Category Archives: Automotive Warranty & Recall

SRR’s Automotive Warranty & Recall Blog will provide you with timely and newsworthy insights into the automotive warranty and recall data, trends, news, and developments.

Tychy, Poland - June, 16th, 2011: Cars production line in Fiat factory in Poland. The Assembly Plant ensures both the production of the Fiat range models (Panda II, 500), Lancia/Chrysler Ypsilon and Ford Ka. The manufacturing line was adapted for an annual capacity of 600,000 cars

Vehicle Makers Shift More Warranty Costs Onto Their Suppliers

A decade ago, the top U.S.-based makers of cars and trucks began a major effort to shift more of their warranty expenses back to their suppliers. It worked for awhile, but then the car and truck makers ran into an entirely new set of problems with massive safety recalls, which made their warranty expenses rise back to previous levels.

Warranty Week, an online publication aimed at warranty management professionals, tracks hundreds of U.S.-based companies that report their warranty expenses in their financial statements and annual reports.  Roughly 176 of them have a significant stake in the automotive industry, either as a manufacturer of vehicles or as a supplier of parts and components.

In late 2002, in an effort to prevent a repeat of the Enron and WorldCom accounting scandals, the Financial Accounting Standards Board began to require all manufacturers that issue warranties to disclose the size of those liabilities. One of the required disclosures tabulates the net amount a company pays out in warranty claims, consisting of payments they make to dealers, customers, and repair service providers, minus reimbursements they receive from suppliers.

In the automotive industry, the vehicle makers, or original equipment manufacturers (OEMs), pay most of the claims and also pay out a much higher percentage of their sales revenue than do their suppliers. This is the case whether the vehicle in question is a passenger car or a commercial truck.  Simply put, the customer-facing company gets stuck with the vast majority of the warranty expense.

Two Lists

Warranty Week separates the roster of 176 U.S.-based automotive manufacturers into two separate lists, with one comprised of 55 car and truck manufacturers such as GM, Ford, Paccar, and Navistar, and the other containing 121 of their top suppliers. Some, like Cummins and Eaton, make engines and transmissions.  Others such as Johnson Controls, Goodyear, and Wabco, make seating, tires, brake parts, and other components.

In Figure 1, the annual claims payments reported by the OEMs and their suppliers are counted for the past 13 years. Notice that the OEM total grew every year from 2003 until 2008, while the supplier total grew more or less proportionally.  At their peak in 2008, the entire U.S.-based automotive industry paid a net $13.64 billion in warranty claims, before that total plummeted during the recession to a low of $10.6 billion in 2010.

figure 1

Once the recession deepened, warranty claims, along with car and truck sales, remained subdued through 2013, before rebounding sharply in 2014 and 2015. However, most of that 2014 jump was related to GM’s ignition switch safety recalls.  Once that major expense has run its course, the OEMs are likely to go back to spending roughly $9 billion a year on warranty claims.

Passenger cars and light trucks account for roughly three-quarters of the OEM warranty expense, with heavy trucks and other commercial vehicles accounting for the rest. The main reason is that there are vastly more cars and SUVs sold. However, another factor is the way truck warranties are structured: instead of bumper-to-bumper warranties from the OEM, the warranties on truck engines and other major components are issued by the suppliers directly to the customer.

That structure serves to reduce the expense of the truck OEM and increase the expense of the suppliers counted in Figure 1. In effect, the heavy truck makers have already found an efficient way to transfer a huge amount of their warranty expenses to suppliers such as Cummins and Allison Transmission: They make suppliers responsible for their own warranties from the get-go.

Relative Shares of the Total

The most striking aspect of Figure 1, even allowing for the heavy truck anomaly, is the relatively large share of the total paid by the OEMs compared to the relatively small share paid by their suppliers. This is true in all of the past 13 years.  Though the totals change from year to year, the OEMs always pay the largest share.

The main reason behind the imbalance is the presence of various inefficiencies in the warranty claims processing systems, which prevent the OEMs from fully recovering the cost of warranty from their suppliers. Outside of a contractual agreement, there’s not much an OEM can do if the failure of a part that costs a few dollars causes a hundred-dollar repair, beyond recovering the few dollars from the supplier.  Or is there?

