April 2, 2009
sponsored by Tavant
ISSN 1550-9214         

Telecom & Medical Equipment Warranties:

While Motorola sets the pace in the telecom equipment warranty sector, no one company dominates medical equipment warranties. In fact, if anything, the medical and scientific instrument makers are known for consistently low rates of warranty spending.

Is it the second quarter already? There's still a huge pile of fourth quarter 2008 data to rummage through, with this week it being the turn of both telecom equipment and medical & scientific instrument manufacturers to go under the microscope.

In this newsletter, we're examining the past six years of warranty expenses as reported by some 329 U.S.-based makers of the high-tech equipment used by telecom network providers, doctors, hospitals, and laboratories. However, only 171 of the companies are still in business; the balance were either acquired, taken private, or ceased operations.

That is a sobering statistic for anyone looking after American manufacturing policy: nearly half the makers of telecom and medical gear that began reporting their warranty expenses in 2003 no longer were in a position to do so by the end of 2008. And, as bad as things are in all industry sectors, it's a rate of attrition that was high long before the recession officially began.

We last looked at the medical & scientific industry in the October 2, 2008 newsletter, with a look at the telecom industry following in the October 9 newsletter. In both instances, we provided a series of eight snapshots of some of the industry players. In this newsletter, we'll do that again, trying not to duplicate any of the companies and also leading off with a six-year chart for the entire industry segment.

We'd like the statistics to tell a story, but in some cases the data can mislead. Let's start with the telecom equipment industry, where the reasons why the statistics can so easily tell a misleading story is easiest to see.

The Telecom Recession?

In Figure 1 below, it looks as if warranty claims peaked at a level of $547 million in the middle of 2006, and have been declining steadily ever since. That is, except for the end of 2008, when claims unexpectedly turned upwards again, jumping from $375 million in the third quarter to $423 million in the fourth quarter.

Figure 1
Telecom Equipment Warranty Claims
Worldwide Warranty Claims of U.S.-based Companies, 2003-2008
(claims paid in US$ billions)

Figure 1

Such a chart would be a great support for anyone who wanted to document the beginning and the bottom of the current recession. It has everything that's needed: the peak, the valley, and the tiny upturn signifying hope for the future.

However, it doesn't tell the whole story. Of the 82 currently operating telecom warranty providers, only Motorola and Cisco Systems are paying out more than $200 million a year in claims, and only six others are large enough to make the list of the top 100 warranty providers.

Motorola Sets the Pace

Like General Motors or Ford in the automotive sector, or HP and Dell in the computer sector, Motorola and Cisco are large enough to sway the industry total all on their own. And although Cisco is rather steady and predictable when it comes to warranty expenses, Motorola is just the opposite.

Motorola announces its warranty claims and accrual totals only once a year, at the end of each year. This makes it more difficult to analyze its warranty expenses on a quarterly schedule, but it's still possible. In Figure 2 below, what we've done is taken the annual expense and chopped it into four equal pieces. While it's unlikely that the company spent precisely the same amount in each of a given year's four quarters, this method at least approximates the true figures.

Figure 2
Motorola Inc.
Warranty Claims & Accrual Rates, 2003-2008
(as a percentage of product sales)

Figure 2

It looks like Motorola is having its own peaks and valleys, at approximately the same moment as the wider telecom industry. But because the Motorola data is in four equal slices, no upturn is evident in the fourth quarter data.

Figure 1 (and Figure 5 below) has its vertical axis stretched as far as possible in order to highlight the quarterly fluctuations as much as possible. The other charts do not have their axes stretched. Still, it does appear that at times, Motorola accounts for almost half the whole industry's warranty spending.

Indeed, as major players of the past such as Lucent technologies, Avaya, and Scientific-Atlanta were acquired or taken private, and as Motorola's own warranty spending continued to grow, its share of the industry total did at times approach half. Its $178 million outlay for claims in 2003 was only 13% of the industry total. Its 2005 share was almost triple that (37%). And the $891 million reported in 2006 claims was almost 42% of the industry total.

