April 28, 2011
sponsored by Tavant
ISSN 1550-9214         

Disk Drive & Semiconductor Report:

Warranty costs are falling for most of the high tech component makers, both in dollars spent and as a percent of sales. And unlike in the auto industry, the computer OEMs are not yet as accomplished at pushing their warranty costs back onto their parts suppliers.

The top computer makers we profiled in last week's newsletter seem to have mastered the art of controlling their warranty costs. So what about their suppliers?

It seems to be a split decision. Semiconductor makers are paying out more, but because sales are soaring, it's a smaller percentage of their total revenue. Disk drive makers are paying out about the same amount, but they're setting less aside for future costs.

Now that all the data is in, it's clear that disk drive and data storage system makers together paid out just slightly more for warranty claims in 2010 than they did in 2009. The claims total for the disk drive sector was $592.4 million last year, up from $592.2 million in 2009.

Their combined warranty accruals, meanwhile, took a big dip in 2010, falling from $622 million in 2009 to $568 million last year. That's nearly a 9% drop, but as can be seen in Figure 1 below, accrual totals have been quite volatile in this industry sector over the past eight years.

Figure 1
Warranty in the Data Storage Sector
Accruals Made by U.S.-based Companies
(in US$ millions, 2003-2010)

Figure 1

Accruals actually peaked back in 2005, though the total in 2008 came awfully close to topping it. The decline in 2006-2007 doesn't seem to follow any obvious trend, though disk drive manufacturers have been gradually reducing their accrual rates over the years.

Declining Reserve Balances

Warranty reserves are also declining in this sector. The peak balance of $953 million came in 2008, and was followed by a 3.3% decline in 2009 and another 6.6% decline in 2010.

Of the top five disk drive and data storage system manufacturers, only Western Digital Corp. has been increasing its warranty reserve balance in recent years. Seagate Technology, EMC Corp., NetApp Inc. and SanDisk Corp. have each chosen to reduce their warranty reserves from the peak levels seen in 2007 or 2008.

In Figure 2, we've charted the year-ending warranty reserve fund balance for the years 2003 to 2010, calculated by adding together the balances reported by 42 current and former disk drive and data storage system manufacturers.

Figure 2
Warranty in the Data Storage Sector
Reserves Held by U.S.-based Companies
(in US$ millions, 2003-2010)

Figure 2

With both claims and accruals declining, it's no surprise that the balance in the reserve funds would also decline. Part of the reason, of course, is the sales downturn seen in 2008-2009. But long before the name Lehman became a bad word, manufacturers in this sector were reducing their warranty expenses -- not only in terms of how many dollars was spent, but also as a percentage of sales.

In Figure 3, it's pretty clear that the companies in this sector have been quite successful when it comes to managing their warranty expenses. Over the past eight years, the average claims rate has declined from 2.7% in 2003 to under 1.2% in 2010. The average accrual rate has fallen from a peak of 2.6% to a trough of 1.1%.

Figure 3
U.S.-based Data Storage Companies
Average Warranty Claims & Accrual Rates
(as a % of product sales, 2003-2010)

Figure 3

What makes it all the more surprising is that this massive decline occurred in spite of the fact that disk drive warranties in recent years have been getting longer, and therefore more costly to their issuers. Seagate was one of the first to go to five years, up from three years and -- way back when -- only one year. The only way to provide longer warranties and still enjoy lower costs is if the product is built better. So data storage companies definitely have something to celebrate.

Semiconductor Warranties

The makers of semiconductors, printed circuit boards, and the machines that actually manufacture the units have a somewhat different story to tell. For them, all three warranty metrics are up. Claims grew 6.7% to $673 million in 2010, while accruals jumped an astounding 27% to $839 million.

The claims data for both the disk drive and semiconductor sectors can be found in Figure 9 of the April 1 newsletter. The accrual data for semiconductors is below in Figure 4.

Figure 4
Warranty in the Semiconductor Sector
Accruals Made by U.S.-based Companies
(in US$ millions, 2003-2010)

Figure 4

The 145 current and former manufacturers we track in this sector have chosen to accrue more than $800 million during five of the past eight years. Were it not for the big dip seen in 2009, it would be six out of eight.

Amazingly, though, last year's 27% gain in accruals wasn't the biggest ever. That title goes to 2003-2004, when accruals rose by 51%, from $544 million to $824 million in a single year.

Note that the vertical scale on these charts has been stretched in order to better show the changes from year to year. It would look much less dramatic were that not done.

Warranty Reserves

In terms of warranty reserves, one would expect that with claims rising and accruals rising faster, the balance in all these companies' reserve funds would also be rising. And the trend doesn't disappoint. In Figure 5, we see that warranty reserves set a new record in 2010, rising from $629 million to $772 million -- a 23% gain.

Figure 5
Warranty in the Semiconductor Sector
Reserves Held by U.S.-based Companies
(in US$ millions, 2003-2010)

Figure 5

The surprise in the data is how erratic and seemingly seasonal the warranty claims and accrual rates have been as a percentage of sales. In Figure 6, the rates bounce around from 1.45% back in 2003 to 0.5% in 2010. Or would they be bouncing around from 0.9% in 2003 to 1.2% in 2010? Both statements are true, as the data below reveals.

