Thanks to a tradition of full disclosure across the worldwide automotive industry, we have good measures of how many cars and light trucks were made, how many were sold, where they were bought, and how much they cost. Combined with some basic warranty metrics released by the manufacturers of upwards of 75% of those vehicles, we can also calculate how much has been set aside to pay for warranty work.

There is lots of new data to report, so we will try not to duplicate any data reported in previous newsletters. So we encourage readers to take a look back at the European automaker data in the June 30, 2016 newsletter; the Asian automaker data in the July 7, 2016 newsletter; and the U.S. automaker data in the July 21, 2016 newsletter.

And before we launch into the U.S. dollar-denominated warranty expenses of the world's top automakers, readers might also want to look at two of this year's newsletters for a different perspective on the data in Figure 1 below. In the April 6 newsletter, we looked at the German carmakers, and the previous and current owners of Chrysler, leaving the data in its native euro. And in last week's newsletter, we left the warranty costs of the Japanese carmakers in their native yen.

The reason for doing so is simple. Foreign exchange rates are constantly changing, and sometimes what looks like an increase in warranty costs in one currency is actually a decrease in another currency. Looking at warranty expenses in the native currency of the company paying them eliminates this source of distortion.

However, these fluctuations are already built into the figures the automakers include in their annual reports. When Toyota and Honda face rising costs for warranty work performed in the U.S. because of the relative strength of the dollar, they report that increasing cost in yen. When BMW and Fiat have to deal with the decline in the value of the euro as they operate factories outside of Europe, they report that reduction in sales revenue in their native currency.

Single Common Measure Needed

But to compare multiple companies from multiple countries that use multiple currencies, we have to agree on a single common measure. Percentages of sales do that, and we will get to those in Figure 6. But for the next few charts, we're going to translate everything into U.S. dollars.

In order to calculate the numbers in Figure 1, we collected several metrics from each automaker. First, we noted the amounts of accruals each company reported making in their last two fiscal years. Second, we collected the number of vehicles they sold worldwide. And third, we collected data from Daimler, Toyota, and others regarding the prevailing exchange rates over time for the dollar versus the yen, euro, Korean won, Indian rupee, Chinese yuan, and even the Swedish kronor (for the Volvo Car Group).

The results are startling. In 2016, the three automakers with the lowest accrual rates per vehicle sold were Hyundai, Ford, and GM. Those with the highest accrual rates per vehicle sold were Tesla, BMW, and Volkswagen.

Tesla, in fact, was somewhat off the chart, reporting accruals of $3,033 per vehicle sold. Daimler, VW, and BMW were each accruing over $1,000 per vehicle sold. And in fact, last year they accrued even more per vehicle, as did Honda, when the full effect of air bag and emissions scandals hit home.

Lowest Accrual Rates

But there at the bottom sit Hyundai, Ford, and GM. We should mention that Toyota, Honda, and Tata run on fiscal years that end on March 31, so their warranty data is time-shifted back by three months to conform with the others. We should also note that Tata and PSA Peugeot Citroen have yet to report their latest year's warranty data. And so, like two missing front teeth, they are not in this snapshot. But their absence helps split the ensemble into high- and low-cost factions, to the left and right.

For the record, Hyundai accrued $204 per vehicle sold in 2016, up from $177 in 2015 but still well below the warranty cost of any other company on this list. In Korean won, the bill rose even faster, from 201 thousand per car in 2015 to 246 thousand in 2016, because of a weakening of the currency versus the dollar. In other words, Hyundai had to set more funds aside every time a vehicle was sold in the U.S., partly because the local cost of the warranty work increased and partly because the dollar-won exchange rate increased.

GM and Ford, on the other hand, saw much smaller increases in their accrual rate per vehicle sold, because they make and sell most of their vehicles in dollars. And the ones they make or sell in Australia, Asia, or Europe gained because the relative cost of warranty work was reduced as the euro, won, yen, and other currencies fell.

By now you can see why a discussion of worldwide warranty costs can easily devolve into a study of foreign exchange rates. What matters more is which direction costs are headed. And for VW, Honda, BMW, Fiat Chrysler, and Daimler, warranty costs per vehicle sold fell from 2015 to 2016. But they rose for Tesla, Toyota, Ford, Hyundai, and GM.