And then, as Motorola's warranty claims began to decline, so did the industry's. Motorola's 2007 total was $735 million while the industry's total was $1.89 billion that year. And then in 2008 Motorola's total was $488 million while the industry's total was $1.57 billion.

Last year, therefore, the telecom equipment sector spent $318 million less on claims than it did in 2007. But $247 million, or more than three-quarters of that reduction, was Motorola's alone. So that's why the shape of Figure 1 can be misinterpreted. While it can be taken to show the changes across an entire industry, it mostly shows the changes within just that industry's largest current player.

Nortel Files for Bankruptcy

Speaking of changes, on January 14, Nortel Networks filed in both the U.S. and in Canada for bankruptcy protection from its creditors while it restructures. If that restructuring effort includes a merger with a stronger and presumably a non-North American partner, the industry will lose yet another major player, as it did when the French company Alcatel merged with Lucent in 2006.

In Figure 3 below, the good news is that warranty expenses at Nortel have been rather boring and predictable for the past two years. That comes as a welcome respite from a much more chaotic period from 2003 to 2006, years in which Nortel was forced to restate its warranty expenses as they jumped from very low to very high rates.

In contrast, during 2007 and 2008, Nortel's claims rate remained within a narrow range of 1.8% to 2.0%, while accruals stayed in the 2.3% to 2.8% range. It was as if Nortel had finally mastered the art of warranty, just in time for the recession to sideswipe the rest of the company.

Figure 3
Nortel Networks Corp.
Warranty Claims & Accrual Rates, 2003-2008
(as a percentage of product sales)

Figure 3

In previous years, Nortel's claims and accrual rates had been as low as 1.5% and as high as 4.1%. That's both lower and higher than is typical for telecom equipment suppliers that specialize in sales to carriers, as Nortel does. For instance, back in the day, Lucent Technologies reported a 1.9% claims rate in its last full year as an independent company.

The truth is that most of the telecom warranty providers are small and medium-sized companies that specialize in one segment of the market or another. Some make data communications equipment. Others specialize in wireless, or perhaps in some even narrower segment such as microwave or television broadcasting. In Figure 4, we're spotlighting a company that specializes in the manufacture of the telephone headsets worn by call center agents and others who must be on the phone for long periods of time each day.

Telephone Headset Warranties

Based in Santa Cruz, California, Plantronics operates worldwide, through distributors in places as far-flung as Ghana, Ecuador, and Nepal. Around 60% of the business is in the U.S., however. And although most of the company's business is in the provision of headsets to the professional call center market, Plantronics also has a presence in the consumer entertainment and mobile phone ends of the market.

In Figure 4 below, some of that diversity can be seen in the sudden ups and downs that typically follow a new product launch. In that respect, 2007 and 2008 have been very active, while 2005 and 2006 were not. And while claims and accrual rates have risen as high as 3.3% and fallen as low as 0.9%, the long-term average has remained within the 1.6% to 2.8% range.

Figure 4
Plantronics Inc.
Warranty Claims & Accrual Rates, 2003-2008
(as a percentage of product sales)

Figure 4

Ciena Corp. is one of those companies whose name always seems to get mentioned in the NASDAQ stock market reports but whose reason for being there is never quite fully explained. At its core, Ciena is a optical multiplexing company whose 1997 initial public offering was the biggest IPO up until that date. And then a decade ago, its bestselling multiplexing products helped the telephone companies wedge so much traffic onto their fiber-optic lines that it became feasible for them to stop billing their best customers by the minute. But then the post-Y2K recession hit, and carrier equipment sales plunged.

Instead of merely trying to ride out the post-Y2K recession, Ciena decided to diversify, and began buying up smaller companies engaged in corporate networking activities and more mainstream computer networking activities such as data storage. What's remarkable about the company from a warranty perspective is how all these acquisitions seem to have come together so well during the past six years.

In Figure 5 below, Ciena begins 2003 with a dangerously high 8% claims rate and a dangerously mismatched 2.4% accrual rate. But then in 2005 the claims rate begins to fall, and by mid-2006 it was actually below the accrual rate. By the end of 2008, the claims rate was at 1.5% and the accrual rate was just below 2%. And the six-year chart looked like a Nordic ski jump.

