That old trick question once again gets asked: "Do they have a fourth of July in Europe?" The answer is, of course they do, but they don't all take the week off and head for their holiday homes like their American cousins do.

Being as we have lots of international warranty data to report, this might be as good a week as any to report it. For while our American subscribers may have turned on their "out of the office" alerts, our European subscribers may find the following four company snapshots to be worth a quick scan.

While there are numerous automotive OEMs based in Europe, there are at least four that also report their warranty expenses in their annual reports: Volkswagen AG, BMW AG, Daimler AG and Fiat S.p.A. All four also report their revenue and expenses in euro, which somewhat complicates the analysis, but not if we restrict our view to Europe only.

VW: World's Largest Warranty Provider

Let's start with Volkswagen. Thanks to the relative strength of the euro, the relatively higher labor rates and parts costs seen in German cars, and the company's rapid sales growth in China, VW has rather quietly assumed the title of the world's largest warranty provider, shelling out 5.2 billion euro (US$7.25 billion) in calendar 2011 to pay for warranty work worldwide.

Given the intervening changes in exchange rates, that's considerably more than the 5.6 billion euro (US$6.6 billion) that DaimlerChrysler AG paid out in 2005 -- the previous high water mark in terms of annual warranty cost. And, in fact, it's also slightly more than U.S.-based GM and Ford combined paid out in claims last year.

As can be seen in Figure 1, VW is also making larger accrual payments than ever before, topping off its accounts with a little above 7.5 billion euros in 2011. In 2010, it accrued just under 6 billion euro, so the annual increase was a quite-substantial 26% rise.

But of course, sales are also rising, which is what's requiring the increases in warranty expenses in the first place. More cars sold means more warranty work, even if product quality remains the same. Product revenue was up by 25%, almost precisely matching the accrual increase. All its brands -- Volkswagen, Audi, Skoda, SEAT, Bentley, and Scania -- scored unit sales increases. In fact, VW sold about as many vehicles in China last year as Toyota and Honda did in all of Asia (outside of Japan).

What Recession?

So it's no surprise to find that the world's largest warranty provider has it all under control. It's paying more money than ever before, but it's spread across more vehicles than ever before. Thanks to those strong Chinese sales, VW as a company has not had a down year since 2002 in terms of units sold, with the count reaching 8.36 million vehicles sold worldwide in 2011.

In Figure 2, we've taken the warranty expense data from Figure 1 and divided them by VW's product sales revenue (total sales minus finance, investment and other non-warranted revenues). And what the resulting rates show is that things are just fine at VW.

The company's accrual rate has been around 5.5% for nine years. If anything, the rates have been a bit below average for the past two years. Its claims rate had been as high as 4.7% in 2009, but as sales grew it fell to 4.0% in 2010 and to 3.65% in 2011. In other words, why worry? This is a company that has learned to deal with warranty costs that are a little on the high side, and it's apparently not an issue with the customer base either.

BMW Cost-Cutting

The other top German automakers have, however, found ways to reduce their warranty expenses significantly. BMW, for instance, just reported its second Japanese-like year in a row with both claims and accrual rates remaining below two percent, though slight increases were seen in 2011.

In Figure 3, we see BMW's claims payments rising to 1.1 billion euro in 2011 and accruals rising to almost 1.2 billion euro. Both increases were significantly swifter than the 17% increase in product sales. And both totals are now back to where they were in 2009, though sales are up by 44% since that recessionary year.

Because sales are up so much since 2009, the rates have fallen considerably. While in 2009 1.1 billion euros translated into a 2.4% claims rate, in 2011 the same amount was only a 1.7% claims rate. Similarly, BMW's accrual rate has dropped from 2.6% to 1.8% over the past two years. However, as can be seen in Figure 4, the rates in 2010 were the lowest they've ever been.

While 2010 represents the low tide mark for BMW's warranty expenses, there's nothing to worry about in its 2011 numbers. The trend is clear: BMW has cut its claims and accrual payments by a little bit, has grown its sales by a lot, and has therefore cut its claims and accrual rates considerably over the past decade.

Or to put it another way: At VW, warranty costs are rising in step with sales, so the rates are the same. At BMW, sales are rising but costs are about the same, so the rates are falling. And as we shall see in a minute, at Daimler the sales are flat but costs are falling, and therefore so are the rates.

In addition to product revenue and warranty expenses, we also track the number of vehicles sold and make some estimates of how much each automaker is accruing per vehicle sold. We'll provide more detail about this metric next week, but for now, let us just say that BMW has cut its accrual rate per vehicle sold in half since 2003. Part of that is due to the success of the less-expensive Mini line. But part is also due to massive gains in product quality and massive reductions in the need for warranty work.

Daimler - Chrysler = Lower Costs

Daimler, having sold most of its interest in Chrysler five years ago, continues to see declines in its warranty expenses. The data in Figure 5 shows the decline in terms of cash, and the data in Figure 6 shows it in terms of percentages of sales.

