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        August 18, 2003 Eric Arnum, Editor       

General Motors' warranty change of estimate

A plot of the 255 largest warranty reserve funds, along with their reserves-to-claims ratios, is represented in the chart below. The absolute size of the warranty reserve fund is plotted along the horizontal, while the reserves-to-claims ratio is plotted along the vertical. The red dots in the top half represent companies above the median. The blue dots in the bottom half represent companies below the median.

Figure 1

Warranty Reserves of the Top 255 Manufacturers

GM is represented by the big red diamond to the extreme right. The large red dot nearby represents Ford. The closest blue dot represents Hewlett-Packard Co. The four red dots in a Big Dipper-like cluster represent Dell Inc., General Electric Co., United Technologies Corp., and Boeing Co.

Together, Ford and GM accounted for 45% of all reported warranty reserves as of March 31, 2003. They account for 78% of the warranty reserves of just the 90 largest U.S.-based automotive parts and vehicle manufacturers. The size of GM's and Ford's warranty reserves is more noticeable on a chart plotted with a linear scale, as is done below. To make it even more obvious, all but the 30 largest warranty reserve funds have been eliminated.

Figure 2

"Right-Sizing" GM's and Ford's Warranty Reserves

In the chart below, it's obvious that GM's quarterly outlays for warranty has been remarkably stable over the past six quarters. The high and low quarters are within a few percentage points of the average. Yet the recent decrease in the percentage of sales spent on warranty is equally obvious by the drop in the red line from 2.8% to 2.7%.

Figure 3

Six Quarters of GM's Warranty Expense
and Percent of Auto Sales Revenue

By using a rolling total for the number of vehicles under warranty, as is done in the chart below, it appears that GM's warranty cost per vehicle under warranty has remained in a range of $37 to $39.50 per quarter. This occurred even as the population of vehicles under warranty declined by 500,000 units over the past year.

Figure 4

GM's Vehicles Under Warranty and
Quarterly Cost per Vehicle

Figure 3 suggests that warranty costs which had been steady are now on a downward trend. Figure 4 suggests that the quarterly cost per vehicle remains in a narrow range, but there's no clear trend yet. This is to be expected, since one chart plots current sales against current costs while the other measures current costs against the installed base. It takes some time for very recent quality improvements to make an impact on the installed base.

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