Figure 5
Ciena Corp.
Warranty Claims & Accrual Rates, 2003-2008
(as a percentage of product sales)

Figure 5

Let's switch gears to the medical and scientific equipment industry, where some 93 companies have reported warranty claims in 2008. The big difference from the telecom industry is that there are really no market-dominant players, although five of the companies did manage to get onto the lower half of the top 100 list.

In Figure 6 below, one can see clearly how claims have twice spiked, in the third quarters of both 2005 and 2008. We wish there was a simple explanation, but none of the major players registered sudden increases in claims, at least in 2005. In fact, some such as Varian Medical Systems and Medtronic actually reported declines in their claims levels compared to the second quarter of 2005.

But in 2008, at least, the culprit was clearly Eastman Kodak, which sells a variety of high end medical imaging equipment and which in the third quarter of 2008 saw its claims total suddenly triple to $73 million. One can be forgiven for missing that news -- it has never been reported anywhere. And now it's old news, with Kodak's claims total returning to more appropriate levels in the fourth quarter of 2008.

Figure 6
Medical Equipment & Scientific Instrument Warranty Claims
Worldwide Warranty Claims of U.S.-based Companies, 2003-2008
(claims paid in US$ billions)

Figure 6

Were it not for those twin spikes, warranty claims within the medical and scientific instrument industry would have stayed within the $150 to $200 million per quarter range for 21 of the past 24 quarters. That is an amazing level of consistency, but as we shall see, consistency is a hallmark of many of the major players.

For instance, the six-year warranty track record of Varian Medical Systems is remarkable for its unremarkability. Six years ago, the X-ray imaging company's claims rate was 3.3% and by the end of 2008 it had ... returned to 3.3%. The company's accrual rate was more variable, falling from a 2003 high of 4.3% to a 2008 low of 2.8%. Meanwhile, sales were up 10% so the claims rate fell even as claims in dollars crept up.

Figure 7
Varian Medical Systems Inc.
Warranty Claims & Accrual Rates, 2003-2008
(as a percentage of product sales)

Figure 7

Mettler-Toledo is more on the scientific instrument side of the industry, specializing in lab balances and analytical instruments, though it also is a major provider of grocer's scales, truck scales, and even postage scales. One can almost see how finely balanced the company is in Figure 7, with six years of data extremely close to 1.2%.

Figure 8
Mettler-Toledo International Inc.
Warranty Claims & Accrual Rates, 2003-2008
(as a percentage of product sales)

Figure 8

Bruker Corp., makers of MRI and X-ray imaging equipment is one of only three medical or scientific instrument companies to make it onto any of the top ten lists included in the March 13 newsletter. Its claims rate jumped from 2.0% to 3.6% in the past year, and its accrual rate jumped from 1.9% to 3.3%. In addition, its warranty reserve grew from $14 million to $25 million in size.

The reason for all these massive increases, we're happy to report, is an acquisition the company made last year. Bruker BioSpin had been a separate company owned by investors that also had a stake in Bruker Corp. But in February 2008, the similarly-named company merged with Bruker Corp. That in turn helped to double Bruker's annual revenue, and of course to drive up its warranty costs. The good news, as can be seen in Figure 9, is that claims and accruals have remained close to 3% of revenue, even though the claims totals jumped from $2 or $3 million per quarter to $8 or $10 million per quarter. Accruals have followed more or less the same path.

Figure 9
Bruker Corp.
Warranty Claims & Accrual Rates, 2003-2008
(as a percentage of product sales)

Figure 9

Finally, we wanted to check back in on Medtronic, a company that had quite a scare four years ago when its pacemaker product line was part of a wide-ranging recall. In 2005, Medtronic's claims rate more than doubled while its accrual rate quadrupled. Just in the second quarter of 2005, the company had to put $40.7 million aside in emergency accruals. And then for five of the next six quarters, claims remained above the $10 million mark.

