Stout Issues Third Annual Warranty and Recall Report

21 September 2017 Dashboard Insights Blog

By Guest Authors: 
Neil Steinkamp and Robert Levine of Stout Risius Ross, LLC

Massive automotive recalls continue to grab headlines and raise concerns industry-wide. Recalls of light vehicles topped 50 million units in 2016, representing the third consecutive year of elevated – and record setting – automotive recall activity. Stout’s third annual Automotive Warranty & Recall Report provides a unique and comprehensive analysis of automotive recall trends, with the inclusion of an unprecedented examination of defect-related domestic and international data that can influence the way original equipment manufacturers (OEMs) and suppliers prepare for recalls.

Automotive recall activity once again hit a high water mark in the United States in 2016. Increased vehicle complexity, regulatory scrutiny, integration of technology, and the aging of the U.S. fleet have all contributed to the significant number of automotive recalls. Further, U.S. light vehicle sales have also set a record high, resulting in more vehicles on the road which may be subject to recall. While we observed an increase in the number of vehicles affected by recall in 2016, the number of unique campaigns was slightly lower for the year, indicating an increased number of larger recalls. These large campaigns have a disproportionate impact: only 4% of campaigns involved 1 million or more units, however they account for 55% of the total number of light vehicles recalled in 2016. Despite the increase in the number of large campaigns, it is important to note that 75% of all light vehicle campaigns affected fewer than 100,000 units, and approximately 50% involved fewer than 10,000 units.

We expect the elevated level of activity to continue in years to come. One reason for this is an increased number of defects related to software and integrated electronic components. The continued development of new technologies to assist drivers, differentiate vehicles, and improve vehicle safety also poses recall risk. The widespread use of innovations such as adaptive cruise control, rear backup cameras, forward-collision detection, emergency braking, and brake assist improve vehicle safety, yet add complexity to safety-critical systems. Integration of these new technologies with other devices and safety systems in vehicles introduces a host of software and electronic related risks which may result in defects. Based on our review of recall and defect data, Stout identified two significant issues suppliers may need to be concerned with when they provide components for integration with technologically advanced equipment:

  • Suppliers do not always know the extent of other components in the system or understand how those components and their own will interact. These myriad parts are all intertwined in a complex ecosystem that must function seamlessly in ways few would have anticipated even 10 years ago.
  • Even if multiple components in the system communicate well, suppliers need to realize that the physical environment can cause risks that could affect the performance of the software. For example, extreme temperatures, humidity levels, objects hitting a car, skidding, and low-impact collisions are just a few of the seemingly minor situations that could ultimately compromise the safety of an entire vehicle.

Stout enhanced its study of technology related defects for this year’s report to focus on individual components. As a result of that analysis, we observed an increase in software-related defects among mature component types. For example, Stout identified several powertrain deficiencies related to the timing of gear shifting that required a software refresh to remedy. We also noted a number of campaigns related to airbag sensors (different from inflator focused recalls): since 2012, more than 7.6 million vehicles have been recalled related to airbag sensor defects.

These technology-related recalls may involve components integrated into vehicles five to 10 years before defects manifest, revealing an unanticipated effect of the long-term use of technology. We expect to see the number of defects due to software and technology related defects to continue as their deployment into the U.S. fleet becomes more pervasive.

When evaluating exposure to these defects, suppliers and OEMs alike can benefit from understanding whether defects and recalls are associated with the design, manufacture, or assembly of components into vehicles. By enhancing their understanding of the nature of defects, OEMs and suppliers can explore opportunities to mitigate defects by improving their design processes or ensuring adequate assembly. An analysis of the nature of defects also assists in understanding the degree of suppliers’ potential exposure to such defects, and provides an opportunity for OEMs to benchmark their ability to recover recall costs. Specifically, if an OEM has a significant number of recalls involving defects that appear to occur at their assembly facilities, the likelihood for cost recovery from suppliers may be very different than that for an OEM affected by recalls that appear to be more closely related to supplier manufacturing defects.

We reviewed and classified thousands of defect descriptions to assess trends in the nature of defects resulting in recall, specifically identifying those defects most likely due to design, manufacturing, assembly, or labels/owner’s manuals. Based upon this analysis we found that the proportion of recalls that appear to involve supplier manufacturing related defects has increased in the last few years. Stout also observed that more mature components are less susceptible to manufacturing related defects as the processes and materials associated with these components are more established and have been refined during years of production. Stout found that design related defects tend to result in larger recall campaigns as these defects are less likely to be isolated to a particular period of time when a machine or process was malfunctioning or out of calibration.

The Dashboard Insights team would like to thank our guest authors from Stout, a leading independent advisory firm specializing in Investment Banking, Valuation Advisory, Dispute Consulting, and Management Consulting.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.

Related Services