Figure 6
U.S.-based Semiconductor & PCB Companies
Average Warranty Claims & Accrual Rates
(as a % of product sales, 2003-2010)

Figure 6

We have no explanation for the volatility and seasonality of the data in Figure 6. Readers who have a theory should send it in. It's not the weather outside, as it is with products like lawn mowers, motorcycles and snowmobiles. And it's not the school calendar, as it is with medical equipment. So what is it?

Part of the reason may be the fact that major players such as Applied Materials Inc., Novellus Systems Inc., and Advanced Micro Devices Inc. all end their fiscal years in December, and perhaps they sweep all they can into their warranty accounts before the books close?. But Nvidia Corp. and Lam Research Corp. both end their fiscal years in the second quarter. And in recent years, Nvidia has been the biggest warranty provider in this sector.

The real reason may simply be the stretched vertical scale used in Figure 6. The same data is repeated at the bottom of Figure 7 using a different vertical scale, and it appears no more volatile than the others.

Computer Supplier Recovery?

Finally, we wanted to compare some of this week's data with the computer OEM warranty data contained in last week's newsletter. Our theory is that the OEMs, whether they're making cars, airplanes, computers or household appliances, always seem to suffer the highest warranty costs in their industry.

In the computer industry, the makers of disk drives and semiconductors are parts suppliers to the makers of desktops and laptops. Think of the disk drive makers as the engine and transmission manufacturers. And think of the semiconductor and printed circuit board makers as the parts suppliers.

Back in the April 7 newsletter, we pointed out the gap between the percentage of revenue that warranty consumes for the automotive OEMs and their suppliers. And we pointed out that it's narrowing, as the auto OEMs get better at pushing their costs back onto their suppliers.

In the computer industry, the trend is less conclusive. As can be seen in Figure 7, there is a definite gap between the computer OEMs and their suppliers. And the component suppliers have much lower relative costs than the "drive train" manufacturers.

However, the gap doesn't seem to be changing much. It averages 1.3% between the computer OEMs and the disk drive makers, and 2.1% between the computer OEMs and the semiconductor companies. And it's very close to those averages right now.

Figure 7
Computer OEM vs. Supplier Warranties
Claims & Accrual Rates, 2003-2010
(as a percentage of product revenue)

Figure 7

So while the gap exists, nobody seems to be doing much about it. Or more precisely, almost everybody is reducing their warranty costs in parallel, so the gap remains relatively unchanged between these sectors.

Nvidia's Misfortune

The sole exception to this downward trend seems to be Nvidia, which saw its warranty costs soar in late 2008. And while that company's misfortune seems to have prevented the semiconductor averages from declining by much recently, the gap since 2008 between the OEMs and the semiconductor makers is only slightly below the eight-year average. Were it not for Nvidia, the gap would have widened.

Eighth Annual Product Warranty Reports

Here are the links to the online editions of all eleven parts of this series:

Readers needing more detailed snapshots of individual companies in either a PowerPoint or Excel format are invited to view the list of charts and spreadsheets available on the Warranty Statistics page.



This Week’s Warranty Week Headlines

New book by Bob Lutz defends Chevy Volt, attacks the bean counters.
Motor Trend, April 28, 2011
Nebraska Supreme Court rejects NWIG-linked political defamation lawsuit.
Lincoln Journal Star, April 28, 2011
City of Wilkes-Barre PA partners with Service Line Warranties of America.
Citizens' Voice, April 28, 2011
City of Saline MI partners with Service Line Warranties of America.
AnnArbor.com, April 28, 2011
Navistar sues former auditor Deloitte & Touche for bad advice.
Accountancy Age, April 27, 2011

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Mize Warranty Connect


Warranty Headlines (cont’d)

Warranty now the selling point for some new car buyers.
Toronto Star, April 27, 2011
Vehicle Protection Association revises its Standards of Conduct.
Press Release, April 26, 2011
American LaFrance adds two dealers in New York.
Press Release, April 26, 2011
The pros and cons of getting a home warranty when buying a home.
Associated Press, April 26, 2011
Dealers Warranty, aka Mogi, to pay Missouri $125,000 fine.
Press Release, April 25, 2011

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PCMI - Your technology partner


Warranty Headlines (cont’d)

Gulfstream Aerospace enhances its Airborne Product Support program.
Press Release, April 25, 2011
GM VP notes 45% reduction in warranty repairs since 2007.
Forbes, April 24, 2011
Maine’s seldom-utilized implied warranty law covers all but used cars.
Maine Campus, April 24, 2011
Four builders named in Tarion Warranty’s 2011 Awards of Excellence.
National Post, April 23, 2011
Signet's warranty refund policy called "cumbersome, unclear and unfair."
Morning Call, April 23, 2011

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Warranty Headlines (cont’d)