Figure 10
Medtronic Inc.
Warranty Claims & Accrual Rates, 2003-2008
(as a percentage of product sales)

Figure 10

Again, the good news is that whatever ailed Medtronic back then is now firmly in the past. The past two years have been as quiet as 2003 and 2004 were. And with sales increasing at a 16% pace in the second half of 2008, the recent uptick in claims has resulted in a minimal increase in the claims rate, from 0.1% in the second quarter to 0.2% in the fourth quarter. Yes, that's a doubling in six months, but both figures are towards the low end of the scale.

Go to Part One
Go to Part Two
Go to Part Three
This is Part Four
Go to Part Five
Go to Part Six
Go to Part Seven
Go to Part Eight
Go to Part Nine



This Week’s Warranty Week Headlines

Oki Printing Solutions extends three-year warranty offer to its entire printer product line.
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Plug In America wants California’s stringent warranty requirements for electric cars reduced.
Canadian Driver, April 1, 2009
Chairman of the House Budget Committee says auto warranty plan needs legislative authorization.
CNS News.com, April 1, 2009
An open letter from filmmaker Michael Moore on the firing of GM's CEO.
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Visteon UK Ltd files for administration with the UK High Court under the Insolvency Act 1986.
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White House ousts GM CEO, plans to backstop GM & Chrysler warranties during restructuring.
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Associated Press, March 30, 2009
Understanding Obama’s auto warranty plan.
New York Times, March 30, 2009
Plan for GM may involve a bankruptcy filing with careful help from the government.
Los Angeles Times, March 30, 2009
Pro: Washington state's home warranty bill would make homebuilders accountable.
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KPIT Cummins Infosystems releases slideshow on high performance warranty management.
Press Release, March 30, 2009
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Nike's two-year shoe warranty starts on the manufacturing date, not the purchase date.
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Mississippi regulator fines Vehicle Warranty Options for violating state’s no-call list.
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Warranty Headlines (cont’d)

Keeping tire warranty valid could mean costly front end repair.
San Jose Mercury News, March 27, 2009
Best Buy sees "low single-digit gain" in extended warranty sales, rise in avg. price.
Press Release, March 26, 2009 (PDF file)
Tesla Motors begins taking orders for the Model S, an all electric family sedan due in 2011.
Press Release, March 26, 2009
ServicePower Technologies says 2008 revenues increased by 11% to £15.6 million.
Press Release, March 26, 2009 (PDF file)
National Warranty Insurance RRG becomes an issue in Nebraska candidate's lawsuit.
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Warranty Headlines (cont’d)

Ex-auto dealer David L. Shank arrested for allegedly pocketing extended warranty premiums.
Hanover (PA) Evening Sun, March 24, 2009
Author compares AIG mispricing credit default swaps to GM underaccruing for warranty costs.
Forbes, March 24, 2009
Eaton certifies the first 10 warranty centers under its Eaton Warranty Center Program.
Press Release, March 24, 2009
Cimtek CEO Stan Smith named a 2009 Supply & Demand Chain Executive Pro to Know.
Press Release, March 24, 2009 (PDF file)
Tata Motors launches tiny Nano car with an 18-month, 24,000-kilometer warranty.
Press Release, March 23, 2009

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Warranty Headlines (cont’d)

