June 5, 2007

Worldwide Computer Warranties:

Thanks to exact data for U.S. product warranties and good data for worldwide market shares, we can estimate a worldwide figure of $12.3 billion for IT hardware warranties and $4.9 billion for PC warranties. With mobile phones, however, the precision drops because so much of the industry is based in Asia and Europe, where warranty data remains relatively scarce.

Continuing with the back-of-the-envelope calculations of worldwide warranty spending, we now turn to the computer industry, which is second only to the automotive industry in terms of generating warranty claims and accruals.

In the April 11 newsletter, we totaled the U.S. auto industry's 2006 warranty accruals at $12.8 billion and the high-tech industry's warranty accruals at $9.5 billion.

In last week's newsletter, we slimmed down the definition of automotive to include just cars, trucks, and buses, and estimated that auto manufacturers worldwide spend around 3.4 times as much as do GM, Ford, Navistar, and Paccar.

This week, we're slimming down the high-tech segment to include just computers, storage, monitors, printers, and data communications gear, and we are estimating that U.S.-based computer manufacturers account for about 60% of that sector's worldwide warranty spending. In other words, while U.S.-based automakers account for around 30% of their industry's global spending on warranty, U.S.-based computer manufacturers account for twice that share.

Worldwide IT Hardware Sales

Here's how we arrived at that estimate: In January, the IDC Worldwide Vertical Market research program estimated that end users worldwide spent $1.16 trillion on information technology in 2006, of which we estimate approximately 38% was hardware and 62% was software or services. Since only the hardware gets product warranties, we're effectively talking about roughly $444 billion in worldwide IT spending subject to warranty accruals.

We also estimate that U.S.-based manufacturers such as Hewlett-Packard, IBM, Sun Microsystems, Dell and Apple produced around 55% of that hardware, and issued product warranties for it. This estimate is based on our quarterly canvassing of manufacturers' financial reports, which we covered in some detail in the May 8 newsletter. But just as an example, HP reported $73.6 billion in hardware sales for the year ending Oct. 31, and reported making $2.47 billion in accruals.

By our calculations, HP and around 80 other U.S.-based manufacturers accrued $7.36 billion on $243 billion in computer hardware sales, for a 3.0% accrual rate overall. Computer system vendors accrued $5.7 billion in 2006. Disk drive and data storage manufacturers accrued an additional $544 million. Peripheral manufacturers accrued $553 million, and data communications equipment makers accrued $602 million.

Therefore, if the worldwide spend was $444 billion and if we found $243 billion of it in the U.S., the rest of the world must have produced around $201 billion worth of computer hardware in 2006, accounting for 45% of the total. However, because warranties tend to be a little longer and repairs a little more expensive in the U.S., we're going to estimate that these rest-of-the-world vendors issued only 40% of the product warranties and made 40% of the accruals.

U.S. and Worldwide Figures

Table 1 details some of these assumptions. With 55% of the $444 billion in hardware sales, U.S.-based computer manufacturers were responsible for making 60% of the $12.26 billion in accruals. While U.S. vendors saw an average accrual rate of 3.0%, vendors based elsewhere saw a 2.4% accrual rate.

Table 1
Computer Makers Worldwide
Warranty Accruals in 2006
(in millions of US dollars)

   2006   2006   Accrual 
   Sales    Accruals  Rate
  U.S. manufacturers $243 B $7.36 B 3.0%
  Rest of World $201 B $4.9 B $2.4%
  Total Worldwide $444 B $12.26 B 2.8%

Source: Warranty Week   

We estimate that about 36% of the $444 billion in total sales came from what IDC defines as personal computers: desktop, notebook, ultraportable PCs and x86 servers, but not handhelds. But we also estimate that around 40% of the industry-wide total of $12.26 billion in accruals came from this segment.

Worldwide PC Shipments

IDC counted 228.6 million PCs were shipped in 2006, up 10% from year-before levels. Although HP's shipments outpaced Dell's late in the year, the full-year numbers gave Dell a 17.1% worldwide market share to HP's 17.0%. Lenovo was number three with 7.3%, Acer had 5.9%, and Toshiba had 4.0%. Together, the top five had 51.3% of the total worldwide market, IDC said.

We're going to estimate that HP's PCs accrued at a 3.4% rate, meaning that the company set aside $34 out of every $1,000 in sales to finance future warranty claims. We're going to estimate Dell's PC accrual rate at 4.0%. Toshiba's estimate is 3.2%. Acer is estimated at 3.0%, and Lenovo is at 2.6%.

With average PC system prices being what they are, this amounts to something in the range of $20 to $25 per unit in warranty accruals. If that doesn't sound like much, keep in mind that each vendor's average revenue per system is now in the range of $500 to $800. Three or four percent of that would fall into the range of $15 to $32 per system.

Table 2
Computer Makers Worldwide
Top PC Manufacturers, 2006
(in units and percent)

   2006 Worldwide   Market 
  Company PC Shipments Share
  Dell 39.1m 17.1%
  HP 38.8m 17.0%
  Lenovo 16.6m 7.3%
  Acer 13.6m 5.9%
  Toshiba 9.2m 4.0%
  Other 111.3m 48.7%
  Total 228.6m 100%

Source: IDC   

Dell and HP together count for 34% of the unit shipments. As the estimates in Table 3 will detail, their share of PC warranty accruals is a little larger. Others ranked below the top five include Fujitsu-Siemens, NEC, Gateway, Apple, and Sony.