Worldwide Warranty Costs

Now, let's change topics slightly to include not only these dozen automakers, but also all the other car and light truck manufacturers around the world that don't report their warranty expenses publicly. Over the years, readers have asked a simple question: how large is the worldwide warranty industry? This week, we'll attempt to answer that question for cars and light trucks.

What we did was to gather revenue figures for 14 additional automakers, from Japan, China, India, France, and Sweden. We focused on the years 2012 to 2016 to ensure that as much data as possible was retrievable from annual reports. And we tapped into expert sources to give us some idea of how much each of these shy companies was spending on warranties.

We know for certain that the top 12 automakers listed above spent US$38.3 billion on warranty claims in 2016 (time-shifting Toyota and Honda back by three months). We believe that the automakers that don't report their warranty expenses publicly spent an additional US$9.7 billion on claims last year. Therefore, we believe that automakers worldwide spent US$48.0 billion on claims last year, up from $42.2 billion in 2015.

In Figure 2, we're looking at worldwide claims costs as if it's an industry in which companies can have market shares. Ten of the automakers included in Figure 1 are repeated here. We constructed estimates for France's PSA Peugeot Citroen, as well as for Japan's Nissan Motor and China's SAIC Motor Corp., and included them alongside hard-number actual figures for the eight other market-leading automakers named in the chart. And then there are another dozen companies grouped into the "other" category, ranging from Tesla to Renault.

The market shares of the automakers, in terms of both revenue and vehicles sold, are well-known and thoroughly researched by numerous analytical companies. And just as we didn't want to repeat our own data from previous newsletters, we don't want to repeat theirs.

However, we are certain that there is no pie chart that gives Volkswagen anywhere near a 21% share of the worldwide market for anything. However, they did pay more than 21% of the world's automotive warranty claims last year. And unfortunately, their share of accruals was even higher.

Worldwide Warranty Accruals

In Figure 3, we're looking at the allocation of the world's US$55.7 billion in automotive warranty accruals. As with the claims chart above, there are close to a dozen named companies that account for 83.2% of the world's accruals, and about 14 additional manufacturers lumped together into the "other" category, including five smaller Japanese manufacturers, four more Chinese manufacturers, and two Indian manufacturers, as well as a few others from Europe, the U.S., and elsewhere. All of these add up to about US$9.4 billion in additional accruals, we estimate.

But look at the outsized slice of the pie taken up by Volkswagen. Last year, after the eventual cost of the diesel emissions scandal became more predictable, VW accrued a huge amount -- 12.2 billion euro, or US$13.5 billion -- to pay for the clean-up. This gave the company a commanding 24% share of the world's automotive warranty accruals last year, by our estimates. In contrast, in terms of either vehicles sold or automotive revenue, their share of the global pie was closer to 10% or 11%, based on publicly-available market data.

Because of the air bag recalls, Honda also made a huge accrual in the fiscal year ended March 31, 2016, but we've conveniently time-shifted that into the 2015 column. In the just-completed fiscal year, Honda's accruals went back to normal levels. So in Figure 3, Honda has one of the thinnest slices, surrounded by the estimates we've inserted for PSA, SAIC, and Nissan. Once again, Hyundai, with only a 1.8% "market share" of worldwide accruals, didn't make it past the cut.

Because of the recent misfortunes of Volkswagen, Honda, GM, and Toyota, among others, the world's warranty expenses have been somewhat elevated in recent years. The strong dollar has some impact on that as well, but it merely magnifies the pain of increasing costs, rather than causing them. In the next two charts we're tracking the automotive world's warranty claims and accruals for the past five years, once again time-shifting the fiscal years of Honda and Toyota back by three months.

Claims Paid per Company

In Figure 4, we're clearly separating what is known from what is estimated. On balance, the companies responsible for 70% to 75% of the world's automotive sales revenue report their warranty expenses. And we think they account for 80% to 85% of the world's automotive warranty expenses, because many of the non-reporters are selling into the Asian market, which is huge, but not in terms of warranty expenses.

In 2016, as was mentioned, we believe the world's automakers spent US$48 billion on warranty claims. We can be sure of US$38.3 billion of that total, and are estimating the rest. In 2015, the world's claims cost was US$42.2 billion, of which 81% is certain and 19% is estimated.

Note that the worldwide total has increased in each of the past four years. If we were to carry the calculations back to the beginning of warranty expense reporting in late 2002, we'd probably find some annual decreases, particularly during the slow years. But there was a slight decrease in the known totals from 2014 to 2015, with big decreases by GM and VW more than offsetting big increases for Honda, Fiat Chrysler, and BMW.

