April 16, 2009
sponsored by Tavant
ISSN 1550-9214         

Appliance & Building Material Warranties:

The economic downturn that started with the homebuilders is showing its effects on the makers of appliances, fixtures, tools, furniture and building materials. But some segments haven't seen very big recent declines in warranty expenses, and some companies have actually seen their warranty costs rise.

Of the three major sectors in the warranty world -- vehicles, electronics, and buildings -- the latter is by far the smallest. While almost half of last year's $28.7 billion in warranty claims arose from the sale of automobiles, heavy equipment, boats and aircraft, and while more than a third came from computers, telecom, medical equipment, consumer electronics and other high-tech lines of business, only 14.4% came from the building trades.

And despite the slowdown that's evident below in Figure 1, the combined reported claims costs of the more than 123 warranty providers active in the building trades topped $4 billion for the third year in a row in 2008. Makers of home appliances and heating, ventilation, and air conditioning systems accounted for the bulk of that claims cost ($1.85 billion), followed by the manufacturers of portable generators and other power generating equipment ($951 million), the makers of fixtures, furniture, and other building materials ($757 million), and finally by the publicly-traded builders of new homes ($570 million).

Figure 1
Appliance & Building Material Warranty Claims
Worldwide Warranty Claims of U.S.-based Companies, 2003-2008
(claims paid in US$ millions)

Figure 1

When we last checked in with the building trades, coincidentally in the year-apart newsletters of September 25, 2008 and September 25, 2007, it wasn't yet clear how pervasive the economic downturn that began with the homebuilders would later become. We're planning an in-depth report on the homebuilders in next week's newsletter, so this week we'll tackle the other three segments.

Appliances & HVAC

Let's start with the appliance sector. One reason this sector accounts for so much warranty expense is the breadth of the products within it. Everything from basement furnaces to rooftop HVAC systems fits in here, as does practically anything mechanical that's used to cook or clean food or clothing (or people).

In Figure 2, we've taken the same data included in Figure 1 and chopped it into quarterly pieces, stretching the vertical scale as much as possible to show off the fluctuations in a better light. And it's clear from this angle that the peak came in the second quarter of 2007, when claims almost hit $600 million. By the final quarter of 2008, claims had fallen to $437 million, the lowest quarterly total since the end of 2006.

Figure 2
Appliance & HVAC Equipment Warranty Claims
Worldwide Warranty Claims of U.S.-based Companies, 2003-2008
(claims paid in US$ millions)

Figure 2

They say you never know when an industry has bottomed out until you're looking at it in the past. We suspect the same may be true of the industry peaks. Indeed, we weren't even told the current recession had begun until it was almost a year old. And looking at the appliance and HVAC data now in hindsight, it's clear that the peak for this segment was more than a year and a half ago. No other quarter has come close to that $600 million peak.

But wait, let's not jump to conclusions so quickly. As we saw two weeks ago in the April 2 newsletter, one very large company (in that case, Motorola) can skew an entire industry's data (in that case, telecom equipment), making its own peak look like the industry's peak. In this case, we suspect the peak arose from an anomaly reported by Whirlpool.

As can be seen in Figure 3, Whirlpool's warranty claims total momentarily surged in the second quarter of 2007, jumping from a $125 million total in the first quarter to $279 million in the second. The company never revealed the reason for the surge, but it quickly subsided and claims rates went back to "normal." And then at the end of both 2004 and 2005 there's a notch in the data, as claims fell to unusually low levels.

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

Figure 3

There's nothing alarming in this data. It just shows how timing can mean everything in warranty reporting. For any given company, after six years one can see a baseline developing, or at least a normal range of ratios, and one can spot the divergences from that baseline with the naked eye. It's a big reason why we present so much of the warranty metrics in chart form -- the pictures tell the story so much better than words or numbers ever could.

Acquisition-Related Surges

We spent a lot of time in the report on the top 100 warranty providers of 2008 describing how Ingersoll-Rand managed to get onto so many lists. Basically, that's what happens when a company makes a major acquisition in a warranty-intensive industry, as Ingersoll-Rand did when it acquired Trane and in the process became a major HVAC industry player.

Rather than repeat all of that again here, we'll suggest a detour back to that newsletter and then a quick look at the chart below, where it's rather easy to spot the moment the acquisition became final.

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

Figure 4

IR's claims rate and accrual rate each more than doubled from the end of 2007 to the end of 2008, and its warranty reserve quadrupled in size. But that's almost entirely caused by Trane coming into the fold. The same thing happened to Johnson Controls when it acquired York International. At first the metrics soar, then they readjust to the new "normal."

