The Dilemma between Quality Reputation and Risk Prevention: Warranty Provisions of Car Manufacturers
©2014
Textbook
85 Pages
Summary
Car manufacturers are playing a major role beneath the most promising industries for investors. But the changing environment of political decisions and moving values of customers influence the strategies of the OEMs. The quality strategy of the car brand plays an enormous role. The increasing trend of major recall initiatives of vehicles is part of the daily press and harms the quality reputation of the car makers. But how can the analyst give a statement about the quality performance with the public information provided by the OEMs? One possibility is the evaluation of the provision for warranty which is part of the liabilities in the annual report. This book compares the applicable requirements like laws and reporting standards which have to be followed. It shows calculation methods to make the impact of laws and reporting standards visible. In respect to the estimation of the failure probability statistic methods are explained. Finally the annual reports of the biggest car manufacturers are compared with each other in regards to the available information about warranty provisions and key figures are analyzed.
Excerpt
Table Of Contents
VIII
FY
Fiscal
Year
GAAP
Generally Accepted Accounting Principles
GM
General
Motors
Company
HGB
Handelsgesetzbuch, German code of commercial law
IAS
International Accounting Standards
IASB
International Accounting Standards Board
IATF
International Automotive Task Force
IFRS
International Financial Reporting Standards
INR
Indian
Rupee
ISO
International Organization for Standardization
JV
Joint
Venture
KBA
Kraftfahrt-Bundesamt
km
Kilometer
KPMG
Independent accounting firm
KRW
South Korean Won
LC
Local
Currency
m Million
M&A
Mergers and Acquisitions
MAN
Maschinenfabrik Augsburg Nürnberg
MIS
Miles
in
Service
MKD
Medium Knocked Down
MTBF
Mean (operating) time between failures (after repair)
MTTF
Mean time to failure
MTTFF
Mean time to first failure
MTTR
Mean time to repair
NAFTA
North American Free Trade Agreement
NHTSA
National Highway Traffic Safety Administration
IX
OEM
Original Equipment Manufacturer
OICA
International Organization of Motor Vehicle Manufacturers
ppm
Parts
per
Million
ProdHaftG
Produkthaftungsgesetz German law on product liability
PWC
PricewaterhouseCoopers
SFAS
Statement of Financial Accounting Standards, main part of U.S.-GAAP
SKD
Semi Knocked Down
SOP
Start of Production
TIS
Time
in
service
TTF
Total time to failure
UCC
Uniform Commercial Code
UN
United
Nations
U.S.
United
States
U.S.A.
United States of America
VD
Vehicle
Division
VDA
Verband der Automobilindustrie German Association of the Automo-
tive Industry
VDI
Verein Deutscher Ingenieure The Association of German Engineers
VW
Volkswagen
X
List of Figures
Figure 1 Guarantee contracts according to the German code of civil law ... 17
Figure 2 Requirements regarding the recognition of provisions ... 34
Figure 3 Example of an Isochronous Diagram ... 42
Figure 4 The Bathtub Curve ... 44
XI
List of Charts
Chart 1 Comparison of manufacturer guarantee periods in Germany and in the U.S.A. ... 19
Chart 2 Warranty provisions of OEMs in percent of sales ... 66
Chart 3 Warranty provisions of OEMs per unit sold ... 67
Chart 4 Comparison between IFRS and HGB on the example of Volkswagen
in percent of sales ... 68
Chart 5 Comparison between IFRS and HGB on the example of Volkswagen
in EUR per unit sold ... 69
Chart 6 Comparison between Toyota and Volkswagen AG in percent of sales ... 70
Chart 7 Comparison between Toyota and Volkswagen AG in EUR per unit sold ... 70
Chart 8 Comparison between PSA and Renault in percent of sales ... 72
Chart 9 Comparison between PSA and Renault in EUR per unit sold ... 72
List of Tables
Table 1 Calculation of collective warranty provisions for 3 years ... 46
Table 2 Calculation of the warranty provision according to IFRS ... 48
Table 3 Calculation of the warranty provision according to HGB ... 49
Table 4 Calculation of the warranty provision according to EStG ... 49
Table 5 Descriptions of warranty provisions in annual reports ... 63
Table 6 Content in regards to warranty provisions in annual reports ... 64
List of Symbols
* multiplied
/
divided
^
to the n
Euro
XII
13
1. Introduction
These days, the car industry is experiencing major changes. The market focus tends to
be more on emerging regions with higher potential for growth.
