June 22, 2023

U.S. Auto OEM Update:

GM is recovering from the recall of its Chevy Bolt batteries, but it hasn't soured on electric vehicles. Tesla's sales and warranty expenses have soared in the past two years, and GM and Ford's transition to EVs is bolstered by the IRS's new tax credit.

In the coming weeks, we are going to check in on the warranty expenses of the international automotive OEMs. To start off the worldwide automotive warranty report, this week we are analyzing the first quarter data for the three biggest U.S.-based passenger car manufacturers: Ford, GM, and Tesla.

Remember that Chrysler, though founded in the United States, has been part of the Amsterdam, Netherlands-based Stellantis NV since that corporation's founding in 2021. Stellantis itself is the result of the merger of the French Peugeot SA Group and the Italian Fiat Chrysler Automobiles. So although the Chrysler, Dodge, RAM, and Jeep brands are manufactured in North America and traditionally considered American, they are European from a data perspective, since Stellantis reports the combined warranty expenses of all of its brands in Euro.

To create this report, we perused the annual reports and quarterly financial statements of Ford, GM, and Tesla, and extracted our key warranty metrics: total claims paid, total accruals made, and warranty reserves held. We also gathered figures for total automotive sales revenue, and used those data to calculate our two expense rates: claims as a percentage of sales (the claims rate), and accruals as a percentage of sales (the accrual rate).

Electric Vehicles on the Rise

We last checked in on Ford Motor Co., General Motors Co., and Tesla Inc. when they put out their 2022 annual reports. Ford remained steady at the top of the pack, and Tesla saw a meteoric rise in sales that led to a big increase in its total warranty expenses. GM was amidst the Chevrolet Bolt electric battery recall, which prompted a huge spike in accruals in mid-2021, and slightly higher-than-usual claims distributed over several quarters in 2021 and 2022.

The Chevy Bolt battery recall story is one we've been following closely, and may reveal key new trends in the auto industry and its warranty expenses. An electric vehicle expert described this battery failure to us as "growing pains." $2 billion in extra accruals in 2021 is certainly painful. This is the first recall we've seen from a major U.S.-based manufacturer in the electric vehicle sector, but we doubt it will be the last, especially since the Biden administration has pushed through several pieces of legislation that underline the transition from combustion engines to electric batteries.

This EV transition has been ramping up in recent years, especially since the Inflation Reduction Act of 2022 was passed last August. According to the U.S. Senate Democrats, one of the law's many goals is to "reduce carbon emissions by roughly 40% by 2030." This law, which also aimed to build the United States' domestic supply chain and energy production, reauthorized the $7,500 tax credit for purchasing a new electric vehicle -- but with a few key caveats that only came into effect this April. The nuances of the law surrounding this tax credit will likely have huge impacts on the U.S. auto market and its warranty expenses in the coming years.

As Camila Domonoske summarized for NPR,

The Inflation Reduction Act, a major climate law passed last summer, dramatically reworked an existing tax credit for electric vehicle purchases. The credits are intended to make electric vehicles cheaper, and hence more appealing, part of the administration's plan to fight climate change. But the complex rules are also designed to incentivize U.S.-based production, to build up a domestic clean-vehicle supply chain and reduce reliance on China.

Before April 18, 2023, the $7,500 tax credit applied to any new electric vehicle purchase. Then the Internal Revenue Service (IRS) announced some new requirements. Now, the credit is split into two. For the vehicle to qualify for the first $3,750, a certain percentage of critical minerals and battery components must be sourced from North America (specifically the NAFTA countries) or another country with which the United States has a free trade agreement. This means the lithium, cobalt, nickel, copper, etc. in the batteries must be mined and/or processed in the U.S. or a free trade partner. And then to qualify for the other $3,750, the vehicle and battery must be manufactured and/or assembled in North America.

Undoubtedly, the tax credit highly incentivizes Americans to purchase vehicles from U.S.-based manufacturers, though the small number of non-U.S.-based manufacturers with an assembly plant in the U.S., Canada, or Mexico benefit as well. Right now, the vast majority of the vehicles that qualify are made by GM, Ford, or Tesla. One other U.S.-based manufacturer, Rivian Automotive Inc., makes two vehicles that qualify, but the company does not yet report its warranty expenses. Chrysler currently only has one vehicle that qualifies, though Stellantis maintained the company's many assembly plants in North America. German-based Volkswagen has a whole line of vehicles that qualify for the credit, likely made at the company's assembly plant in Tennessee. And BMW, another German manufacturer, currently has just one qualifying vehicle, likely made at its assembly facility in South Carolina.

