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An update on the warranty industry


Eric Arnum, editor of Warranty Week, gave an overview of the industry as a whole. Clearly the recession is taking its toll. Starting with new home builders it has spread to RV makers, auto makers, various retailers, GE and others. Warranty is important in many of these company’s challenges and some, like Hyundai, are trying to tie their warranty to the economy by offering to take back a car if you lose your job. For instance, US home builders paid more claims at the end of 2006 than ever before and it has dropped since. This is, in many ways, a leading indicator of their problems as warranty claims represent an indicator of general activity. RV makers peaked in the middle of 2006 while auto makers peaked in 2007 and their reserves have dropped rapidly since then (from nearly $19B to$16B).

On the plus side, auto makers have managed to control their warranty costs over the last few years, in part by pushing costs onto the part manufacturers but also by improving quality. There are still issues like the quality gap between Honda/Toyota who spend 1.5% on warranty claims and Ford at 2.5% and GM/Daimler/Chrysler at 3.5% (big jump from their recent move to 5 year warranties). In general, though, all the non-Japanese companies are making progress.

Outside auto there is mixed news. Microsoft, for instance, has managed to get control of their warranty costs driving it down from 6% to 2% but they are still putting aside $200M for claims! In 2007 they had to put aside $1.2B! Against that, Circuit City was surviving in part thanks to the profit on extended warranties and one of the reasons they are out of business was that this dropped off steeply over the last few years. Dell has driven down the reserves it has for basic product warranty relative to extended warranties through better control of its base warranty claims.

Top 20 warranty providers in the US dominate claims paid. For instance:

  • GM and Ford account for 26% to 33%!
  • Top 6 (GM, Ford, HP, Dell, IBM and Caterpillar) account for 50% of all claims
  • Top 20 (GM, Ford, HP, Dell, IBM and Caterpillar, Boeing, Seagate, Apple, Paccar, Microsoft, Navistar, Cummins, Sun, United Technologies, Whirlpool, Deere, Cisco, GE, Motorola) account for around 70% of all claims
  • The next 800 or so account for the remaining 30%
    This is not to say that all these companies don’t notice their warranty costs but they don’t contribute to the overall numbers.

Outside the US data is harder to come by so hard to drive out details but Eric estimates worldwide claims now total $72B with 53% in automotive and another 20% in high tech. The US is about 40% of this (US auto is 18% of the world total, high tech 15% and other US 7%) and non-US warranty is more focused on building trades and auto. Information is not available worldwide but even in the US the availability of warranty information is still pretty recent – it was not until Enron that warranty claims data had to be reported. The US is ahead in terms of managing and using this information as a result with many other countries still making the transition to automated systems. Worldwide auto is about 53%, high tech about 20%, building about 17% and others the remaining 10%.

Eric hopes that reporting will become more widespread because warranty information is a key indicator of quality and customer service, for instance, and having this information available would help see how things are doing.

Eric was asked about fraud and he estimated that perhaps 10% of this number is actually fraud rather than actual entitlement and that there is also non-entitled claims that are just errors or problems or goodwill too. He was not able to say if this was consistent worldwide in part because the data is collected and stored so manually in other areas. Detecting fraud patterns from faxes, for instance, is really tough!

You can subscribe to Warranty Week at http://www.warrantyweek.com

Don’t forget to check out the white paper I have at decisionmanagementsolutions.com/warranty