Despite all the headlines about U.S. manufacturing jobs moving overseas, about disappointing sales volumes and a loss of competitiveness, the warranty news is actually quite encouraging. Those who practice the profession of warranty management are getting really good at what they do, and the statistics are starting to show it.

The most exciting news is the continuing reduction in warranty costs, a combination of higher sales, lower failure rates, and less expensive repairs. Across multiple industries, U.S.-based manufacturers are now paying out a smaller percentage of their revenue for warranty work than ever before. And that is happening because products are being built better than ever before.

Lowest Warranty Costs Ever

In Figure 1 below, we can see the average claims rate for all U.S.-based manufacturers falling to 1.36% in the second quarter of 2011, down significantly from both the first quarter and from the end of 2010. And except for the recession-driven spike in claims rates seen in 2008 and 2009, this is a trend that's been in play since we began collecting warranty data in 2003.

The average accrual rate is even lower, at 1.33%, and is also significantly lower than it's ever been before. And that's a trend that wasn't interrupted by the recession. In Figure 1 below, the green line shows how trend has been down year after year, with only a few upwards bounces. And just when it looked like the curve was flattening late in 2010, it went lower yet in 2011.

Figure 1 adds two additional quarters of data to a chart we last included in the April 1 newsletter. At that time, we noted that the average accrual rate for all manufacturers had never been higher than it was in 2003 and had never been lower than it was in 2010. Well, now it's lower. And that's a cause for celebration. Warranty managers, design engineers, and financial planners are doing a better job than ever before. Product reliability has never been higher, and warranty costs have never been lower.

FIN 45 Accounting Rules

We must caution our readers, however, to keep in mind that multiple manufacturers have chosen to release their warranty expense reports only once a year, at the end of each year. So we're inserting placeholder estimates for their first, second, and third quarter reports, until we can get a hold of the fourth quarter data.

The list of annual reporters includes Eaton Corp.; Exide Technologies; Flowserve Corp.; Fortune Brands Inc.; General Electric Co.; Goodyear Tire & Rubber Co.; Honeywell International Inc.; Illinois Tool Works Inc.; Motorola Mobility Holdings Inc.; Motorola Solutions Inc.; and Xerox Corp., among others. The FASB Interpretation No. 45 accounting rules clearly state that warranty expense tables must be included in all annual and interim financial reports. But these companies have apparently crafted their own interpretations of FIN 45.

However, the point is that our placeholding estimates may in fact be too low for 2011, and perhaps that's dragging down the average? We won't know for sure until March or April of next year, when all the annual reports arrive. But we doubt it will move the curve by much. And it definitely won't reverse the overall direction downward.

Change For the Better

Among the hundreds of companies that are filing quarterly warranty expense reports, however, there is a strong downward current. For instance, among the top 100 warranty providers of 2011 (measured by claims paid), 57 saw their claims rate fall, while 31 saw their claims rate rise, in the year between June 2010 and June 2011. Among all manufacturers, large and small, 65% saw their claims rate fall; 59% saw their accrual rates fall; and 45% saw both rates fall together in the past year.

The claims rate for the 11 annual filers are set to be unchanged from 2010. And then one member of the top 100 -- Bucyrus International Inc. -- was acquired by another top 100 member (Caterpillar) and therefore has now ceased reporting its warranty expenses separately. So after those dozen companies are taken out, our top 100 list has only 88 members whose claims and accrual rates could actually change. But most saw a change for the better.

When we grouped all manufacturers into one of 14 industry segments, as we have in past newsletters, we found that there were only slight changes. Compared to the pie chart included in the April 1, 2011 newsletter, the figure below shows only a slight enlargement of the automotive OEM and computer OEM slices. The auto OEMs have grown from 35% to 36% of the pie, while the computer OEMs have grown from 21% to 22%.

All other industry segments are more or less the same as they were six months previously. So far in the first half of 2011, all U.S. manufacturers have paid out around $11.7 billion to satisfy warranty claims, about 1.5% more than they had at this same point in 2010. However, their product sales are up 13% in the first half, so the overall claims rate has fallen significantly.

Comparing Companies

In Figures 3 through 6, we're going to do something that indirectly compares the warranty costs of all manufacturers in all industries. We can't compare companies to each other, because each might include or exclude different cost components in their warranty expense calculations. For instance, one might include the cost of product recalls while another may not. There's no list of what to include or exclude in FIN 45, so each company is free to design their own checklist.

We do, however, believe that a company uses the same checklist from year to year, unless they announce a major change in their methodology, or a major change in the way they segment their revenue. So what we're going to do is compare each top 100 company to itself, from the middle of 2011 to the middle of 2010, and then rank all those changes in order, from the largest increase to the largest decrease.

In Figure 3, we've listed the top ten decreases in claims rates, taken from among the top 100 warranty providers. These are the companies that have done the most to help drive down the average claims rate seen in Figure 1 to new lows. They're the companies that have reduced the percentage of sales that goes towards paying for warranty claims, through either increased sales or decreased payments, or through a combination of both.