Ford Warranty Costs Plummets on Higher Quality

[range]

Very impressive warranty cost improvements. In North America alone there was a huge improvement in warranty costs. Given PAGs numbers, I assume they had equally impressive quality improvements.

 

LINK

 

JP Morgan analyst Himanshu Patel said lower warranty costs bolstered Ford's North American results by about $400 million during the quarter and helped the automaker beat Wall Street expectations.

 

"The underlying upside was still quite impressive," he said in a note for clients.

[LincolnFan]

I remember a while ago it was $500 Million, nice job Ford!

[Hydro]

Good news, that's the right direction. Now to keep this ongoing and Not lax off.

[2005Explorer]

This is probably the best indicator that quality is starting to improve. I would assume that the CD3's are helping a lot to reduce warranty claims.

[NickF1011]

This is probably the best indicator that quality is starting to improve. I would assume that the CD3's are helping a lot to reduce warranty claims.

 

No doubt. Looks like the Edge is off to a good start also. And the Mustang has been really solid since its redesign. Wonder how the truck side of things is looking, as they seem to be responsible for always dragging Ford's overall quality ratings down below their Mercury cousin.

[Daryll40]

Ford's marketing people should be all over this like flies on excrement. THIS is the type of thing that lay people like myself can really understand. Lower warranty costs clearly means the vehicles are better. Beyond saving money on warranty costs this is a HUGE marketing opportunity.

[swenson88]

Ford's marketing people should be all over this like flies on excrement. THIS is the type of thing that lay people like myself can really understand. Lower warranty costs clearly means the vehicles are better. Beyond saving money on warranty costs this is a HUGE marketing opportunity.

 

One thing to do if warranty costs continue to decline is to bring out a 100K mi warranty at least matching GM's. It was kind of embarassing last year when Ford tried to tout their new 60K mi warranty only to have GM bring out a 100K mi warranty the next week or so. If the warranty costs are truly declining it may be financially sound to bring out a longer extended warranty to further boost consumer confidence.

[igor]

One thing to do if warranty costs continue to decline is to bring out a 100K mi warranty at least matching GM's. It was kind of embarassing last year when Ford tried to tout their new 60K mi warranty only to have GM bring out a 100K mi warranty the next week or so. If the warranty costs are truly declining it may be financially sound to bring out a longer extended warranty to further boost consumer confidence.

that is correct ... I believe at this point, though - before they post profit, they should simply pocket the savings ..

 

Igor

[NickF1011]

One thing to do if warranty costs continue to decline is to bring out a 100K mi warranty at least matching GM's. It was kind of embarassing last year when Ford tried to tout their new 60K mi warranty only to have GM bring out a 100K mi warranty the next week or so. If the warranty costs are truly declining it may be financially sound to bring out a longer extended warranty to further boost consumer confidence.

 

Speaking of Ford's warranty...when I was test driving the Fusion last week, the sales guy had NO IDEA that Ford now offered a 5-year/60,000 mile powertrain warranty. That's just sad.

[2000SableWagon]

Speaking of Ford's warranty...when I was test driving the Fusion last week, the sales guy had NO IDEA that Ford now offered a 5-year/60,000 mile powertrain warranty. That's just sad.

 

 

I was talking to a sales guy a month ago and he claimed that the new Duratec 3.5 was a Nissan design. After all there are both about 3.5 liters in displacement, they must be the same, right.

[bilge]

Lower warranty costs clearly means the vehicles are better.

 

I read the link, maybe it has changed, but I can't find any mention of $400m saved in warranty costs.

However it does mention market share for the same time period last year was 17.2% and this year it is 15.1% plus sales are down 13%.

I would say ford better have lower warranty costs if they lost 2% of the market compared to last year and selling 13% fewer vehicles than last year...

[swenson88]

I read the link, maybe it has changed, but I can't find any mention of $400m saved in warranty costs.

However it does mention market share for the same time period last year was 17.2% and this year it is 15.1% plus sales are down 13%.

I would say ford better have lower warranty costs if they lost 2% of the market compared to last year and selling 13% fewer vehicles than last year...

 

That doesn't make any sense. If anything you'd assume their warranty costs went up, customers got pissed and stopped buying, then their market share went down. What we see is the paradox of increasing quality/reliability with decreased sales. Just goes to show you how little the buying public thinks of Ford right now, but hopefully things like this are the beginning of a true turnaround.