Carrier & Otis

Last week, we included United Technologies Corp. in the aerospace industry, because of its ownership of Sikorsky, Pratt & Whitney, Hamilton Sundstrand, and other aerospace operations. This week, we'll borrow them back for the appliance industry, thanks to its ownership of Carrier. And, one could make a case that they also belong in the building materials segment, thanks to its ownership of Otis Elevator.

In spite of the early 2008 spike in warranty costs, UTC has been rather stable over the past two years. Warranted product revenue grew by 5% in 2008, the claims rate fell by 3%, and the warranty reserve contracted by 9%. The only big change was the accrual rate's one-tenth reduction from 1.1% to 1.0%.

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

Figure 5

As was mentioned in last week's newsletter, it's impossible for an external observer to reliably separate the warranty costs of Carrier, Sikorsky, and Otis. But the company itself reports that 21% of its revenues were in the civilian aerospace segment, while Carrier was 25% of total revenue and Otis was 22%.

Therefore, one could make a case that with $551 in total warranty claims last year, United Technologies was likely a major player in the provision of warranties in civilian aerospace, air conditioning, and building materials. We're not going to double-count UTC in building materials this week, however. Let's just assume that something on the order of $150 million or more of UTC's total warranty outlays were for elevator repairs, and let's mentally add that into the data in Figure 6 below.

Figure 6
Tools & Building Material Warranty Claims
Worldwide Warranty Claims of U.S.-based Companies, 2003-2008
(claims paid in US$ millions)

Figure 6

Except for spikes in the third quarters of both 2004 and 2006, the claims total for makers of building materials and tools have been rather stable for the past six years. And if one overlooks that most recent peak, the average quarterly claims total has remained rather close to $190 million for three-and-a-half years. What's truly amazing, however, is that claims actually rose in the fourth quarter of 2008, when the homebuilders were at what one hopes was the very bottom of their industry downturn.

The claims total for the full year of 2008 was actually down a bit from 2007, but as the data in Figure 1 shows, it's been close to $750 million per year for four years. And one can see why expenses are so stable in this industry segment from a glance at the snapshot below of one of its biggest players, Black & Decker Corp.

Figure 7
Black & Decker Corp.
Warranty Claims & Accrual Rates, 2003-2008
(as a percentage of product sales)

Figure 7

Black & Decker reports its warranty data only once a year, which is part of the reason its data looks so flat. However, in the six annual reports filed with the U.S. Securities and Exchange Commission since 2003, the company has never reported more than an 0.1% difference between its claims and accrual rates, nor have either ever been more than 0.2% away from their long-term average of 1.8%. We suspect that the quarterly data might contain a surprise or two -- maybe even a one-time anomaly like Whirlpool -- but the annual data is as smooth as they come.

Stanley Works, on the other hand, saw its claims and accrual rates dive precipitously during the fourth quarter of 2003. Like a missing tooth, it ruins an otherwise good-looking portrait, as can be seen in Figure 8 below.

Figure 8
Stanley Works
Warranty Claims & Accrual Rates, 2003-2008
(as a percentage of product sales)

Figure 8

Stanley Works reported $23 million in claims last year; $22 million in 2007; and $20 million in 2006. Its claims and accrual rates have remained amazingly close to 0.5% for most of the past three years, and have never been very far from each other over the past six years. Sales were down 1% in 2008. Even its warranty reserve balance has remained the same over the past few years. Were it not for that notch taken out of the 2003 data, Stanley Works would have an impeccable track record in warranty expense reporting.

Electrical Power Generation Warranties

There's one more sector to spotlight this week: electrical power generation equipment. Warranty Week tracks more than a dozen warranty providers in this category, including Dresser-Rand Group Inc., American Superconductor Corp., Power-One Inc., and Capstone Turbine Corp. But, as is the case in several other sectors, one company utterly dominates the segment.

First, let's look at the overall trend. With the stretched vertical scale we're using, it's easy to spot the 2007 decrease and the 2008 increase. Total industry claims fell from $689 million in 2006 to $600 million in 2007, but then jumped by more than half in 2008 to $951 million. So what happened? It can't all be windmills and micro power plants.

Figure 9
Power Generation Equipment Warranty Claims
Worldwide Warranty Claims of U.S.-based Companies, 2003-2008
(claims paid in US$ millions)

Figure 9

The answer is two letters long: GE. General Electric has a major presence in both the appliance and the aerospace industry, and has lately acquired a major stake in medical equipment. All of those industries are warranty-intensive. But GE has always stated that its warranty costs arise primarily from sales of power generating equipment, so we'll take them at their word.