Now let's create some estimates for warranty accruals. For HP and Dell, we used a fraction of their total accruals, assuming that they also accrue for sales of non-PC products such as handhelds, servers and peripherals. Same goes for Apple, for which a small fraction of their $285 million in calendar 2006 accruals went towards iPods and other peripherals. For Lenovo, Toshiba, and Acer, we used a combination of public information and private estimates to arrive at the figures listed in Table 3.

Table 3
Top PC Manufacturers
Warranty Accrual Estimates for 2006
(in US $ millions and percent)

   2006 Warranty   Accrual 
  Company Accruals Rate
  Dell $853m 4.0%
  HP $978m 3.4%
  Lenovo $366m 2.6%
  Acer $285m 3.0%
  Toshiba $211m 3.2%
  Other $2,225m 3.1%
  Total $4,918m 3.1%

Source: Warranty Week   

HP and Dell end up with a 37% share of the worldwide PC warranty accruals, a little more than their unit market share. What this means is that their PCs are sold to customers and into markets that generate a slightly higher per-unit warranty cost. In terms of accruals, Dell is around $22 per unit while HP is close to $25. The industry average, we estimate, is $21.50 per unit.

The industry average accrual in Table 3 is around 3.1% of PC revenue being set aside to fund future warranty claims. Dell, HP, and Toshiba are above this level while Lenovo, Acer, Apple, and Gateway are below. We estimate that U.S.-based vendors account for 45% of the total accruals while vendors based elsewhere in the world account for around 55%.

What that means, then, is that just under half of the worldwide PC warranty accruals come from U.S.-based firms. In terms of IT hardware in the broader sense, the American share of warranty outlays is 60%. And so, the worldwide warranty multiplier for PCs is 2.2 times the U.S. figure and for IT hardware in general is 1.7 times the U.S. total.

Worldwide Mobile Phone Warranties

Let's take a look at one more market. A subscriber asked what the total worldwide spending was on mobile telephone warranties. With Motorola being one of the few U.S.-based mobile phone manufacturers, there is a scarcity of data for this segment.

We typically include Motorola in the U.S.-based telecom equipment segment, which generated just over $7 billion in warranty accruals in 2006. But both mobile phones in general and Motorola in specific were a small fraction of this total.

So let's see what we can do. Fortunately, IDC also recently published 2006 market share data for worldwide mobile phone shipments. Unfortunately, they listed only the top five vendors by name: Nokia, Motorola, Samsung, Sony Ericsson, and LG Electronics. In the same format as Table 2, here is that data:

Table 4
Mobile Phone Shipments Worldwide
Top Handset Manufacturers, 2006
(in units and percent)

   2006 Worldwide   Market 
  Company Handset Shipments Share
  Nokia 347.5m 34.1%
  Motorola 217.4m 21.3%
  Samsung 118.0m 11.6%
  Sony Ericsson 74.8m 7.3%
  LG Electronics 64.4m 6.3%
  Other 197.8m 19.4%
  Total 1,020m 100%

Source: IDC   

Notice that worldwide shipments crossed the one billion mark in 2006. This was the first time this happened, IDC noted in its press release. The growth rate for mobile phones was 22% from 2005 to 2006, substantially higher than the 10% growth rate seen in PCs (or the 6% growth rate projected for IT hardware).

Notice also that market share in the mobile phone industry is much more concentrated at the top than it is in the PC industry. Notice as well that only one American firm is in the top five. So the extrapolations we make here should be somewhat less accurate than was the case with cars or PCs.

Accruals per Handset

Let's assume that Motorola is accruing roughly $3.00 per handset to finance future warranty claims. Let's assume that Nokia is accruing around $2.00 per handset, and everyone else is somewhere in between. In rough numbers, then, the worldwide mobile phone industry accrual in 2006 was likely somewhere between $2 and $3 billion.

We believe that Motorola's accrual rate was close to 2.3%, because their per-handset pricing tends to be a bit higher than some of the others. Likewise, we believe Nokia's accrual rate was a notch lower at 2.2% because their handset prices tend towards the low end of the spectrum. These and our estimates for the other top vendors are detailed in Table 5.

Table 5
Mobile Phone Warranty Accruals Worldwide
Top Handset Manufacturers, 2006
(in US $ millions and percent)

   2006 Warranty   Accrual 
  Company Accruals Rate
  Nokia $685m 2.2%
  Motorola $647m 2.3%
  Samsung $300m 3.0%
  Sony Ericsson $165m 2.4%
  LG Electronics $175m 3.0%
  Other $400m 2.0%
  Total $2,370m 2.3%

Source: Warranty Week   

The worldwide estimate, therefore, is $2.37 billion in mobile phone warranty accruals in 2006, or roughly $2.32 per handset. Only 28% of that accrual total comes from American firms, and the worldwide warranty multiplier for mobile phones is therefore around 3.6 times the U.S. total.

Worldwide Warranty Estimate

When the question was first asked, our initial response was that the worldwide multiplier for all warranties was somewhere between two and three times the U.S. total. Given $28.4 billion in known warranty accruals by just the 800 U.S.-based firms that we track, our short answer was therefore something on the order of $57 to $85 billion worldwide.

Having narrowed down the worldwide estimate for auto to $36.9 billion and $12.3 billion for IT hardware, we can safely now add another decimal place to that range and restate it as somewhere between 2.4 and 2.8 times the U.S. total. So it looks like the worldwide accrual for product warranties is something on the order of $70 to $80 billion, of which roughly half is for autos and roughly one-sixth is for IT hardware.

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