As a result of this tax credit, will these auto OEMs ramp up the design and production of a wider variety of electric vehicles, perhaps creating more room for design malfunctions and parts failures? In the coming years, we will also find out if the warranty costs of electric vehicles are more, the same, or less than those of their internal combustion engine counterparts, as we watch the expenses of the traditional OEMs as they transition to electric.

For its part, General Motors announced during its first-quarter earnings call this year that it will be discontinuing production of the Chevy Bolt at the end of 2023. Around the same time, the company announced that it will be launching three new electric vehicle models this year, powered by its "next generation" of battery cells. In the meantime, the company's claims totals are still much higher than usual, but its claims rates are fairly consistent, since sales have risen too.

Warranty Claims Totals

Figure 1 shows the past 21 quarters of warranty claims totals for GM, Ford, and Tesla. GM and Tesla's claims totals both rose slightly in the first quarter of this year, while Ford's fell a bit.

Figure 1
U.S.-based Auto Manufacturers
Claims Paid per Quarter
(in US$ millions, 2018-2023)

Figure 1

The highest quarterly claims total for the three came in the fourth quarter in 2022, closely followed by the first quarter of 2023. Claims have exceeded $2 billion during every quarter since the beginning of 2022.

GM paid $1.06 billion in claims in the first quarter of 2023, up slightly from the end of 2022. Ford's claims total fell by about 10% to $990 million during the same quarter, and Tesla's rose by about 20% to $280 million.

General Motors' total claims exceeded Ford's in the first quarter of 2023, but Ford's exceeded GM's during the fourth quarter of 2022. During the first quarter of 2021, two years prior to our most recent data and before the Chevy Bolt battery recall was announced, GM paid about $300 million less than Ford did. So while GM's claims expenses have been higher-than-usual since the beginning of 2022, they rose to be on par with those of Ford.

Tesla's claims increase is mainly due to increased sales. The company sold two and a half times as many cars in 2022 as it did in 2020, and its claims totals were around twice as high.

Warranty Accrual Totals

Figure 2 shows the three manufacturers' warranty accrual totals over the same 21 quarters. It seems safe to say that accruals have stabilized from the huge level of volatility we saw in 2020 and 2021, which was the result of a few different warranty problems.

Figure 2
U.S.-based Auto Manufacturers
Accruals Made per Quarter
(in US$ millions, 2018-2023)

Figure 2

In the first quarter of 2023, accruals totaled $2.23 billion for these three automakers. This was down a little bit from the prior quarter. But the highest accrual total for the industry in the past five years was during the third quarter of 2020.

Firstly, all three companies dramatically slashed their accruals during the second quarter of 2020, when the pandemic was announced and lockdowns began. It was the first time in 10 years that quarterly accruals between the three fell below $1 billion.

And then in the fourth quarter of 2020, both Ford and GM experienced warranty problems related to the usage of faulty airbags made by Takata Corp. Ford accrued an additional $610 million, and GM accrued $1.1 billion during that quarter. In addition, Ford accrued around $2 billion extra just to deposit into the warranty reserve fund, due to changes in estimates for future warranty costs of pre-existing contracts.

Accruals fell back to normal levels during the first quarter of 2021. And then in the second quarter of 2021, another recall came to GM that transcended the airbag issue. As the company states in its most recent quarterly report:

In July 2021, we initiated a voluntary recall for certain 2017-2019 model year Chevrolet Bolt EVs due to the risk that two manufacturing defects present in the same battery cell could cause a high voltage battery fire in certain of these vehicles. Accordingly, in the three months ended June 30, 2021, we recorded a warranty accrual of $812 million. After further investigation [...], in August 2021, we expanded the recall to include all 2017-2022 model year Chevrolet Bolt EV and Electric Utility Vehicles (EUVs) and recorded an additional warranty accrual of $1.2 billion in the three months ended September 30, 2021.
However, it's worth noting that GM subsequently received $1.9 billion from its battery supplier, LG Energy Solution Ltd., which offsets the vast majority of the warranty costs associated with this recall.

Considering that GM has recalled basically every Chevy Bolt ever produced, it's not surprising that the manufacturer is discontinuing the model. But it's certainly not letting this warranty problem deter its expansion into the fast-growing electric vehicle sector.

The only manufacturer of the three to exclusively make electric vehicles, Tesla accrued $532 million in the first quarter of this year, down a bit from the fourth quarter of 2022, but still higher than every other quarter for which the manufacturer has ever reported its warranty expenses. In its most recent quarterly report, the company cites increased vehicle sales, as well as increasing warranty costs. Of course, recent U.S. dollar inflation has driven up total claims and accruals for all three manufacturers, simply because repairs and parts cost more money than they used to.

Warranty Expense Rates

Figures 3 and 4 compare the three manufacturers' claims and accrual rates, which are calculated using the claims and accrual totals divided by total vehicle sales revenue for each quarter. Figure 3 shows the claims rates from the past 21 quarters.

