Chrysler takes a big hit on warranty work

David Barkholz and Robert Sherefkin
Automotive News
August 13, 2007 - 12:01 am EST Among the challenges facing new Chrysler LLC CEO Bob Nardelli: big warranty costs that run far above the industry average.

DaimlerChrysler paid an eye-popping 4.8 billion euros, or $6.1 billion, in global warranty claims in 2006, according to regulatory filings.

Chrysler, whose vehicles consistently rank below industry average for quality, didn't account for all that, of course.

DaimlerChrysler's warranty payouts also cover Mercedes-Benz, Smart and DaimlerChrysler's commercial-truck unit. The data did not separate the results for Chrysler.

DaimlerChrysler's warranty costs were 36.8 percent higher than General Motors' $4.46 billion in claims last year. The figures for other top automakers: Ford, $4.10 billion; Toyota, $2.37 billion; and Honda, $960 million.

The online industry publication Warranty Week gathered the five automakers' data. Automotive News converted those costs - expressed in yen or euros for Toyota, Honda and DaimlerChrysler - into dollars as of the end of each company's fiscal year.

Ford, GM, DaimlerChrysler and Toyota have confirmed that the numbers are generally correct.

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Warranty woes Worldwide automaker warranty costs in 2006 DaimlerChrysler $6.10 billion GM $4.46 billion Ford $4.10 billion Toyota* $2.37 billion Honda* $0.96 billion *For 2007 fiscal year ended March 31 Source: Warranty Week, from SEC filings

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'We're talking billions'

Now that automakers are competing to offer the longest warranties, the reduction of warranty claims has grown in importance.

Last month Chrysler introduced a lifetime limited powertrain warranty on all models. GM and Hyundai offer 100,000-mile powertrain warranties.

"We're talking billions in costs," says Eric Arnum, editor of Warranty Week. "The car companies just don't want failures."

Mercedes contributes to the high warranty costs of DaimlerChrysler - which becomes Daimler AG in October, if shareholders approve. Mercedes' reputation for quality took a hit in recent years because of bugs in its Comand infotainment system. Arnum says DaimlerChrysler's medium and heavy trucks play only a small part in the corporation's total warranty costs.

Chrysler: Problems, progress

In April, Consumer Reports slammed Chrysler for the quality of the Dodge Caliber, Jeep Compass, Dodge Nitro and Chrysler Sebring.

Nardelli is entering a Chrysler that has made progress. Over the past five years, the Chrysler group has cut warranty costs 40 percent, said Frank Klegon, Chrysler's executive vice president of product development.

Klegon declined to disclose the portion of DaimlerChrysler's warranty costs attributable to Chrysler. But he described Chrysler's campaign to improve quality. The company has:

• Standardized its procedures for vehicle launches for every assembly plant and every vehicle.
• Created "customer problem resolution teams" - groups of engineers, customer service experts and others - who debug vehicles after they are launched.
• Invited suppliers to join Chrysler's product teams earlier in the design process.
• Distributed hundreds of vehicles to employees and suppliers for test drives before a new model goes on sale.

Ford also has improved. In the first six months of 2007, Ford says, it has reduced its warranty costs by $700 million from the same period a year earlier.

As an indication of quality gains, Ford vehicles received the most awards in the latest J.D. Power and Associates survey of initial quality. In April, Consumer Reports also singled out several Ford models for praise.

Bruce Culver, vice president at technical services firm MSX International, said carmakers can achieve additional savings by making sure vehicles are fixed right the first time at dealerships.

"Although there have been impressive gains in vehicle quality and warranty costs," Culver said, "there is an opportunity to reduce those costs further by focusing on process waste in the dealer network."