A decade ago, just as the recession was about to take hold, the top U.S.-based passenger car and truck makers began a conscious effort to increase the amount of warranty expense reimbursements gained from their suppliers through various means. Basically, they told their suppliers to expect to pay a greater share of the whole – a more equitable slice of the pie than they had previously.  As was mentioned, each company reports its net warranty claims expense, so the OEM totals equal annual payments minus reimbursements from suppliers.  Therefore, OEMs can reduce their net warranty expenses both by cutting the amount they pay for warranty work and by boosting the amount they recover from their suppliers.

Back in 2006, Warranty Week counted roughly $13.1 billion in warranty claims paid by the entire U.S.-based automotive industry, which included the overseas warranty expenses of manufacturers such as General Motors and Ford, but excluded the U.S. expenses of international companies such as Daimler and Toyota. On a net basis, the OEMs paid about $11.5 billion and their suppliers paid about $1.6 billion of that total.  So the split was roughly 88% to 12%, more or less the same ratio as it had been since manufacturers began reporting their warranty expenses in early 2003.

A decade ago, the passenger car makers used to plan on spending around $550 per vehicle on warranty claims. But then the OEMs began to increase the pressure upon their suppliers to pay a larger share of the total.  By 2010, the suppliers’ share was up to 17%.  By 2011, the OEMs had cut their own net expense down to $9.7 billion while driving their suppliers’ share of the bill up to $1.9 billion.

Increased Reimbursements

GM and Ford now budget only about $330 on warranty costs for each car they sell – a reduction of roughly 40% per unit. While part of that cost savings came from reduced warranty work, primarily through better reliability and less-frequent repairs, part of it also came from increased reimbursements from suppliers.  Notice that in Figure 1, while the OEMs pay less from 2009 to 2013, the suppliers pay more than they did from 2003 to 2008.

Here’s a better way to see the trend. In Figure 2, the annual totals from Figure 1 are each set to equal 100%, so that the amounts paid by the OEMs and their suppliers are assigned a percentage of the total rather than a dollar amount.  The vertical scale is restricted from 80% to 90% in order to zoom in and spotlight the annual change in these percentages.

figure 2

In 2003, at the start of this data series, the OEMs paid a net $10 billion, or 88% of the industry’s $11.3 billion claims total. In 2004, their share peaked at 89% of an $11.9 billion total.

But then, as increased supplier recovery efforts began to take hold, the OEMs’ share began to drop. It was 86% of a $13.6 billion total.  By 2010 their share was down to 83% of a $10.3 billion total.  By 2012 the OEMs’ share briefly dipped below 83%.

By then, unit sales were well into their own recovery, with both cars and trucks getting back to near pre-recession levels. But then the safety recalls began to rise as well.  In the first half of 2014, GM had to set aside nearly $4.7 billion to cover warranty and recall costs, which was nearly triple its expenses during the same period of 2013.  Ford had to set aside an extra $763 million and Navistar had to add $94 million to its warranty reserves.  Because of these and other setbacks, the OEMs’ share of warranty claims rose back to 84% in 2013, and then jumped to 87% in 2014.  It fell back slightly in 2015 to 86% of a $12.2 billion total.

Permanently Higher Costs?

However, notice that while the OEMs saw their share rise and fall, the suppliers did not. Suppliers actually paid $3 million more in 2015 than they did in 2014.  And the annual total for the suppliers has remained at or above $1.7 billion a year since 2008.  In other words, were it not for the dislocation caused by the recent recalls, the suppliers would still be paying 16% or 17% of the industry total, as they were from 2010 to 2013.

The effort to transfer a greater share of warranty expenses from the OEMs to their suppliers, which began a decade ago, has become a more or less permanent state of affairs. Because of its success, suppliers are in their eighth consecutive year of elevated warranty expenses, caused by a consistent push by the OEMs to boost reimbursements.

Meanwhile, although the OEMs are in their second consecutive year of elevated warranty expenses, these are caused by increased recalls, which are temporary. Also, some of these costs are likely to be shifted back to suppliers. One can assume that OEM legal teams are now looking for ways to boost their reimbursements for faulty airbags, ignition switches, power steering motors, and other allegedly supplier-caused problems.

Eric Arnum is the editor of Warranty Week, an online publication written for the warranty industry professional.