If that's the case, then GE alone accounts for between 95% and 97% of the expenses in Figure 9. Granted, the portable generator revenues of Cummins, Honda, and others aren't included there, nor are many of the hybrid car battery pack manufacturers. But even if they were, GE would still dominate the data, and the slope of the curve in Figure 9 would still look rather similar to the slope of the curve in Figure 10.

GE Nears The $1 Billion Mark

Tomorrow is the day GE is scheduled to reveal its first quarter financials, but if the past six years is any guide, their Friday morning announcement won't contain any warranty information. That's because GE has chosen to reveal this data only once a year, and that's why the lines and bars in Figure 10 look somewhat stair-like. To fit it into a quarterly format, we've taken each annual report and divided it into four pieces, as was done with Black & Decker.

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

Figure 10

In calendar 2008, GE reported $917 million in warranty claims, a 60% jump from 2007 levels. And that right there accounts for most of the rise seen in Figure 9. But GE also said sales revenue within the Technology Infrastructure and Energy Infrastructure operating segments that account for most of the warranty expenses was up by 13%, so the company's overall claims rate jumped much more modestly, from 0.8% to 1.1% (we don't include revenue from non-warranted sources such as NBC or Universal).

Back in 2003 and 2004, GE's operating segments were organized differently, so the data from those years is largely incomparable to the past four years. As the graph suggests, though, it wasn't so much because of changes in the total warranty costs reported per year as it was a change in how revenue was segmented. Back in 2003 and 2004, GE said warranty expenses arose primarily from the sales of Power Systems, which was just one small part of what's now included in Energy Infrastructure. So the claims rate was higher, simply because it was spread across less revenue.

To get that into the graph, we had to use a logarithmic scale for the claims and accrual rates. That compresses the data somewhat, perhaps making it look like GE's claims and accrual rates have remained very close to one percent since 2005. In truth, though, the rates have remained within a range of 0.8% and 1.2%, which actually is a fairly narrow spread.

In 2009, if GE's sales and warranty expenses increase a bit more, the company could become only the sixth member of the Billion Dollar Warranty Club. To date, only five American companies have ever reported spending more than $1 billion within a single calendar year on warranty claims: GM, Ford, Caterpillar, HP, and Dell. Caterpillar reached this milestone for the first time in 2008, and Dell reached it for the first time in 2005. The other three have been there since before Warranty Week began counting in 2003. So it's a pretty exclusive club.

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



This Week’s Warranty Week Headlines

SigmaQuest announces April 30 webinar on improving the costs of quality within the supply chain.
Press Release, April 16, 2009
Sprint updates its warranty policy, drops $35 to $55 in-warranty service fees.
Phone News, April 16, 2009
Custom installers of wall-mounted flat-panel displays absorb true cost of warranty work.
CE Pro, April 16, 2009
Belkin India's surge protector product warranties to also cover connected equipment.
Channel Times, April 16, 2009
Canadian Trucking Alliance says biodiesel averaging rules risk voiding their warranties.
Press Release, April 15, 2009

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Mize Warranty Connect


Warranty Headlines (cont’d)

Financial specialist explains what to look for when evaluating an extended warranty.
WKOW-TV Madison (WI), April 15, 2009
U.S. Fidelis vs. Better Business Bureau: Dueling statements on extended warranty firm.
St. Louis Post-Dispatch, April 15, 2009
Magic Investments buys the Crazy Eddie retail name and intends to bring it back!
Brand Week, April 14, 2009
Microsoft Xbox 360 warranty extended for E74 error message.
Major Nelson, April 14, 2009
Service Line Warranties sells utility line warranty protection to homeowners in West Verginia.
WBOY-TV Clarksburg WV, April 14, 2009

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PCMI - Your technology partner


Warranty Headlines (cont’d)

Avocent white paper addresses issues in tracking costs of service contract and warranty renewals.
Press Release, April 14, 2009
Report finds UN rebuilding blunders, defects and warranty issues in Afghanistan projects.
Associated Press, April 14, 2009
Asus offers warranty in India for motherboards burnt by power fluctuations.
CRN India, April 13, 2009
Tech Mahindra subsidiary Venturbay Consultants to buy 51% stake in Satyam Computer Services.
Indo-Asian News Service, April 13, 2009
Cutting dealerships key to reducing GM and Chrysler's costs.
Los Angeles Times, April 13, 2009

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After Warranty Analytics


Warranty Headlines (cont’d)

