Warranty Costs the Next Supplier-OE Battleground

There’s always been a push-pull between automakers and suppliers when it comes to determining who should cover how much of the cost of under-warranty vehicle repairs.

But that tension only is likely to worsen in coming years, market trends and data compiled by consultant Stout Risius Ross indicate.

Among factors that could intensify warranty-cost negotiations:

·         NHTSA’s seemingly growing interest in pushing for defects-related recalls and seeing as many vehicle owners follow through on repairs as possible.

·         The rise in new-model introductions, with two to three dozen vehicles slated to roll out in 2014 alone. SRR says its data indicates quality issues spike during a car or truck’s first year on the market, meaning the next couple of years could see the industry saddled with some big repair bills. Of 220 vehicles analyzed by SRR, 64% suffered a recall in debut years.

·         Proliferation of new technology, which often comes with its own quality learning curve. Electronics now account for 35% of a vehicle’s market value, SRR says.

·         Leaner organizations at both automakers and suppliers, meaning quality-related resources have become stretched wafer thin.

·         Rising sales volumes. With more vehicles leaving U.S. dealer showrooms, there are more to repair in the event of a defect or safety recall.

But the real driving factor behind the OE movement to force warranty costs down the supply chain? Parts makers currently spend a fraction of what vehicle manufacturers do annually to cover warranties, and automakers are eager to share the pain.

It’s difficult to quantify and compare warranty costs precisely, because vehicle manufacturers keep as much detail as possible close to the vest, and what is included in financial statements can vary from one company to another.

Some may roll in recall costs with warranty repairs, for example, while others don’t. How one automaker estimates its expected future repair bills in its accruals – the money it sets aside to cover the potential expense – can differ markedly from the way it’s done by another.

But any way you slice it, warranty work is costing U.S. automakers a bigger chunk of revenue than it is suppliers, SRR says.

Warranty claims ran $7.57 billion in the U.S. in 2013, the consultancy says, with automakers shelling out between 1% and 3% of their total revenues to cover the bill. Suppliers on average paid out less than 1% of their revenues to cover defects.

In 2012, $10 billion was spent on automotive warranties, SRR Managing Director Neil Steinkamp says citing data from publication Warranty Week, with OEs contributing $8.5 billion and suppliers a relatively meager $1.5 billion.

With gross profit margins per vehicle often at less than $5,000, “it’s not a huge number to begin with,” Steinkamp tells a gathering of the Society of Automotive Analysts in Southfield, MI.

Both warranty claims and the accruals set aside to cover them have been falling over the past decade, he notes. “The question is whether that trend will continue, stabilize or we’ll see an increase.”

OEs collectively had $15.9 billion set aside to cover repairs at the end of 2012, according to the Warranty Week data, compared with a recent peak of $18.8 billion in December 2007.

But even a quick glance at the headlines makes it clear automakers are coming under more intense regulatory scrutiny that is resulting in more frequent recalls affecting an increasing number of vehicles.

SRR data shows recall campaigns numbered 1,298 in the decade of the 2000s, up from 889 in the 1970s. The total number of vehicles involved reached 168.7 million in the last decade, up from just 61.1 million in the 1970s.

NHTSA also is looking to increase the fix rate on vehicle recalls, now at about 70%, via a planned online database that will allow owners to track their car or truck by VIN and see whether recall-related repairs have been made. If successful, that effort also could hike the cost of recall campaigns, because more of those vehicles that now slip through the cracks due to ownership changes will be coming back to dealers for repairs.

This is the first year for SRR in compiling the warranty- and recall-related data, and the firm expects to begin to draw some more concrete conclusions in the years ahead.

But one thing that appears clear is automakers will continue to ask for more from their supply network.

Dan Sharkey, a partner at Birmingham, MI-based law firm Brooks Wilkins Sharkey and Turco, says the Detroit Three and Nissan have been the most aggressive at trying to recover warranty costs from suppliers, with Toyota and Honda more benign.

Automakers “are pushing costs down,” notes Sharkey, whose firm specializes in supply-chain issues. “Eighty percent of their content comes from suppliers, so they’re looking at how these (repair) costs can be recovered.”

The question is whether an increasingly powerful supply base has developed the muscle needed to push back.

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