Figure 3
U.S.-based Auto Manufacturers
Warranty Claims Rates
(as a % of product sales, 2018-2023)

Figure 3

In the first quarter of 2023, GM had a claims rate of 2.89%, and Ford had a rate of 2.61%. The claims rates of the two have met again in the past year, after a couple of years of divergence.

GM and Ford's claims rates both jumped during the second quarter of 2020, when revenues dropped due to the onset of the pandemic. Both of them took about a year to get back on track afterward, though some of this can be explained by changes in consumer habits, since many delayed service due to lockdowns in the early pandemic days.

But Tesla's claims rate barely was affected by 2020. The company's claims rate continue to meander in the same lazy path, amazingly consistent during the turmoil of it all. Tesla's claims rate has been far below either GM's or Ford's since the middle of 2016. That's 30 consecutive quarters of claims cost leadership.

In the most recent quarter, Tesla's claims rate was 1.37%. This means that Tesla generally spends a smaller portion of its vehicle sales revenue on fulfilling warranty claims than either Ford or GM. However, in Figure 4, we will see that the three companies all have accrual rates right around the same level.

Figure 4
U.S.-based Auto Manufacturers
Warranty Accrual Rates
(as a % of product sales, 2018-2023)

Figure 4

In the first quarter of 2023, GM's accrual rate was 1.98%, Ford's was 2.56%, and Tesla's was 2.61%. So GM was accruing a little bit smaller proportion of its sales revenue than either Ford or Tesla, but all three generally accrue around the same amount of their total revenue, normalized for sales volume.

In mid-2021, when GM announced the Bolt battery recall, its accrual rate spiked to 5.83%, and then up further to 6.75%. The claims rate around the same time was up by about one percent compared to pre-pandemic rates. So while accruals came all at once in two big lump sums, the claims associated with this recall have been more dispersed over a larger period of time. Still, it makes sense to accrue total expected expenses at once for something like this, though it does make the warranty data wonky.

We can also see in Figure 4 that while accrual totals fell significantly during the middle of 2020, they actually remained proportional to sales. Of course, it makes sense, since manufacturers directly control their accruals, unlike claims, which happen to them.

It's heartening to see the accrual rates back on track after the confusion and tumult the U.S.-based manufacturers in the industry have seen over recent years. GM is likely hoping that the rest of its electric vehicle rollout and transition will go smoother, while Ford is hoping it won't have similar warranty problems on the road to come. Tesla, meanwhile, seems to be putting more thought and attention to its warranty expenses since around mid-2016. Whoever they hired into their warranty department around then brought the manufacturer from having the most volatile expense rates of the bunch to being a warranty cost efficiency pioneer among the industry. Kudos to them.

Warranty Reserve Balances

We have one more warranty metric to measure. And once again, we will measure it over 21 quarters, since the beginning of 2018. Reserve balances have risen steadily over the past five years, and reached a new high in the first quarter of this year.

Figure 5
U.S.-based Auto Manufacturers
Reserves Held per Quarter
(in US$ millions, 2018-2023)

Figure 5

Warranty reserves between the three exceeded $20 billion for the first time in the fourth quarter of 2021. Then they dipped below that threshold for the first nine months of 2022, before rising back to over $21 billion at the end of the year. In the first quarter of 2023, total reserves between the three manufacturers totaled $21.7 billion.

These recent increases in reserves have mainly been the result of Tesla's higher warranty accruals. We will note that Tesla generally has higher warranty costs per vehicle than either Ford or GM does. This makes sense considering that Tesla is a luxury brand, though the prices of some of the models are lower than they used to be.

The balance of Tesla's warranty reserve fund has tripled over two years, from the first quarter of 2021 to the first quarter of 2023. At the end of the first quarter of 2023, Tesla had a warranty reserve balance of $3.97 billion.

GM had a reserve balance of $8.48 billion, down about $1.5 billion since the third quarter of 2021, when the accruals for the Bolt recall were made. This means that the majority of the Bolt batteries have likely already been replaced using the funds accrued as a result of the recall. GM seems to be mostly out of the weeds, and seems to plan on wrapping up all of its Bolt-related operations by the end of the year.

Ford ended the first quarter of 2023 with a warranty reserve balance of $9.28 billion, the largest total of the three. Ford's reserve balance has been steadily rising for several years now. While GM had the larger reserve balance for the whole rest of the two decades for which we have data, Ford's reserve balance exceeded GM's for the first time in the fourth quarter of 2022. During that quarter, Ford had $663 million more in its warranty reserve fund than GM did. The gap between the two grew in the first quarter of 2023, since GM's reserve balance dropped by $48 million, while Ford's rose by $91 million.

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