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Appliance & HVAC Warranty Report:

HVAC manufacturers have lower warranty costs but are more cautious than other kinds of appliance makers, keeping a much higher ratio between claims and reserves. But neither group has done much to reduce their warranty expenses, though some companies have cut their costs by hundreds of millions of dollars.

Unlike in the automotive industry, warranty is not a huge issue for appliance buyers. Remember when the warranties were five or ten years long? Remember when they were cut to one or two years? That's precisely the point: try doing that to car buyers.

Clothes and dish washing machinery, food cooking and refrigeration appliances, personal care gadgets, and indoor heating, ventilation and air conditioning systems certainly do break and get repaired frequently. There is a thriving business in the sale and administration of their extended warranties, both by retailers and by home warranty companies. And there is a huge amount of money flowing into their product warranties as well, though it's not a top-of-mind issue for many customers.

To create this week's report, we gathered warranty data from the annual reports and quarterly financial statements of 78 companies -- half of them manufacturing HVAC systems, and half of them manufacturing other types of major appliances. From each company we gathered four essential metrics: claims paid, accruals made, reserves held, and products sold. By dividing the claims and accrual totals by sales, we derived a claims rate and an accrual rate. And then by dividing reserves by claims we derived a measure of the company's capacity to pay claims, as measured in months.

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Food Service Equipment Warranties:

The commercial appliances used in restaurants cost more to buy but less to keep in good working order. Over the past 10 years, the average warranty expense rates for professional food service equipment has been less than half as much as for home kitchen appliances.

As we continue our journey through the community of U.S.-based manufacturers that report their product warranty expenses to shareholders, we're circling back to revisit some segments that we skipped over the first time around.

In May, we looked at major appliance and HVAC warranties, but we skipped over the small but important group of companies that make professional food processing, cooking, cleaning and refrigeration systems specifically for restaurants, cafeterias, and other commercial customers.

With the HVAC systems used to heat and cool the air, many of the same brands used in commercial office buildings are also sold into homes. Same goes for laundry: Whirlpool Corp. and others have both residential and commercial laundry business units.

Commercial vs. Residential Appliances

However, with food, it turns out that the home kitchen appliance and the commercial food service appliance communities have very little in common. The only brand name that seems to span across both groups is Electrolux AB, which operates a professional sales unit in Charlotte, North Carolina. All the others seem to choose either the home or the commercial market, but not both.

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Warranty Accruals per Vehicle:

The German OEMs still have the highest warranty costs worldwide, but the Japanese carmakers are no longer unopposed at the bottom. Both Fiat and Ford are cutting their warranty costs to within range of longtime low-cost leader Honda. And Toyota is well on its way to getting back to normal.

Most of the top passenger car manufacturers continue to reduce their warranty expenses, as calculated by the size of the expense per vehicle and as a percentage of their automotive revenue.

The good news spreads across Europe, Asia, and North America, as we reckon that six of the top eight automotive OEMs saw decreasing warranty expenses in their most recently completed fiscal years.

The bad news is that for some brands, particularly those from Germany, warranty costs remain stubbornly high. And while costs are down from years past, the warranty accrual on a Volkswagen Golf or a Mercedes-Benz C 200 is still four to five times as large as it is on a Honda Accord.

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Appliance Service Contract
Market Shares:

Though the market has remained relatively flat for years, market shares are changing as online sales are gaining and new players are emerging. Still, six underwriters control 90% of the market share.

In our series of articles on the major appliance service contract industry back in early 2011, we neglected to include one important item: a market share report. Seven consecutive weekly newsletters explored the history of ServiceBench Inc., GE Appliances, Lowe's, and Abt Electronics and Appliances, among others. But before we could get to the pie charts, the calendar mandated that coverage of the Warranty Chain Management Conference needed to begin.

After that was done, we never went back to finish the series.

This week, as part of our current half-year of service contract industry coverage, we'll fix that oversight and provide some details on appliance service contract market sizing and market share. But we'll admit to one major problem: seven of the top ten retailers of service contracts for major appliances sell considerably more service contracts for consumer electronics, mobile phones, and/or home computers. Separating those segments therefore required some heroic assumptions to be made.

So what we're going to say is that our estimates are rough on both edges. They're rough in terms of estimating the amount of premiums paid by consumers for their service contracts, and they're rough in terms of what kind of product the consumer protected with a service contract when they shopped at Best Buy, Home Depot, Lowe's, Sears or Wal-Mart.

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Smartphone Warranties:

As with luxury cars, we're finding that the smarter the phone and the more advanced its features, the higher the warranty costs. And some of the smartest phones with the biggest market shares are now driving up the warranty costs of their manufacturers.

The smarter the phone, the harder they fall. As these little computers get more compact and sophisticated, their warranty costs are escalating. And it's beginning to hurt some of the largest players.

Two weeks ago, we found that some of the most luxurious passenger cars with reputations for high quality also had relatively high warranty costs. That's not supposed to happen. High quality means low warranty costs, no?

With smartphones, it seems to be a different problem. These units are sophisticated devices that aren't meant to be dropped, sat upon, or left out in the heat, cold, or humidity. But they're also meant to be portable and always available, so abuse and misuse are inevitable.

We just collected some new warranty data that illustrates the problem. Research in Motion Ltd., or RIM, is the Canadian company responsible for the BlackBerry product line. In its most recent fiscal year, warranty claims cost more than seven percent of the company's revenue. And that was the fifth straight year in which warranty costs rose as a proportion of revenue.

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After Warranty Analytics