warranty costs over the life of its warranty, and Manufacturer A sells a thousand of them, the company will set aside $500,000 in its warranty reserve fund. And if Sedan Two is expected to generate only $250 in warranty cost per vehicle, and Manufacturer A sells two thousand of them, it will add another $500,000 to the reserve fund.

Of course, the automakers would never reveal which of their nameplates generate the most warranty costs. In fact, they're dead set against the public release of warranty data now collected by the U.S. National Highway Transportation Safety Administration as part of the TREAD Act. But if Manufacturer A reveals to one government agency that it sold three thousand vehicles (SUVs and sedans) and tells another government agency that it accrued one million dollars for their predicted warranty costs, it's a rather straightforward process to figure out an average per-vehicle accrual rate of $333.

It turns out that General Motors Corp., Ford Motor Co., DaimlerChrysler, Honda and Toyota Motor Corp. each separately report both their annual sales figures and their annual warranty accruals. In terms of units sold, these five (or six) companies have an estimated 77% market share in the U.S. and a 46% share of the worldwide market for passenger cars, vans, and light trucks. So it's a rather straightforward process to figure out the expected warranty costs for more than three-quarters of the vehicles sold in the U.S. and almost half the vehicles sold in the world.

General Motors First

Let's start with General Motors. Now that the company has spun off its locomotive division and because its primary product line is comprised of passenger cars and light trucks, the calculations are rather straightforward. GM reported $5.14 billion in accruals in 2007 and sold 9.37 million vehicles worldwide, suggesting an accrual rate per vehicle of $548.

Ford Motor Co., meanwhile, reported 6.55 million vehicles sold in 2007, including the Jaguar and Land Rover brands. Excluding those nameplates, Ford reported $2.9 billion in warranty accruals for 2007. Adding in a $600 million estimate for accruals made by Jaguar and Land Rover, we've adjusted that figure upwards to $3.5 billion. Using that higher figure results in a calculation of $533 for accruals per vehicle.

The corresponding estimates for GM and Ford in 2006 are $497 and $525 per vehicle, which means that the accruals per vehicle have increased for both companies. At GM, the average revenue per vehicle was unchanged, which means the accrual rate took a slight jump. At Ford, however, we're estimating an 8.4% increase in revenue per vehicle sold, so the accrual rate took a slight dip.

Back in 2005, we're estimating a per-vehicle accrual for GM of $562 and a per-vehicle accrual at Ford of $579. We're also estimating a worldwide average revenue per vehicle for GM of $17,500 for 2005, as opposed to $22,500 for Ford. Therefore, the accrual rate for Ford was 2.6% in 2005 while at GM it was 3.2%.

If those figures sound off, keep in mind that only 7.5% of Ford's unit sales and 5.4% of its revenue that year came from the Asia/Pacific region while 37% of its unit sales and 42% of its automotive revenue came from Ford Europe and the Premier Automotive Group. Prices tend to be higher in Europe and lower in Asia/Pacific.

At GM, Europe accounted for 22% of unit sales in 2005 and Asia/Pacific accounted for 28%. In addition, GM has a strong market share in markets such as Brazil, Venezuela, and Colombia. So the product mix is stronger for GM in low-priced markets and weaker in high-priced markets.

The most striking aspect of Figure 1 is how both Ford and GM seem to track each other. Whatever caused the dip in 2006 -- be it exchange rate fluctuations, improved quality, increasing sales in low-cost markets, or some other factor -- it happened to both of them at the same time. And one could eyeball the chart and estimate that the typical warranty accrual per vehicle for this pair of manufacturers is $540. It might be more for cars sold in Western Europe and less for cars sold in South Asia, but that's the worldwide average for GM and Ford vehicles: $540.

DaimlerChrysler Warranty Accruals

Calculating estimates for DaimlerChrysler gets a bit trickier, because of course last year the companies split into Daimler AG and Chrysler LLC, and both ceased reporting their warranty expenses either together or separately. Meanwhile, Daimler reports its sales figures in euros and Chrysler, as a privately-held company, no longer makes any financial reports. So we had to look back into 2006 and 2005 to create 2007 estimates for both companies.

Daimler reported selling 1.25 million Mercedes brand vehicles worldwide in 2006 and 2.65 million Chrysler, Jeep and Dodge brand vehicles. It reported sales of 1.22 million Mercedes and 2.81 million Chrysler Group vehicles worldwide in 2005. From this data and their previously reported warranty expenses we've been able to fashion a warranty accrual estimate of €609 per vehicle for Chrysler in 2006 and €665 in 2005, and €1,495 for Mercedes in 2006 and €1,534 in 2005.