1
A value change is
taking place in the younger generation of consumers where the automobile is not as
much a status symbol now as it was in previous generations. Technology wise, e-
mobility is growing and will take a market share away from the traditional combustive
engine technologies. Due to these changes the Original Equipment Manufacturers
(OEM) have to focus more strongly than ever on their strategies for the future in order
to assure their investors that they are not losing their value.
One of the important strategic factors in the automobile industry is the quality reputa-
tion of a company or the car brand
2
. In 2004, when Toyota was the third largest car
manufacturer in the world, Jeffrey K. Liker wrote in The Toyota Way: "Much of
Toyota´s success comes from its outstanding quality reputation".
3
Today, Toyota is the
biggest car manufacturer in the world. But is Toyota still the benchmark
4
when it comes
to the reliability of a vehicle?
5
What would Mr. Liker say today, eight years later, seeing
that Toyota´s public image is affected by a high number of recalls?
6
This sensitiveness
on quality issues at Toyota might be a lesson learned from the accident in 2009 in the
United States of America where one woman was killed and Toyota was taken to court.
7
The aftermath of this accident led to Toyota recalling 10 million vehicles and having to
pay 1.1 billion U.S. dollars
8
to rectify the problems, suspected to have been caused by a
floor mat.
9
Customers have high expectations with regards to the reliability of their vehicles. Car
companies are afraid of public recall actions because this kind of publicity harms the
quality reputation. The quality of the automobile as a product has a direct influence on
the company's financial success, not only due to marketing factors which influence the
1
Cp. ACEA (2013), pp. 75-82., OICA (2012).
2
Cp. Hertog (2008), p. 30.
3
Cp. Liker, J. K. (2004), p. 5.
4
Cp. Dippe, A. (2008), p. 92.
5
Cp. Dippe, A. (2008), p. 7.
6
Cp. Schneider, M. C., Murphy, M. (2013) in Handelsblatt am Wochenende Nr. 221 (2013/11/15), p. 1.
7
The court did release Toyota from the responsibility for the accident (Handelsblatt, 2013/10/11)
8
Cp. Fasse, M. (2012) in Handelsblatt No. 250 (2012/12/28), p. 8.
9
Cp. Fasse, M. (2012) in Handelsblatt No. 250 (2012/12/28), p. 8.
14
sales figures
10
, but also due to costs for quality which reduce the revenue, profit and
finally, the dividend payout.
11
Accumulating the warranty provisions of the three
biggest car manufacturers in the world, General Motors (GM), Toyota and
Volkswagen
12
, the accrued amount is comparable to the budget of the German state
Hesse.
13
The mentioned quality costs occur due to recall campaigns for vehicles on the
road, law suits due to safety related events and warranty costs for exchange or repair
caused by incapable production processes and poor design.
14
Production processes
which waste less than 1 % of turnover in quality costs only are within the world class
level in the electronic industry.
15
But this is not anymore an acceptable level for the car
industry where the benchmark
16
failure rate of processes is supposed to be below
0.00034 %.
17
The analysis in chapter 5 will show whether this high expectation is
reflected in the actual warranty figures.
The potential investor wants to know if the company in which he invests or is consider-
ing investing in, is able to generate a good profit. Most of the big OEMs are public
companies listed on the important stock markets. Therefore it is possible to analyze the
costs for quality using the information on provisions for warranty which is part of the
annual report. This book intends to show how reliable and comparable the figure of
warranty provision of OEMs in the annual report is and which valuable information the
investor or analyst can get out of it. In the context of globalization, it is also important
to know if there are regional differences in regards to warranty costs or provisions. In
order to show as many influencing factors as possible, first the prerequisites in regards
to the legal requirements and accounting rules will be shown and compared with each
other. The calculation of the warranty provisions will then be explained. As the warran-
ty payment is a future event which is not predictable at the moment when the provision
is built, the calculation of costs relies on statistic models and industry specifics. Finally,
10
Cp. Prabhakar Murthy, D.N., Blischke, W.R. (2006), p. 257.