[igor]

I was talking to a sales guy a month ago and he claimed that the new Duratec 3.5 was a Nissan design. After all there are both about 3.5 liters in displacement, they must be the same, right.

yeah it is a Toyota, Nissan, Hyundai and Ford Joint Venture .. you did not know that?

 

Igor

[kenp77]

Of course fords warranty costs plummeted every problem you have isn't covered and everything is within ford spec s , spark plugs won't come out not covered, plugs blow out not covered, give me a break :happy feet:

[bilge]

That doesn't make any sense. If anything you'd assume their warranty costs went up, customers got pissed and stopped buying, then their market share went down. What we see is the paradox of increasing quality/reliability with decreased sales. Just goes to show you how little the buying public thinks of Ford right now, but hopefully things like this are the beginning of a true turnaround.

 

 

Will make it simple. If there are 100,000 fewer new fords on the road in 2007 as compared to 2006, ford has decreased their warranty exposure by 100,000 potential claims. There is no paradox, simple math.

 

What does the 2% less market share equal in terms of numbers of sales. 100,000 is just a guess. May be more or less.

[Noah Harbinger]

I was talking to a sales guy a month ago and he claimed that the new Duratec 3.5 was a Nissan design. After all there are both about 3.5 liters in displacement, they must be the same, right.

 

I would assume he was lying rather than just stupid, trying to glom off Nissan's better reputation.

[Ford-150]

Wonder how the truck side of things is looking, as they seem to be responsible for always dragging Ford's overall quality ratings down below their Mercury cousin.

WHAT!!

 

umm Ford trucks are the longest lasting pickups on the roads, but maybe you are talking about the SUVs of which i don't know, but i have had three F-150s all with over 100k on it, not one problem....PERIOD.

 

their pickups are just better, maybe you are talking about recalls because i did have to go in for that, which took, let see... 10 min cause the guy was in the bathroom, he changed the cruise control right in the parking lot and i was off

 

sorry if i came off as harsh

[Ovaltine]

yeah it is a Toyota, Nissan, Hyundai and Ford Joint Venture .. you did not know that?

 

Igor

 

Igor.... the above's a joke, correct?

 

Do us a favor, and add one of these: B) or these :shades: to clue us in.

 

-Ovaltine

[LincolnFan]

It could be true Oval, I mean Ford likes to screw people and Toyota are always the savior.

[RichardJensen]

I read the link, maybe it has changed, but I can't find any mention of $400m saved in warranty costs.

However it does mention market share for the same time period last year was 17.2% and this year it is 15.1% plus sales are down 13%.

I would say ford better have lower warranty costs if they lost 2% of the market compared to last year and selling 13% fewer vehicles than last year...

1) I think it's in the conference call.

 

2) Overall, Ford has sold 98,000 fewer vehicles from Q1 '06 to Q1 '07. C. 62k of those sales are from the discontinuation of the Taurus and Freestar.

 

But that aside.... a) Ford warrants vehicles for 3 years and 36k or 5 years and 70k miles. Why 'either'? Because at this point in time there are Ford vehicles out there that are still covered by the old 3/36k plan.

 

b ) When Ford sells a vehicle, they allocate a certain portion of the proceeds toward expected warranty costs. These costs vary based on a number of factors (vehicle model, etc.).

 

These set-asides are placed in an account for 'expected warranty costs'; these 'expected warranty costs' are budgeted out on a quarter by quarter basis.

 

The whole process basically works similar to health insurance. In the same way that in any given quarter, a health insurance carrier expects to take in certain premiums and pay out certain claims, Ford plans on taking in a certain amount of warranty allowances and paying out a certain number of warranty claims.

 

Now the difference between the two is not the 'savings' referred to here.

 

The savings referred to here is the difference between what Ford expected to pay out this quarter in warranty costs, and what they actually paid out in warranty costs.

 

To reiterate, changes in Ford's sales volume year over year do not impact 'savings' reported, as the savings refer to actual performance over expected performance.

[Surgen]

The savings referred to here is the difference between what Ford expected to pay out this quarter in warranty costs, and what they actually paid out in warranty costs.