Note that the company used to reports its warranty expenses on a quarterly basis until 2007, and has done so annually since that time. It doesn't affect the format of Figure 5, but it adds some extra detail to the first four years of data in Figure 6.

Translated Into US Dollars

The 5.6 billion euro total for claims paid in 2005 by DaimlerChrysler remains a world record for that metric, at least in terms of euros. Because the euro was trading at only US$1.18 per unit back then, however, it's no longer a world record in dollar terms. VW spent 5.2 billion euro on claims last year, and at 2011's prevailing exchange rate of US$1.40 to the euro, that equates to US$7.25 billion. But let's stick to just euros this week.

One would have expected the claims and accrual totals to fall after the sale of Chrysler. But one wouldn't necessarily have expected those metrics to also fall as a percentage of sales, given the high cost of Mercedes repairs. Still, as can be seen in Figure 6, both Daimler's claims and accrual rates are now down below 2.5% -- the product of an 11% rise in auto sales, a 14% reduction in claims payments, and a 16% reduction in accruals made in the past year.

We've even detected a significant reduction in claims and accruals per vehicle sold, after a scary rise in those metrics in 2009 and 2010. But we'll leave that discussion for next week. Right now, let's just say that Daimler has been almost as successful as BMW in recent years when it comes to getting its warranty expenses under control.

Fiat + Chrysler = Higher Costs

Finally, we turn to Fiat, the Italian carmaker that also controls Maserati and Ferrari, used to control CNH and Iveco, and as of a year ago, controls more than half of Chrysler Group LLC. Because Fiat increased its Chrysler stake above 50% last summer, it's now also reporting that company's warranty expenses in addition to its own.

We've tried to portray that acquisition in the following three charts, but we fear we've fallen short. For instance, while we can blame Chrysler's assimilation for the high 2011 numbers, to what should we assign the blame for 2010? Back then, Fiat owned only 20% of Chrysler, and so it did not include Chrysler's warranty expenses alongside its own.

As can be seen in Figure 7, claims payments are about where they've been for five years running, but accruals have risen to new heights. And this doesn't adequately portray the addition of nearly 2.3 billion euros to the warranty reserve fund that came with the acquisition of Chrysler, though that does show up in Figure 9.

Fiat's accruals passed 1.4 billion euros last year, and that exceeded 3.8% of product revenue. Or maybe it didn't. If we also include half a year of Chrysler's revenue, the accrual rate was only 2.4% -- back to where it was in 2007. But the boost above 50% control didn't happen until the middle of last year, so not all of Chrysler's revenue and not all of Chrysler's warranty expenses are in the consolidated totals yet. We're seeing only half the picture so far.

What's clear from Figure 8 is that Fiat's warranty expense rates have been climbing. Back in 2003-2004 the claims and accrual rates were around 1.5%. From 2005 to 2009 they hovered below 2.5%. Now, the claims rate is around three percent while accruals are even higher.

As mentioned, Fiat added in the Chrysler balance at midyear, reporting it as a 2.256 billion euro acquisition of warranty reserves. That and the excess between claims and accruals helped boost Fiat's warranty reserve fund balance from 970 million euros at the end of 2010 to 3.53 billion euros at the end of 2011.

In Figure 9, we've charted Fiat's warranty reserve balance, along with another metric that we derive by figuring out how much the company is paying per month in claims, and then dividing that amount into the balance. Therefore, a company with 970 million euros in its warranty reserve, which was paying out roughly 92 million euros a month in claims, would have a reserve capacity of about 10.6 months -- which is exactly where Fiat was in 2010.

But then, with the addition of Chrysler's reserves, and without the full effect of having to report all of Chrysler's claims for the full year, the balance more than triples in 2011, and so does the company's capacity to pay claims.

We would suggest that in 2012, these metrics will both drop. The balance will drop because those are funds committed to go towards the payment of claims on Fiat and Chrysler cars already sold. The capacity will drop because the amount of claims paid per month will rise far above what Fiat would have paid for its legacy nameplates alone.

So there's the European portion of our annual reports on the top automotive OEMs. Combine them with the reports of Toyota and Honda in last week's newsletter, and with the reports of Ford and GM in the April 5 newsletter, and you have a glimpse of the top-level warranty metrics of eight of the world's largest automotive OEMs.

Worldwide Trends

Of those, it's clear that Toyota and Fiat are seeing their expenses rise, while Honda, BMW, and Daimler are seeing their rates fall. GM, VW and Ford are about the same, though Ford is showing some increases after deciding to include recall costs alongside pure warranty expenses.

Next week, we'll dive a level deeper, looking at warranty costs per unit sold, using some additional metrics for average revenue per unit sold. But that also adds an additional level of uncertainty, because we'll have to make some estimates and assumptions. What you see here is all fact -- reported totals for warranty divided by reported totals for product sales. And these pictures really do tell a story.

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