Automotive Industry: Impact of Rising Warranty Costs

Current Trends in Warranty Costs

Warranty costs in the automotive industry are rising, driven by increased warranty reserves, new product-related material costs, and inflationary pressures. Ford's warranty and recall costs surged to $2.3 billion in Q2 2024, up $800 million from Q1 and $700 million year-over-year. Conversely, GM reported decreased warranty-related costs.

"Costs were up year-over-year, primarily reflecting an increase in warranty reserves, higher new product-related material costs and higher manufacturing costs. Now if you take a step back and look at our sequential performance, Q2 saw revenue growth of 12% on a 9% increase in wholesales, driven by higher truck volume and the strength of our product portfolio." --- (F, earning call, 2024/Q2)

"In the six months ended June 30, 2024, decreased Cost was primarily due to: (1) the non-recurrence of charges of $0.7 billion related to the VSP; (2) decreased campaigns and other warranty-related costs of $0.6 billion; (3) decreased EV-related charges of $0.4 billion, primarily due to inventory adjustments to reflect the net realizable value at period end; and (4) increased equity earnings related to Ultium Cells Holdings LLC of $0.4 billion; partially offset by (5) charges of $0.6 billion related to Cruise restructuring; and (6) increased manufacturing labor costs of $0.4 billion." --- (GM, sec filing, 2024/Q2)

"Our launch in initial quality are leading indicators for warranty in the future and we expect to see benefits in the future. We did see warranty cost increase in 2Q, of course, tied to new technologies, FSAs and inflationary pressures for the cost of repair." --- (F, earning call, 2024/Q2)

"Analysts and journalists, including The Associated Press and The Washington Post, reported that, in the second quarter, warranty and recall costs totaled $2.3 billion, $800 million more than the first quarter and $700 million more than a year prior, according to the complaint." --- (F, press release, 2024/08/09)

"Analysts and journalists, including The Associated Press and The Washington Post, reported that, in the second quarter, warranty and recall costs totaled $2.3 billion, $800 million more than the first quarter and $700 million more than a year prior." --- (F, press release, 2024/08/09)

Financial Impact on Automakers

Ford's second quarter 2024 financial results were negatively impacted by a surge in warranty costs due to quality issues with new vehicles, leading to increased warranty reserves and affecting profitability.

"If you are a shareholder who suffered a loss, click here to participate. On July 24, 2024, Ford reported second quarter 2024 financial results, falling short of consensus estimates, stating that quality problems with new vehicles led to a surge in warranty costs." --- (Ford, press release, 2024/08/02)

"The Ford class action lawsuit further alleges that on July 24, 2024, Ford announced second quarter 2024 financial results, revealing that Ford's "[p]rofitability was affected by an increase in warranty reserves" and "higher warranty costs."" --- (Ford, press release, 2024/08/09)

Technology and Quality Control Measures

Automakers are enhancing technology and quality control measures to improve safety and efficiency. GM is expanding safety metrics and simplifying engineering processes, Ford is verifying quality standards and leveraging past know-how, and Tesla is advancing Full Self-Driving technology, all aimed at reducing costs and improving product quality.

"We've also expanded our safety metrics to make sure it measures across many scenarios. So I'm very confident as we now have vehicles operating and we're on the path very quickly to get to -- back to driverless with much safer technology, again, getting to this better than a role model driver." --- (GM, earning call, 2024/Q2)

"We know it fits a future technology roadmap for that challenger supplier. We have our own quality standards, which we have to actually study and verify, whether those are really required to be competitive." --- (Ford, conference, 2024/05/30)

"This allows for better cost control, more scale, quicker time to market, and a superior product, applying not to -- not just to autonomous vehicles, but to autonomous humanoid robots like Optimus. Regarding Full Self-Driving and Robotaxi, we've made a lot of progress with Full Self-Driving in Q2 and with version 12.5 beginning rollout, we think customers will experience a step change improvement in how well supervised full self-driving works. Version 12.5 has 5x the parameters of 12.4 and" --- (TSLA, earning call, 2024/Q2)

"Then we leveraged our proven platforms and component sets for lower cost and greater efficiency. Winning with simplicity, which is our drive to eliminate unnecessary complexity in the way we engineer and equip our vehicles, will help ensure that we can continue to sustain and even improve our margins in the future." --- (GM, earning call, 2024/Q2)

"And we're finding that there's ways to be more efficient in many ways than some of the Chinese by incorporating the technology that the team is able to bring forward and leveraging the know-how that they've had from the last products that they've put forward. So I think there's a lot of opportunity for us with that team and the talent and the change in the process that's not only going to show up when we get to our affordable EVs that are going to come from them, but it's also important to understand that if you don't have that transfer function Jim talked about, the entire company isn't going to improve." --- (Ford, earning call, 2024/Q2)

Customer Satisfaction and Retention

GM's focus on customer satisfaction scores, meeting customer demands, and maintaining pricing stability has been instrumental in winning new customers and excelling at customer retention, even amidst rising warranty costs.

"And when you look at their customer satisfaction scores across their portfolio, not just with the retail customers, but also with the dealer network and the floor plan financing they do." --- (GM, conference, 2024/08/08)

"quite consistently through it. I think one of the great things that our team has learned is that by meeting the customer where they are by reproducing vehicles that the customer demands, we're actually able to maintain more stability in our pricing, which that consistency I think has value to it as well." --- (GM, conference, 2024/08/08)

"These vehicles are helping us win new customers, and we will continue to excel at customer retention." --- (GM, earning call, 2024/Q1)

Regulatory and Compliance Factors

Automakers are navigating regulatory and compliance challenges by leveraging credits, supporting policies like the IRA, and implementing rigorous compliance measures. These strategies are crucial for meeting stringent standards and managing warranty costs effectively.

"In addition, slower-than-anticipated development of the electric vehicle market may impact our strategy to comply with regulatory standards, and, in some cases, we plan to utilize credits purchased from third parties to demonstrate regulatory compliance or we may need to modify our product offerings." --- (F, sec filing, 2024/Q2)

"At the end we have said that we support IRA as a bridge to the compliance mandates that public policy has established because we need that to be able to scale up as rapidly as policy has indicated." --- (GM, conference, 2024/06/11)

"Hardware and software changes can lower exposures generally. Tesla has developed extremely rigorous compliance and hazard screenings beyond regulatory requirements for certain toxic chemicals." --- (TSLA, event transcript, 2024/06/13)

"And so we believe as a company, even if there were short-term adjustments we can make to a compliance-led, lower requirement lineup, we're not going to approach it that way." --- (F, earning call, 2024/Q2)

"So as we're marching towards these increasing EPA stringency levels, if the consumer isn't ready for full battery electric, bringing an option to them that also qualifies as an EV under the compliance standards is going to be really important for us as a flex lever." --- (GM, conference, 2024/06/11)