 

Not quite. From Ford's Annual Report:

"Nature of Estimates Required: The estimated warranty and additional service action costs are accrued for each vehicle at time of sale. Estimates are principally based on assumptions regarding the lifetime warranty costs of each vehicle line and each model year of that vehicle line, where little or no claims experience may exist. In addition, the number and magnitude of additional service actions expected to be approved, and policies related to additional service actions, are taken into consideration. Due to the uncertainty and potential volatility of these estimated factors, changes in our assumptions could materially affect net income.

 

"Assumptions an Approach Used: Our estimate of warranty and additional service action obligations is re-evaluated on a quarterly basis. Experience has shown that initial data for any given model year can be volatile; therefore, our process relies upon long-term historical averages until sufficient data is available. As actual experiences becomes available, it is used to modify the historical averages until sufficient data are available. As actual experience becomes available it is used to modify the historical averages to ensure that the forecast is within the range of likely outcomes. Resulting accruals are then compared with present spending rates to ensure that the balances are adequate to meet future obligations."

 

My interpretation means that the warranty expense can be influenced by:

1) Current Year Accruals (Volume x Estimate Lifetime Cost)

2) Adjustments to the reserve for vehicles sold in a Prior Year/Quarter

 

So it looks to me like they are adjusting for changes in the life time costs, not just the difference in anticipated spending for one quarter.

[Daryll40]

It would be interesting if someone (JD POWERS, CONSUMER REPORTS) was able to publish the warranty costs per vehicle sold by various manufacturers and model.

[RichardJensen]

Resulting accruals are then compared with present spending rates to ensure that the balances are adequate to meet future obligations.

True, this may suggest that they were able to reduce the lifetime allowances by a total of $400M this past quarter. However, the $400M may refer to warranty savings achieved this quarter, instead of an adjustment to warranty allowances. Why?

 

Because (IIRC) Ford doesn't refer to this as a one-time gain. A retroactive adjustment to warranty allowances, would, I believe constitute a one-time gain, as such savings would not be expected to recur the following quarter.

 

$400M divided by approximately 9M Ford vehicles still under warranty (3 years worth of production) is a savings last quarter of about $44 per vehicle. If you figure only 2/3rds of Fords sold in the last 3 years are still under warranty, the savings is $67 per vehicle.

 

So the question is: does it seem reasonable that Ford's warranty expenses this quarter were $44-$67 per vehicle cheaper than last year?

[Surgen]

True, this may suggest that they were able to reduce the lifetime allowances by a total of $400M this past quarter. However, the $400M may refer to warranty savings achieved this quarter, instead of an adjustment to warranty allowances. Why?

 

Because (IIRC) Ford doesn't refer to this as a one-time gain. A retroactive adjustment to warranty allowances, would, I believe constitute a one-time gain, as such savings would not be expected to recur the following quarter.

 

$400M divided by approximately 9M Ford vehicles still under warranty (3 years worth of production) is a savings last quarter of about $44 per vehicle. If you figure only 2/3rds of Fords sold in the last 3 years are still under warranty, the savings is $67 per vehicle.

 

So the question is: does it seem reasonable that Ford's warranty expenses this quarter were $44-$67 per vehicle cheaper than last year?

 

One-time gains or 'Specials' must be unusual, or infrequent. An adjustment that occurs every quarter is not 'one-time'.

 

Potentially higher than $67-- much of the developing world doesn't have 3-year warranties - many only have 12-month warranties. Their wording also suggests they may not adjust all the way to where their current savings are - they only 'ensure that the forecast is within the range of likely outcomes'. And if their 'process relies upon long-term historical averages until sufficient data is available', they may not if even be recognizing much of the savings from the 2007MY warranty spending yet.

[RichardJensen]

One-time gains or 'Specials' must be unusual, or infrequent. An adjustment that occurs every quarter is not 'one-time'.

 

Potentially higher than $67-- much of the developing world doesn't have 3-year warranties - many only have 12-month warranties. Their wording also suggests they may not adjust all the way to where their current savings are - they only 'ensure that the forecast is within the range of likely outcomes'. And if their 'process relies upon long-term historical averages until sufficient data is available', they may not if even be recognizing much of the savings from the 2007MY warranty spending yet.

Right, but you can't retroactively adjust things every quarter. If, as you suggest, Ford retroactively reduced the warranty expense estimates for vehicles already sold in past quarters, they can't do that again.

 

Also, the warranty cost savings was, again, IIRC, in the NA market. Not shaved from Ford's global automotive operations.