SAS Institute releases SAS Enterprise Miner, reduces large sets of variables to smaller subsets.
Press Release, March 23, 2009
Hitachi Power Tools offers a 10-year warranty on its Lithium Ion cordless tools.
Press Release, March 23, 2009
Michigan iPod repairman charged with warranty fraud.
Associated Press, March 19, 2009
National Car Rental forbids use of B30 biodiesel in its rental cars, fearing warranty problems.
Tusker News, March 19, 2009
ArvinMeritor introduces truck driveline with three-year, 300,000-mile warranty.
Press Release, March 19, 2009
GM warranty support staff in Ontario poised to strike.
Canadian Driver, March 18, 2009
UK company called We Predict develops system to help automakers reduce warranty costs.
Wales Online, March 18, 2009
Data Savers offers data recovery services to Apple customers getting their drives replaced.
Press Release, March 18, 2009
West Virginia legislation would let used car dealers sell old vehicles without a warranty.
Charleston Gazette, March 18, 2009
Office Depot salesmen won't sell laptops to customers not buying extended warranties.
KCAL-TV Los Angeles, March 17, 2009
A.M. Best affirms A- (Excellent) ratings of London General Insurance Company Limited.
Press Release, March 17, 2009
Chery Automobile models on sale in Thailand with three-year, 100,000-kilometer warranty.
The Nation, March 17, 2009
Boston-Power’s laptop batteries, based on Sonata technology, given three-year warranty by HP.
Press Release, March 16, 2009
Nvidia paid out $43.6 million to cover the cost of graphics chip defects in latest fiscal year.
CNET News.com, March 16, 2009
ClearCount Medical Solutions gives surgery warranty that no sponges will be left behind.
Press Release, March 16, 2009 (PDF file)
Empire Kitchen & Bath will give a five-year warranty on all kitchen remodeling projects.
Press Release, March 16, 2009
Archetype Joint says joints and fasteners account for 70% of warranty cost and 20% of recalls.
Press Release, March 16, 2009
Michigan dealer group head predicts GM will always honor warranties, even in bankruptcy.
Lansing State Journal, March 15, 2009
GM effort to drop dealers faces state laws and contracts that will slow the process.
Detroit Free Press, March 15, 2009
Warranty complaints that vehicles would not restart once placed in park prompts GM recall.
Reuters, March 13, 2009
Proton Cars covers GEN-2 Special Edition vehicles with a five-year warranty.
Press Release, March 12, 2009
4CS Inc. announces Service Suite, including its iWarranty warranty lifecycle management module.
Press Release, March 12, 2009
U.S. Dept. of Defense renews SigmaQuest's International Traffic in Arms Regulation certification.
Press Release, March 12, 2009
Washington state Senate, House each pass separate home warranty bills.
Associated Press, March 11, 2009
New Jersey governor suggests taking $10 million from the New Home Warranty Security Fund.
Cherry Hill (NJ) Courier-Post, March 11, 2009
Renewable Fuels Association says 15% ethanol blends will force auto warranties to change.
Ethanol Report (audio file), March 11, 2009
Emocean Marine shipyard in Abu Dhabi says it has the best warranty in the region.
Press Release, March 11, 2009
Fleetwood Enterprises Inc. files voluntary petitions for Chapter 11 protection.
Press Release, March 10, 2009
Monaco Coach dealers to get incentive payments against warranty claims that have accrued.
Eugene (OR) Register-Guard, March 10, 2009
Office Depot employee says chain has 30% extended warranty attach rate quota for laptops.
Laptop Magazine, March 10, 2009
Microsoft Notebook Cooling Base and Arc Base mouse have three-year warranties.
Press Release, March 10, 2009
Indian computer trade association launches Web sites to deal with warranty issues.
Channel Times, March 10, 2009
Fulcrum and 4CS announce a strategic marketing partnership.
Press Release, March 9, 2009
Dell Latitude E6400 XFR rugged touch-screen laptop has three-year warranty.
PC World, March 9, 2009
AIAG recognizes 30 companies for their 25 years of membership.
Press Release, March 9, 2009 (PDF file)
New owners of racing car maker Saleen Inc. won't honor warranties on any existing vehicles.
Motor Trend, March 9, 2009
RV dealer sells motor homes made by bankrupt Monaco covered by an extended warranty.
Tulsa World, March 7, 2009
Pedata RV touts extended warranties to cover buyers whose manufacturers go out of business.
Press Release, March 6, 2009
Miguel Caballero to sell bullet-proof T-shirts covered by five-year warranties.
Deccan Herald, March 6, 2009