11
Cp. Kaiser, S. (2008), p. 68.
12
Cp. General Motors Company (2013), p. 115, Toyota (2013), p. 92, Volkswagen Group (2013), p. 315,
the provision also includes other items.
13
Cp. Hessisches Ministerium der Finanzen (2011), p. 3.
14
Cp. Prabhakar Murthy, D.N., Blischke, W.R. (2006), p. 9.
15
Cp. Rehbehn, R. , Bülent Yurdakul, Z. (2003), p. 54.
16
The expected capability level for processes in the automotive industry is 6 Sigma. Sigma refers to the
failures which are around a defined mean in the Gaussian (normal) distribution curve. The dominant
methodology used for the process improvement of manufacturing as well as administration processes in
the automotive industry is the Six Sigma methodology which is also used in other industries and business
areas.
17
Cp. Levine, D. M. (2006), p. 2.
15
after the clarification of the prerequisites and calculation methods, the annual reports of
the biggest car manufacturers will be analyzed in regards to their warranty provisions
and methods of predicting the provisions for warranty.
16
2. Definitions
2.1 Warranty versus Guarantee
When defining warranty and guarantee, the differences are often confused.
18
The common understanding is that the seller of a product has to warrant that his product
fulfills its purpose and is free from defects.
19
Literature about the warranty history shows that the warranty was already common
practice in the twenty-first century B.C.
20
in the Assyrian and Babylonian cultures.
21
The linguistic roots of the word "warranty" can be found in old French words
22
and the
German word "guarantee" but also in the Latin language from where it found its way
also to other languages.
23
If the product has a fault which negatively influences the purpose or does not meet
promised specifications in a negative manner, the consumer can make a claim under
warranty at the company where the product was purchased.
24
It is the responsibility of
this company to repair a faulty product, to replace it or to release the buyer from the
contract in the case that the failure is confirmed. In Germany this consumer right is
described in § 436 in the German code of civil law (BGB). The law also defines the
time period in which the product can be claimed. Since 1980 the United Nations (UN)
Commission on international trade law (UNCITRAL) recommends a two year period in
which the buyer can claim the product after it was handed over to him.
25
This UN
statute is ratified and accepted by 79 countries.
26
The European Union (EU) Directive
1999/44EC from May 25
th
of 1999
27
also confirmed this period. Germany followed this
18
Cp. Wawerla, M. (2008), p. 17.
19
Cp. § 433 BGB
20
Before Christ
21
Cp. Prabhakar Murthy, D.N., Blischke, W.R. (2006), p. 2.
22
Cp. Prabhakar Murthy, D.N., Blischke, W.R. (2006), p. 2.
23
Cp. Wiewiórowska-Domagalska, A. (2013), p. 7.
24
Cp. Alpmann-Pieper, A. (2012), p. 6.
25
Cp. § 39 CISG
26
Cp. Piltz, B. in NJW 35/2013, p. 2567
27
Cp. EU DIRECTIVE 1999/44/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
(2013), § 17
17
commandment and describes the two year period in the German code of civil law as
well.
28
In Germany, the warranty describes this right for repair, price reduction, replacement or
cancellation of the purchase contract.
29
This right does not depend on the content of a
contract between the seller and the buyer. It is civil law and cannot be overruled
negatively for the buyer by other agreements like contracts or terms and conditions of
the seller. But it can be extended favorably by voluntary guarantee contracts. Figure 2.1
shows the Guarantee from seller or manufacturer according to German law. This
guarantee is independent from the warranty by law or is an extension of the warranty by
law. The condition refers to the promised or expected quality within the defined
duration.
Source: Translated from Alpmann-Pieper, A. (2012), p. 65.
Figure 1: Guarantee contracts according to the German code of civil law
28
Cp. § 438 BGB
29
Cp. § 437 BGB
18
The warranty is a protection of the consumer by law. Which law applies, depends on the
market in which the product is sold. In the United States of America (U.S.A.), which is
one of the most important markets for the car business, the warranties given by law are
called "implied warranties" and the voluntary guarantees are called "express warran-
ties".
30
The implied warranty is not comparable to the warranty according to the
European law, however. It does not, for example, cover a certain time period like the
European law does. It only promises the product to be "fit for use" in the moment it is
bought.
