NOVI, MI – General Motors Corp. and Ford Motor Co. are in a “warranty-cost” dogfight.

So says Eric Arnum, editor of Warranty Week, at the Automotive Industry Action Group’s (AIAG) third annual warranty conference here on developing early warning standards to pinpoint potential warranty issues.

By fourth-quarter 2006, globally, Ford’s warranty claim rate was 2.8% of product revenue and GM’s was just over 2.5%, according to data culled by Warranty Week from company U.S. Securities Exchange Commission filings. By first-quarter 2007, they flipped: with Ford’s claim rate dropping to 2.6% and GM’s increasing to 2.7%.

DaimlerChrysler AG’s warranty claim rate account for just over 3.5% of product revenue, Arnum says.

Honda Motor Co. Ltd. and Toyota Motor Corp. remain the lowest, with their warranty claims running neck-and-neck at 1.3%.

Arnum says auto makers do not budget for the full 3- or 5-year length of their vehicle warranties.

“Basically, GM has said it needs two years of warranty in the bank, and Ford has said it needs 1.5 years to feel safe,” Arnum says.

“Why do they need two or 1.5 years to feel safe when vehicles have a 3- or 5-year warranty?” he says.

Because drivers usually reach a warranty’s mileage limit before the time limit. When GM sells 1 million vehicles, the actual warranty lasts 24 months, he says.

Industry-wide, warranty costs climbed slightly, according to information presented at the conference.

Costs rose $100 million between 2005 and 2006, with totals of $10.9 billion and $11.0 billion, respectively. Parts’ costs went from $1.6 billion in 2005 to $1.8 billion in 2006.

It’s a trend continuing into 2007. Auto makers’ warranty costs totaled $2.813 billon in the first quarter of this year compared to $2.718 billion during the first quarter of 2006, according to Arnum.

To combat rising warranty costs by reducing the time it takes to detect problems, AIAG drafted the Early Warning Standards (EWS) charter in 2004.

“We started with warranty as it is so expensive and visible,” says Marianne Grant, business solutions director for Snap-On Business Solution Inc. and member of the EWS work group.

More than 80 companies – including auto makers, suppliers and technology vendors – are involved in the initiative.

EWS is developing communication standards to enable service, parts and repair data to flow freely from dealer-computer systems to auto makers and suppliers.

“The biggest bang for the buck, so to speak, is reducing the inefficiency in the system,” Arnum says. “Over time, the EWS should lead to fewer claims that are much more efficiently processed.”

While the initiative spends much of its time developing complicated technology standards, technology found in applications such as I-pods and MySpace are beginning to simplify how warranty and service information is processed and delivered, according to Arnum.

In past years, the focus was on text analytics technology – how best to analyze written repair orders from the dealership. A hot topic at the conference this year was the potential of using voice clips – having service technicians verbally record what the problem is and attaching the sound or wave file to the online repair order, which then gets sent to the OEM or the supplier.

“We’re seeing consumer technology being applied in business,” Arnum says. “So why not this industry? It makes perfect sense.”

The AIAG also is looking at ways to incorporate digital photography into the process.

Another benefit of focusing on warranty is that the lessons learned there can be applied in other process areas of supply-chain management, Grant says.

One of the EWS initiative’s goals is to educate companies in the supply-chain process about how much money is lost to warranty issues.

Joe Barkai, practice director of IDC Manufacturing Insights, says his firm’s research shows company CEOs often are less aware of the magnitude of warranty problems and, as a result, do not devote as much time or money to address it. Most auto makers, he says, recover less than 50% of their warranty costs.

“Make warranty goals an integral part of product design and performance goals,” Barkai advises manufacturers. “Blend warranty transactions and product-quality attributes. Incorporate non-financial metrics. Make the quality-warranty connection.”

Attorney Paul E. Wojcicki, a partner in the Chicago-based Segal McCambridge Singer & Mahoney, Ltd., explains the difference in cost between typical warranty claims and claims tied to lawsuits.

“We continue to pay today for the sins of a couple of generations ago,” he says. “In the 1950s and 1960s, warranties were not administered very well. Basically warranties would take away more rights then they’d give.”

Congress responded to consumer complaints, Wojcicki explains, by requiring manufacturers “to build better products” and stand by them.

He says a typical lawsuit stems from frustrated expectations by a disgruntled customer. Such cases arise from incompetent techs, repeat visits, an aloof service manager, a rude customer service writer or an unhelpful customer service advisor.

He adds many consumers look at possible lawsuits as their “big break.”

“People are less scared off by the prospect of a lawsuit,” says Wojcicki. “(But) most customers that file a lawsuit had a genuinely bad experience.”

Litigation costs can total $5,000-$7,000 as soon as complaints are filed. An average case costs a company approximately $25,000-$30,000. In total, clients who lose can expect to pay $100,000. Clients who win may pay up to $70,000, according to Wojcicki.

He tells AIAG members, keeping these numbers in mind, the only case they can’t lose is the one that’s never filed.

“We live in an era where people have high expectations of product and customer service,” he says. “Remember that every time your vehicle has a problem, your brand and your name is on the line; and how you respond shapes the perspective (of your business).”

– With Cliff Banks

egenoff@wardsauto.com