Accruals Pie Chart

In terms of warranty accruals, there was a big drop last year, mainly because VW and Honda reduced the amounts they set aside in 2016, compared to the catastrophic levels reported in 2015 (when VW accrued the equivalent of US$21.4 billion and Honda accrued the equivalent of US$5.4 billion). Known accruals dropped from US$54.6 billion to US$45.2 billion, while our additional estimates rose from $8.7 billion to $10.4 billion.

Armed with this data, it's a straightforward process to calculate the worldwide average for accruals made per vehicle sold. Last year, it was a shade under $600 per vehicle, while in 2015 it was a shade over $700 per vehicle. Back in 2012 and 2013, before all the bad news struck, the worldwide average was closer to $500 per vehicle.

Percentage of Revenue

But there's another way to measure expense rates, as a percentage of sales revenue. This has the added benefit of taking currency conversions out of the equation, or at least reducing their impact. What we did was to take our worldwide estimates for claims paid and accruals made from Figures 4 and 5, and divide them by our revenue estimates, to calculate the worldwide averages included in Figure 6.

Notice that the worldwide average claims rate has been steadily rising since 2012, while the average accrual rate peaked at 3.3% in 2015. Also notice that the accrual rate has always been higher than the claims rate, which would be expected since a rise in the accrual rate usually predicts a rise on the claims rate. The good news is that the opposite is also true: the 2016 drop in the average accrual rate would seem to predict a 2017 or 2018 drop in the claims rate. We shall see if that comes to pass.

As far as the question about the size of the worldwide automotive warranty industry, the answer depends on the metric selected. We estimate that automakers paid US$48.0 billion in claims last year. They accrued US$55.7 billion to pay future claims. And they ended the year with approximately US$121.9 billion in their warranty reserve funds, though they did so in a myriad of currencies in addition to the U.S. dollar.

Over the past five years, automakers worldwide have set aside an average of US$588 every time they sold a vehicle, based on their predictions of how much that vehicle's warranty will cost in the future. If their predictions turn out to be low, they will have to make additional accruals later on to plug the gap. If they accrued too much, they will end up with unexpected profits to be taken out of their warranty reserve funds. But something near $600 per vehicle is the rule of thumb.

Worldwide Average Warranty Cost

Measured another way, automakers worldwide have set aside an average of 2.7% of their sales revenue every time they sold a vehicle over the past five years. Last year, BMW, Fiat Chrysler, PSA Peugeot Citroen, Tesla, Toyota, and Volkswagen were above this average. Daimler, Ford, GM, Honda, Hyundai, and Tata were below it.

That doesn't mean their products are good or bad. Besides foreign exchange rates and recalls, there are numerous additional factors to be considered, such as the tax and labor rates of the countries in which they do business, the average selling price of their most popular models, and the typical length of the warranties issued in the place of sale (hint: warranties are longest in Europe and North America).

In that respect, Volkswagen seems to have the worst luck. It's at the wrong end of the euro's recent decline. And although it does well in China (where warranties are generally shorter and less costly), its biggest market remains Europe. Therefore, it dominates a market in which both taxes and labor rates are high. While its products are not as luxurious as BMW or Mercedes, they're still premium-priced compared to Hyundai or Ford. And thanks to some students doing the government's job of emissions testing, it is in the midst of a giant recall and legal process in the U.S. that will cost it additional billions.

Conversely, there are those whose home markets feature short warranties and low costs. Although SAIC Motor did make it onto some charts, for the most part it and the other Chinese automakers are not generating what should be their proportional share of warranty expenses. Last year 28 million vehicles were sold in China -- nearly three-tenths of the worldwide total. We estimate the top five China-based automakers generated far below 30% of the world's warranty expenses -- in fact, far below half that much. But without hard data, we can never be sure.

Contributing Estimates

Therefore, if any readers wish to contribute any inside information on the actual warranty expense rates of all the automakers that are too shy to report it themselves, by all means send it in. Some of our estimates in this newsletter are the result of key metrics contributed anonymously, for which we remain privately grateful.

And now that we've measured the world's warranty costs for both commercial aviation and passenger vehicles, we're tempted to try and do so for both computers and appliances, and possibly for trucks and buses as well. Any contributions made in these areas would be most appreciated and will of course remain confidential.