31
Manufacturers can bypass this law by selling the product "as is". But this
disclaimer is not allowed in all states in the U.S.A.. Two warranty legislations should be
mentioned in this regards. The "Magnuson-Moss Act"
32
and the "Uniform Commercial
Code" (UCC)
33
. Both are federal law. The Magnuson-Moss Act is the most important
warranty law in the USA and is applicable to consumer goods. The Magnuson-Moss
Act requires that consumer products starting at $ 15 US are marked with "full warran-
ty
34
" or "limited warranty" in order to improve the protection of the consumer which
was not assured with the UCC.
35
Unlike German federal law, the federal Magnuson-
Moss Act does not overrule the warranty law of the states.
36
The warranty period in the
United States of America (U.S.A.) is defined by state law. A comparison between the
guarantee periods given by the manufacturers in Germany and in the U.S.A. is shown in
chart 1.
30
Cp. Prabhakar Murthy, D.N., Blischke, W.R. (2006), p. 261.
31
Cp. Prabhakar Murthy, D.N., Blischke, W.R. (2006), p. 36.
32
Cp. Prabhakar Murthy, D.N., Blischke, W.R. (2006), p. 261. Magnuson-Moss Warranty and Federal
Trade Commission Improvement Act of 1975 is commonly called "Magnuson-Moss Act".
33
Cp. Prabhakar Murthy, D.N., Blischke, W.R. (2006), p. 261. The UCC was established by the U.S.
National Conference of Commissioners on Uniform State Laws.
34
Cp. Prabhakar Murthy, D.N., Blischke, W.R. (2006), p. 262. Full warranty means free replacement or
full rebate.
35
Cp. Prabhakar Murthy, D.N., Blischke, W.R. (2006), p. 262.
36
Cp. Prabhakar Murthy, D.N., Blischke, W.R. (2006), p. 263.
19
Source: Based on data from Henn, Ch. (2013) in ADAC Motorwelt No. 11-2013 p. 56.
Chart 1: Comparison of manufacturer guarantee periods in Germany and in the
U.S.A.
The Chinese market is the place where the automobile business is growing out of
proportion with the rest of the world. In China, repair agreements for cars are described
in the vehicle-repair contract which is under control of the federal commerce admin-
istration office.
37
The period for guarantee is also defined in this contract.
38
The
warranty period is defined by federal law.
39
The responsibility of the producer is
comparable to that described by German law.
40
The German law on product liability
(ProdHaftG) was used as an example for the definition of a nonconforming product
41
in
China and the United Nations Convention on Contracts for the International Sale of
Goods (CISG) is also applicable for business with China.
42
In the car industry manufacturers often advertise their products including a voluntary
"guarantee" for a certain time period or mileage and for certain parts of the vehicle. This
guaranteed meeting of costs caused by certain repairs or replacements of the faulty
37
Cp. Joos, B. (2013), p. 138.
38
Cp. Joos, B. (2013), p. 208.
39
Cp. Joos, B. (2013), p. 273.
40
Cp. Christ, S. (2011), p. 102.
41
Cp. Christ, S. (2011), p. 102.
42
Cp. Christ, S. (2011), p. 99.
0
1
2
3
4
5
6
7
8
Manufacturer guarantee periods (in years)
Germany
U.S.A.
20
components of the vehicle is a voluntary extension of the legal warranty. This guarantee
is defined in the written contract between seller and buyer of the car. Therefore it
becomes a legal right of the buyer to claim faults which are not covered by the legal
warranty.
43
The guarantee also releases the buyer from the obligation to prove that the
product was already faulty at the moment of purchase, unlike the legal warranty which
determines that the buyer has to prove fault within 6 months of purchase.
44
The volun-
tary guarantee is mainly a marketing tool which increases the quality reputation of the
car brand and is supposed to strengthen the relationship between consumer and car
brand.
45
Some car manufacturers offer 5 years or even more
46
. Aneta Wiewiórowska-
Domagalska wrote in her dissertation about consumer sales guarantees: "The signifi-
cance of the duration is based on the fact that it carries an indirect message to the
consumer, how far does the guarantor stand behind the goods. This is the reason why
advertisement campaigns that employ guarantees concentrate mostly on the duration of
the guarantee, as the element of duration easily catches the attention of the consumer.