Making some adjustments for sales increases and warranty cost decreases, our estimates for 2007 accruals are €1,390 per unit for Mercedes vehicles and $772 for Chrysler, Jeep and Dodge vehicles.

Note the switch of currencies for 2007. Although the U.S. has always been Chrysler's primary market, in 2005 and 2006 DaimlerChrysler reported those sales in euros. To make those figures comparable to GM and Ford, we're going to have to convert those numbers from euros to dollars. And here's where it gets even trickier.

The conversion rates we choose will affect the estimates considerably, because of the recent decline of the dollar versus the euro. For 2005, we're using an exchange rate of €1.00=$1.18 and for 2006 we're using a rate of €1.00=$1.32. And that gives Chrysler a per-vehicle accrual rate of $803 for 2006 and $787 for 2005.

In other words, while we're estimating that DaimlerChrysler cut its accrual rate for Chrysler vehicles from €665 to €609 in its home currency, the corresponding dollar value of those accruals increased from $787 to $803. And when Chrysler was making accruals on its own last year, it cut the accrual rate per vehicle back to $772. But as a percentage of revenue per vehicle, it was relatively unchanged.

At Mercedes, meanwhile, we estimate that accruals have been falling in euros but soaring in dollars. How's that? Well, we estimate accruals per vehicle of €1,534 in 2005, €1,495 in 2006, and €1,390 in 2007. But using the conversion rates noted above (along with €1.00=$1.46 for 2007), the corresponding figures in dollars are $1,816 per Mercedes in 2005, $1,973 in 2006, and an incredible $2,030 per vehicle in 2007. It's a good thing the average price per Mercedes is climbing towards $60,000, or else the accrual rate would have soared as well.

Toyota & Honda

The top Japanese nameplates are not only exporting vehicles to the U.S. but they're also making them in the U.S. They're selling in Asia and they're selling in Europe. Toyota is the number two brand in the U.S. and is getting close to the number one slot worldwide. In the fiscal year ended March 31, 2008 (which we're calling "2007" in the chart below), Toyota reported 8.91 million vehicles sold worldwide, not far behind GM's 9.37 million sold in calendar 2007.

One suspects that vehicles made and/or sold in the U.S. will generate higher warranty costs than those sold in Asia. And one suspects that because of high labor rates and the strength of the euro, the cost of repairs in Europe might be higher still.

But what we're calculating here is a worldwide average for warranty accruals per vehicle, and for Toyota at least that's a straightforward process. Toyota reported ¥324.11 billion in warranty accruals worldwide in 2007, which works out to ¥44,000 per vehicle. That's up 11% in their home currency from 2006, and is up 18% in their local currency from 2005.

Honda is a bit more complicated. The company also sells motorcycles and portable generators, so not all their accruals are attributable to cars and light trucks. However, we've fashioned an estimate that takes this into account, allocating 17% of the company's ¥136.4 billion accrual in the year ended March 31 to these lines of business.

That leaves Honda with a per-car accrual of ¥28,750 in 2007, ¥32,650 in 2006, and ¥30,900 in 2005. However, translated into dollars, with an exchange rate of ¥114=$1.00 in 2005, ¥118=$1.00 in 2006, and ¥100=$1.00 in 2007 reveals a different slope to the curve.

Rather than increasing then decreasing, as it does in yen, the Honda accrual rate per vehicle increases each year in dollars. But since of course Honda is based in Japan, it's calculating its accruals in yen. So the yen-dollar conversion rate is not really relevant to its warranty planning, except in regards to vehicles repaired in the U.S.

For Toyota, the conversion to dollars makes the upward trend look even worse. Rather than a 2006-2007 increase of 11%, as was the case in yen, the increase in dollars per vehicle is 33%. It looks like a crisis until one remembers that the dollar doesn't go as far as it used to. So perhaps it is a crisis -- it's just not a warranty crisis.

All six companies won't fit onto one chart comfortably, so let's rank them from lowest to highest: Honda ($287), Toyota ($439), Ford ($533), GM ($548), Chrysler ($772), and Mercedes ($2,030). But before one jumps to conclusions about quality, reliability, or the cost of ownership, remember that the average sales revenue per vehicle also varies by market and by currency. Measured in dollars, the average Mercedes vehicle sells for more than three times as much as a GM nameplate! So in proportion to selling price, the accruals per vehicle aren't all that far apart.