Signet Financial Group closes shop as customers wait on refunds.
WDAF-TV Kansas City, April 22, 2011
Pros and cons of extended warranty services.
Philadelphia Inquirer, April 22, 2011
Hyundai Canada tells customer in-service date cannot be changed.
Wheels Canada, April 22, 2011
Team Group Inc. lengthens portable hard drive warranties to 3 years.
Press Release, April 22, 2011
Old Republic Home Protection appoints Gene Roberts regional VP.
Press Release, April 22, 2011 (PDF file)

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Warranty Headlines (cont’d)

S&S Cycle to stand behind Big Dog Motorcycles engine warranties.
Press Release, April 21, 2011
Landmark Home Warranty selects 4CS iWarranty Home Warranty solution.
Press Release, April 20, 2011
A.M. Best affirms A- rating of London General Insurance Co. Ltd.
Press Release, April 20, 2011
The Warranty Group appoints Joel Appelbaum Senior VP and actuarial officer
Press Release, April 20, 2011 (PDF file)
Solarschmiede offers warranty check service to plant operators in Europe.
Press Release, April 20, 2011

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Entigo, Founding Sponsor


Warranty Headlines (cont’d)

Lawsuit over car window etching anti-theft program moves ahead.
Associated Press, April 20, 2011
Allstate Dealer Services to use Allstate brand for F&I products.
Press Release, April 19, 2011
BPG Home Warranty Co. and HISCO Home Warranty to merge.
Press Release, April 18, 2011
MSY fined in Australia for misleading warranty notices.
CRN Australia, April 18, 2011
The UK's rules and regulations governing consumer rights are confusing.
The Guardian, April 17, 2011
How to account for provisions such as warranty.
Hindu Business Line, April 17, 2011
Utility Line Security plans to sue Pittsburgh Water and Sewer Authority.
Pittsburgh Post-Gazette, April 16, 2011
Munich Re to guarantee power output of Eco Supplies solar modules.
Press Release, April 15, 2011
What is Energy Savings Warranty Insurance?
Green Buildings, April 15, 2011
Extended warranties face study from UK's Office of Fair Trading.
BBC News, April 14, 2011
UK's Office of Fair Trading launches extended warranties investigation.
The Guardian, April 14, 2011
Best Buy Blue Label 3.0 laptops get two-year warranties.
Press Release, April 14, 2011
Premier Guarantee partners with Regentsmead for structural warranties in Europe.
Bridging & Commercial, April 14, 2011
Magneti Marelli parts now on the shelves at Mopar's warehouse.
Detroit News, April 13, 2011
Renault Australia lengthens warranties from three to five years.
Car Advice, April 13, 2011
Spinella’s Auto Sales owner banned from operating car dealerships.
Press Release, April 13, 2011
Texas Attorney General sues Credexx/Auto One Warranty and owner David J. Tabb.
Press Release, April 12, 2011
Right to Repair Act (HR 1449) introduced in U.S. Congress.
Press Release, April 11, 2011
RIM offers warranty, support & service contracts for BlackBerry PlayBook.
Berry Reporter, April 11, 2011
MMF POS announces lifetime warranty on Advantage cash drawers.
Press Release, April 11, 2011
Greek man sued for complaining by Apple service provider gets new iMac.
CNET, April 10, 2011
PC World repairs Acer laptop as a goodwill gesture after news inquiries.
The Guardian, April 9, 2011
Pittsburgh Water and Sewer Authority adopts new ethics guidelines.
Pittsburgh Post-Gazette, April 9, 2011
Big Dog Motorcycles closes, and won't honor remaining warranty claims.
Wichita Eagle, April 8, 2011
Rocla Concrete Ties says MBTA agreed to its shortened warranties.
Commonwealth Magazine, April 8, 2011
Midas lifetime warranty covers muffler only, not pipes or fasteners.
WEWS-TV Cleveland, April 8, 2011
Timothy John Byers lost dealer license but continues to sell used cars.
Toronto Star, April 8, 2011
Automotive Consumer Warranty Institute opens Extended Warranty Hub.
Press Release, April 8, 2011
Opengear lengthens the warranty on its servers to four years.
Press Release, April 8, 2011
Munich Re guarantees solar module performance in France.
Press Release, April 7, 2011
Global Warranty Group names Rick DeFino vice president of sales in Wireless Division.
Press Release, April 7, 2011
Resource Automotive announces QCertified pre-owned mobile app.
Press Release, April 6, 2011 (PDF file)
Judge declares Pittsburgh water line warranty program illegal.
Pittsburgh Post-Gazette, April 6, 2011
Excerpts taken from actual warranties are difficult to read or comprehend.
Tucson Explorer, April 6, 2011
Taylor Guitars offers 12-year warranty to its European customers.
Press Release, April 6, 2011
Retailer won't honor mattress warranty because of stains.
Chicago Tribune, April 4, 2010
EquityLock Home Price Protection policies guarantee home won't lose value.
CNBC, April 4, 2010
Zareba Systems triples electric fence warranty to three years.
Press Release, April 4, 2011
Tesco offers used cars online along with one-month RAC warranties.
BBC News, April 3, 2011

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