Home warranty bills advance in Minnesota, despite opposition of builders.
Finance & Commerce, March 5, 2009
Warranty work is bargaining chip in Transport Workers Union strike talks.
Philadelphia Inquirer, March 5, 2009
Hewlett-Packard makes HP Insight Remote Support service free for all warranty holders.
Press Release, March 4, 2009
Univ. of South Dakota students lose the extended warranties they had on Gateway laptops.
The Volante, March 4, 2009
Consumers in Dubai need to be educated about their warranty rights.
Gulf News, March 4, 2009
Chrysler says its corporate warranty claim rate is down over 30% in the last 12 months.
Press Release, March 3, 2009
Warrantech appoints Dominic Sansone as president of Warrantech Automotive.
Press Release, March 3, 2009
Warranty Solutions selects the StoneEagle Group's SecureCard for claims management.
Press Release, March 3, 2009
Meisho to fix Melbourne's crippled Southern Star Observation Wheel under warranty.
The Age, March 2, 2009
ACS to provide Brother International with data entry services for warranty registration cards.
Press Release, March 2, 2009
Monaco Coach gives termination notices to the majority of its remaining workforce.
Press Release, March 2, 2009
Nokia stops selling the 5800 XpressMusic mobile phone in U.S. due to 3G signal issues.
Information Week, March 1, 2009
Warranties on unlocked Etisalat iPhones undercut imports and grey market prices.
The National (UAE), March 1, 2009
Dealers slash prices and double warranties at Roanoke boat show.
WSLS-TV Roanoke VA, February 28, 2009
SCIC says consumers should protect new digital TV purchases with service contracts.
Press Release, February 27, 2009 (PDF file)
C.P. Morgan Homes closes; residential warranty company to administer new home warranties.
Indianapolis Star, February 27, 2009
Amazon.com's Kindle 2 has one-year warranty and an optional two-year extended warranty.
ZD Net, February 26, 2009
Two-year extended warranty for Kindle 2 administered by Service Net Solutions.
Amazon.com, February 26, 2009
NEW Customer Service Companies to provide Dick’s Sporting Goods with No Sweat Protection Plan.
Press Release, February 26, 2009
Onex Corp. annual report includes $42 million dividend from The Warranty Group.
Press Release, February 26, 2009
The First American Corp. reports a decline in its home warranty business for the fourth quarter.
Press Release, February 26, 2009
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Detroit Free Press, February 26, 2009
Cummins says fourth quarter profit cut in half by higher warranty costs.
Associated Press, February 25, 2009
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Automotive Design Line, February 25, 2009
J.D. Power survey finds superior service increases long term profitability for auto dealers.
Press Release, February 25, 2009
Zale Corp. says extended warranty sales fell to $36 million in quearter ended Jan. 31.
Press Release, February 25, 2009
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Dealerscope, February 25, 2009
Gulfstream Aerospace launches a two-year parts warranty program.
Press Release, February 25, 2009
AXT Inc. blames higher warranty costs for deterioration in fourth quarter gross margins.
Press Release, February 25, 2009
Auditor finds Boston mass transit cut back on fare box repair warranties at the wrong time.
Boston Herald, February 25, 2009
Mxi Technologies enhances the aviation warranty functionality within its Maintenix software.
Press Release, February 24, 2009
Home Warranty of America survey finds 90% of realtors see market returning to normal this year.
Press Release, February 24, 2009
Gaggenau Home Appliances announces five-year product warranty effective March 1.
Press Release, February 23, 2009
Dell customer upset with overseas extended warranty help switches to local Geek Squad.
The Oklahoman, February 22, 2009
GM's Saab unit files in Sweden for bankruptcy protection, plans to become an independent company.
Motor Trend Magazine, February 20, 2009
Former Maytag repairman found guilty of submitting fraudulent repair claims.
Associated Press, February 20, 2009
President of Sears Holdings' tools business steps in to honor Craftsman's lifetime warranty.
Hartford Courant, February 20, 2009
Northwest Biofuels Association says engine makers can't void warranties over biodiesel use.
New York Times, February 20, 2009
Text of NWBA's joint letter with the Oregon Auto Dealers Association on biodiesel use.
Press Release, February 20, 2009 (PDF file)

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