The consumer gets the message: If somebody offers (5, 15, 100) years guarantee, the
good must indeed be of an excellent quality!".
47
Opel, which is a GM brand, received major publicity in 2010 when the Chief Executive
Officer (CEO) Nick Reilly announced a life time guarantee
48
on their cars after sales
dropped by 40 %.
49
At this time the Korean OEM KIA had already offered a 7 year
Guarantee.
50
Car companies did not always understand the extended guarantee as a marketing
instrument but saw it also as a cost burden from which they tried to get escape. This can
be seen in an EU law suit from 1983. Some Ford dealers tried to avoid guarantee
services for cars which were bought in other member states of the European Union than
in the one where the dealer was located. The decision of the EU Commission, referring
to Article 101 refused the approach of the Ford dealers.
51
In 2010, the EU commission
did strengthen the consumer rights even more and obliged the OEMs to take guarantee
43
Cp. §§ 443, 477 BGB
44
Cp. § 476 BGB
45
Cp. Wiewiórowska-Domagalska, A. (2013), pp. 6,7.
46
See chart 1
47
Cp. Wiewiórowska-Domagalska, A. (2013), p. 225.
48
Vehicle life time was defined by Opel with 160,000 km
49
Cp. Herz, C. (2010), p. 22
50
Cp. Herz, C. (2010), p. 22
51
Cp. Wiewiórowska-Domagalska, A. (2013), p. 32.
21
responsibility also if the car was not maintained in an OEM certified dealership but in
any independent garage during the guarantee period.
52
Law cases show that the legal warranty law does not cover all circumstances. Tires,
exhaust systems, bulbs or spark plugs have a lower expected life-time than the vehicle
itself.
53
In Germany, purchase contracts between private buyers and a company fall
under the BGB. 6 months from the day when the subject was handed over
54
, the buyer
has to prove that it was already faulty from the beginning.
55
The German automobile
club ADAC provides a list of law suits in regards to warranty or guarantee disputes
between buyers and manufacturers
56
which shows that this reversal of evidence is a
reason for a high number of law suits.
No matter if the repair or exchange service is provided due to legal warranty, contractu-
al guarantee or good will, the dealers will bill these repair to the OEM who is the
manufacturer of the vehicle. These guarantees have to be covered with adequate
provisions. Many components the OEMs use in their vehicles are procured from
specialized companies. Therefore the OEM charges the cost for a supplier failure to the
supplier of this component. This supplier will also have to build a provision for the
warranty payments to the OEM and does reimburse these costs from his sub-supplier.
This process does continue to the last tier
57
in the supply chain. Some OEMs deduct the
expected reimbursement of suppliers from their warranty provision. Details are shown
in chapter 5.
Civil law is not applicable in the case that the OEM claims the failure to his supplier.
According to the German code of commerce (HGB) a company is obliged to verify the
product at the moment it is handed over and has to claim a failure immediately.
58
As
OEMs do not want to cover the costs for testing the incoming goods, contracts between
52
Cp. EU Commission notice 2010/C 138 § 69, p. 26.
53
Cp. VDA Volume 3.2 (2008), p. 334.
54
Called transfer of perils
55
Cp. § 476 BGB
56
Cp. ADAC (2013/08/30) Liste zur Abgrenzung Mangel / Verschleiss. It contains law suits and
decisions of the courts with mileage and age of the car, the defect, car brand and model.
57
Tier is the automobile industry wording for the position of a company in the supply chain.
58
Cp. § 377 HGB
22
the parties are agreed in which the quality expectations
59
are described and also the
period in which the buyer can claim under warranty.
2.2 Product Responsibilities beyond the Warranty
The product manufacturer can also be made responsible for incidents which happen
beyond the normal replacement or repair of his product. If it can be proven, that a
failure in the product caused an accident for example, the car manufacturer is also liable
for material costs and other consequences related to this accident. Especially for OEMs
producing in or delivering to the United States, the risk of law suits due to the "strict
liability" is higher than in other countries. Fines defined by the court
60
in the United
States are higher than the penalties imposed in comparable cases in Germany. One of
the reasons for this is the high compensation for immaterial damage.