Nationwide Home Warranty wanted records that a dishwasher was regularly maintained.
KTVK-TV Phoenix, April 13, 2009
Cummins to discontinue making ComfortGuard power units but warranties will continue.
Land Line Magazine, April 13, 2009
Russia threatened to void the warranty on tanks upgraded by Israeli defense companies.
Defense Update, April 13, 2009
Warranties and try-before-buy are biggest issues with duty-free shopping for electronics.
Sydney Morning Herald, April 12, 2009
Town Fair Tire warranty records spark sales tax battle between NH & MA governments.
Boston Herald, April 11, 2009

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Warranty Headlines (cont’d)

Australian appliance company Kleenmaid Group goes into administration; warranties worthless.
Sydney Morning Herald, April 10, 2009
U.S. Fidelis has more Better Business Bureau complaints than just about anyone else in town.
St. Louis Post-Dispatch, April 9, 2009
Poll finds 57% willing to buy car from bankrupt company if U.S. backs warranty.
CNN, April 9, 2009
Man who tricked Cisco Systems out of $3.7 million in parts gets 6-1/2 years in prison.
The Oregonian, April 8, 2009
Apple issues bulletin to authorized service providers on white MacBook casing cracks.
Apple Insider, April 8, 2009

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Entigo, Founding Sponsor


Warranty Headlines (cont’d)

Musical instrument retailer Sweetwater Sound offers two-year product warranties.
Press Release, April 8, 2009
Guide to passenger car makers' buyer assurance and warranty programs.
Associated Press, April 8, 2009
Canadian government to spend up to $185 million to back warranties of new GM & Chrysler cars.
Toronto Globe and Mail, April 7, 2009
Auto suppliers get $700 million in receivables insurance from Canadian government.
Financial Post, April 8, 2009
Websters Twinfisher increases warranty period for all its boats to five years.
Press Release, April 7, 2009
Sensor manufacturer Endevco lengthens warranties to five years.
Test & Measurement World, April 7, 2009
MSX International teams with Xtime Inc. to sell software to auto dealers.
Press Release, April 6, 2009
Samsung India to offer pick-up warranty services for notebook computers.
CRN India, April 6, 2009
U.S. car warranty program will be run by the Treasury Department, which has never defaulted.
Denver Post, April 5, 2009
The Ford Advantage and GM's Total Confidence plans will make car payments if buyer loses job.
Orlando Sentinel, April 4, 2009
Zodiac dealers to sell extended warranies for inflatable boats bought through a liquidator.
Press Release, April 4, 2009
President Obama may soon come to regret getting himself so entangled in the car business.
Washington Post, April 3, 2009
Fleetwood Enterprises gets bankruptcy court approval to pay warranty claims.
Press Release, April 3, 2009
Steve Saleen says SMS Supercars will honor Saleen Inc. warranties.
Motor Trend, April 3, 2009
Oki Printing Solutions extends three-year warranty offer to its entire printer product line.
CRN, April 2, 2009
Para Systems announces exteneded warranty plans for Minuteman uninterruptible power supplies.
Press Release, April 1, 2009
Voting machine service contracts canceled in New Mexico due to non-payment.
Associated Press, April 1, 2009
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
House Minority Leader worries about effect U.S. warranty plan will have on Honda.
CQ Politics, April 2, 2009
Experts say potential auto bankruptcy reorganizations might not be easy or quick.
Associated Press, April 1, 2009
An open letter from filmmaker Michael Moore on the firing of GM's CEO.
Web Blog, April 1, 2009
U.S. government will stand by GM's car warranties and all the taxpayers will get a lube job.
Human Events, April 1, 2009
Visteon UK Ltd files for administration with the UK High Court under the Insolvency Act 1986.
Press Release, March 31, 2009
White House ousts GM CEO, plans to backstop GM & Chrysler warranties during restructuring.
USA Today, March 30, 2009
What the Warranty Commitment Program means.
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.
Washington Olympian, March 30, 2009
Con: Washington state's home warranty bill would push up the price of all housing.
Washington Olympian, March 30, 2009
KPIT Cummins Infosystems releases slideshow on high performance warranty management.
Press Release, March 30, 2009
Bogus expiring warranty scam calls going to Chico police 911 system operators.
Chico (CA) Enterprise-Record, March 29, 2009
Nike's two-year shoe warranty starts on the manufacturing date, not the purchase date.
Toronto Star, March 28, 2009
Mississippi regulator fines Vehicle Warranty Options for violating state’s no-call list.
Associated Press, March 27, 2009
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.
Associated Press, March 25, 2009
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
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

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