 Click here to download a copy of the 2016 Automotive Warranty & Recall Report.


2016 Automotive Warranty & Recall Report: Industry Insights for the Road Ahead

SRR has released results of its latest research into automotive recalls in the 2016 Automotive Warranty & Recall Report: Industry Insights for the Road Ahead. The report is a follow up to last year’s groundbreaking 2015 report [based on 2014 data], which clearly pointed to an industry on the cusp of a new era of heightened recall activity.

Our analysis of 2015 shows that the new era has arrived. One major characteristic of this new era is the impact of software and wireless technology. According to SRR’s analysis, software-related recalls have risen sharply in recent years: In 2011, under 5% of all recalls were software-related. By the end of 2015, the rate had risen to 15%. Read more…


Oh Fine!! – New Proposed Process for NHTSA Fine Assessment

NTHSA recently published a Notice of Proposed Rulemaking (NPRM) “prescribing procedures for the assessment of civil penalties and for interpreting the factors for determining the amount of a civil penalty or the amount of a compromise under the National Traffic and Motor Vehicle Safety Act (Safety Act), to implement the Moving Ahead for Progress in the 21st Century Act (MAP-21).”[1] Read more…


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In our earlier post regarding Motor Vehicle Defect Petitions (MVDP) we noted that while there has been a modest increase in granting these petitions recently, the majority of MVDPs are denied by NHTSA. A pair of recent MVDP denials (here and here) as well as recent recall of Nissan Versas (here with a prior investigation of the same here) prompted us to look further into trends and developments related to brake pedals, accelerator pedals, and related assemblies.

As described below, since the Toyota Sudden Acceleration issues of 2009 and 2010, speed control components have continued to demonstrate significant product defects impacting millions of vehicles. However, the recall data doesn’t tell the whole story… Read more…

Defect Petitions

Allocating and Prioritizing Resources and the Abundance of Caution – Where are MVDPs Headed?

While there has been much interest and discussion recently regarding large recalls, completion rates, fines and congressional testimony, there has been little interest in certain other elements of automotive recalls and defects. One of those areas is referred to Motor Vehicle Defect Petitions (MVDP). Read more…


Q & A about Q’s – An analysis of NHTSA Queries of Recall Effectiveness and Completion

There has been much interest and discussion recently regarding large recalls, completion rates, fines and congressional testimony. NHTSA’s public actions and comments have indicated a greater degree of resources dedicated to scrutinizing OEM compliance with recall reporting and completion. In this post, we analyze the data NHTSA provides regarding official inquiries made to OEMs. Read more…


The Era of the Recall? 2015 Mid-Year Update

Following the “Year of the Recall” in 2014, many in the industry wondered whether the recent increase in recall activity was temporary or the sign of a “new normal” developing in response to industry and regulatory pressures. While the full nature and extent of any long-term transformations in the industry recall landscape remain to be seen, there has certainly been a continuing focus by NHTSA, automakers, the media, and consumers regarding vehicle safety. Read more…


The “Softer” Side of Things – The Impact of the Increasing Software and Complexity on Vehicle Defects

There is an ever-increasing role of complex software in many of the devices that we use on a daily basis. Perhaps no more stark than the increasing usage of software in mass produced automobiles occupying today’s roadways. Modern automobiles rely more and more on their internal computers to not only bring us new found innovations such as automatic braking but also to perform tasks such as fuel mixture management that were previously handled by analog systems. For example, according to WIRED Magazine, the Chevrolet Volt relies on 10 million lines of code in its operation; about 2 million more than required to operate an F-35 fighter jet.[1] As software and computer technologies begins to inherit more responsibility for automobile safety features, they also begin to face more scrutiny by NHTSA for warranty and recall activity.

Read more…


Inconsequential Noncompliance

While there has been much interest and discussion recently regarding large recalls, completion rates and congressional testimony, there has been little interest in certain other elements of automotive recalls and defects. One of those areas is referred to Notices of Inconsequential Noncompliance (“IN”).

The ability to seek an exemption from having to remedy vehicles as a result of IN is provided by legislature: Title 49 → Subtitle B → Chapter V → Part 556. By way of background, relevant sections of this code are provided below:[1]   Read more…