61
In the Pro-
dHaftG, it is defined who the manufacturer is and which circumstances require the
liability for consequences caused by a failure of the product. According to the Pro-
dHaftG
62
, the manufacturer is not only the OEM who assembles the car, but also the
manufacturers of the components of the vehicle. The definition of a failure is described
in § 3 of the ProdHaftG: A product has a failure if it does not provide the safety which
can be expected from its presentation, purpose of usage and the moment when it was
brought into circulation.
63
The right to claim this liability from the manufacturer is
limited to three years after the incident was known to the concerned complainer.
64
Ten
years after the product was brought into circulation, the producer cannot be made
responsible anymore.
65
The ProdHaftG is comparable to product liability laws in other states of the European
Union due to the reason that the EU Council established the directive 85/374 concerning
liability for faulty products in 1985 and it has been implemented in all member states
59
Quality expectations in the automotive industry are defined and measured in ppm (parts per million),
DPMO (Defect Parts per one Million Opportunities) or Sigma. One failure in one million parts delivered
correlates to 1 ppm or 1 DPMO. Sigma refers to the failures which are outside of a defined mean in the
Gaussian distribution curve. Six Sigma, which is industry standard, correlates to a failure rate of 3.4 ppm
(3,4 DPMO) or 99.9997 % good parts. Cp. Williams, M.A. (2008) p. 87.
60
Defined by the Juries.
61
Cp. §§ 7, 8, 9 ProdHaftG. Immaterial damage means injuries of human beings.
62
Cp. § 4 ProdHaftG.
63
Translation from § 3 ProdHaftG.
64
Cp. § 12 ProdHaftG.
65
Cp. § 13 ProdHaftG.
23
since then.
66
The difference between the liability of the producer responsible for a
failure of his product according to the ProdHaftG and the liability of the producer
according to the § 823 BGB should also be mentioned here. The liability according to
the ProdHaftG is related to a failure of the product. But in § 823 BGB, the liability is
related to the personal fault of harming another person, by intention or carelessness.
67
Potential risks of incidents relevant according to the ProdHaftG also have to be consid-
ered in the provisions if they fulfill the requirements for provisions mentioned in
chapter 3. Recall campaigns
68
are also initiated based in the § 4 ProdHaftG
69
and § 823 I
BGB.
70
The analysis in chapter 5 shows how the OEMs report these risks in the annual
report.
2.3 Provision versus Accrual
Outstanding obligations of a company which will have to be paid in the future mean a
certain risk for the liquidity of a business if the amount or time of the obligation is
unknown. Due to that reason a provision or accrual can be created which serves as a
type of reserve for an obligation in a future period. But the important difference to an
actual reserve is that the amount of the provision and the accrual become a part of the
liabilities. The reserve is considered part of the assets.
71
In the annual report, the provision for warranty or guarantee is, according to the
International Accounting Standards (IAS) 37.10, part of "uncertain obligations" but
accruals are shown in "other liabilities" together with the accruals for pensions and tax
payments.
72
Literature shows that the definition of accrual and provision is not always
easily discernable. According to IAS 37.11,
an accrual is used for future debits, the
occurrence of which is almost confirmed and is comparable to the Statement of Finan-
cial Accounting Standards (SFAS) 5 which requests a probability of 80 % - 90 %.
73
An
example for the accrual is the payment of personnel debits as vacation allowance or
66
Cp. EU Council Directive 85/374/EEC.
67
Cp. § 823 BGB.
68
Cp. Chapter 4.3.
69
Cp. Tamme, A. (1996), p. 13.
70
Cp. Tamme, A. (1996), p. 14.
71
Cp. Scheffler, E. (2011), p. 17.
72
Cp. Melcher, W. et al. (2013), p. 34.
73
Cp. Kaiser, S. (2008), p. 69.
24
Christmas bonuses.
74
Also, pending invoices for material already received from suppli-
ers are mentioned as accruals because the uncertainty is very low.
75
Differing from the accrual, the provision is used for future obligations which are less
probable in regards to period and amount.
76
According to the International Financial
Reporting Standards (IFRS) "probable" means a probability of more than 50 %
77
,
"possible" if the risk is lower or equal to 50 % and "remote" if it is not very probable.
78
IAS 37 says "more likely than not" and means a mathematical-statistical probability of
more than 50 %.
79
The United States - Generally Accepted Accounting Principles
(U.S.-
GAAP) only mention "probable" as required for the creation of a provision.
80
The
probability "more likely than not"
81
for provisions seems to be more adequate in regards
to liabilities for warranty and guarantee due to the reason that it is very difficult to
predict if a component in the car will fail during the period of warranty or guarantee.
The prediction of a certain quality issue depends on statistical calculations under
consideration of the technical specification of a component or system and a variety of
other influences. Environmental influences like temperature or road conditions affect
the reliability as well as influences of the individual driver and traffic situations. The
Standard 3.2
82
of the German Association of the Automotive Industry (VDA) shows
statistics of the usage which certain components in a car undergo during the lifetime of
the car. For example, the standardized frequency a car´s driver door is used is double
that of the passenger door usage.
83
That the components of the driver´s door fail earlier
than the components of the passenger´s doors can be statistically proven. But due to the
reason that the failure statistics of components often show a stochastic behavior, that
means failures occur randomly
84
, long term experiences help to predict the expected
warranty costs. Detailed explanations in regards to the statistical prediction of the
reliability are shown in chapter 4.3.
74
Cp. Melcher, W. et al. (2013), p. 34.
75
Cp. Scheffler, E. (2009), p. 186.
76
Cp. Melcher, W. et al. (2013), p. 34.
77
Cp. Rothoeft, D. D. (2004), p. 97.
78
Cp. Melcher, W. et al. (2013), p. 35.
79
Cp. Kaiser, S. (2008), p. 70.
80
Cp. Rothoeft,D. D. (2004), p. 98.
81
Cp. IAS 37
82
OEM participants: Audi, BMW, Daimler, Ford, Opel, Volkswagen, IVECO-Magirus, MAN
83
Cp. VDA 3.2 (2008), p. 371.
84
Cp. Precht, M. et al. (1999), p. 81.
25
In order to build a provision which reduces the profit and also the tax payments of a
company, the probability of a warranty outflow of resources has to be calculated and
documented. A stringent documentation of these calculations is of major importance
85
because it can be reviewed by the tax authorities and auditors
86
and has to be compliant
with legal requirements. Building a provision is requested by local and international law
and accounting standards and can differ from country to country in regards to the
definitions.
If the provision is not completely used or the reason for the provision no longer exists,
the provision has to be reversed partly or completely
87
and will increase the profit of the
company at this moment. This adaption of the provision has to be carried out frequently
or at least at the change of the fiscal year which is the closing day of the annual report.
88
2.4 General Warranty Provision versus Specific Warranty Provision
The general warranty provision is mainly based on historical data of the OEMs warranty
payments and utilization of warranty provisions during the previous years. The general
provision can be characterized as a short term provision
89
which is created during the
fiscal year, will be due in the actual fiscal year and was considered in the budget
planning process. It is based on past experiences and reflects the calculated forecast of
warranty and guarantee costs which will probably happen due to sporadic failures of
components in the vehicles within the warranty or guarantee period. These general
provisions are a feasible indicator for the quality level of the OEMs production process-
es and quality management performance and should show a decreasing trend which, in
turn indicates improvement of the quality. According to ISO/TS 16949, which is the
worldwide accepted quality management certification standard for car OEMs and
automotive suppliers, one of the most important tasks of the company is to maintain a
quality management system which assures a continuous improvement
90
of the processes
in order to guarantee customer satisfaction and to reduce costs.
85
Cp. Behringer, S. (2012), p. 1.
86
External independent Auditor of the financial reporting system.
87
Cp. IAS 37.59
88
Cp. Wagenhofer, A. (2013), p. 299.
89
See chapter 2.5 Short Term Provision versus Long Term Provision
90
Cp. International Automotive Task Force (2009), p. XIX.
Details
- Pages
- Type of Edition
- Erstausgabe
- Publication Year
- 2014
- ISBN (eBook)
- 9783954897865
- ISBN (Softcover)
- 9783954892860
- File size
- 1 MB
- Language
- English
- Publication date
- 2014 (May)
- Keywords
- dilemma quality reputation risk prevention warranty provisions manufacturers
- Product Safety
- Anchor Academic Publishing
