By David Sedgwick, Crain News Service
DETROIT (Aug. 6, 2013) — General Motors Co. has adopted a new purchasing contract that would allow it to recover from suppliers the cost of safety recalls—even if a component met GM specifications, says a lawyer for suppliers.
The new contract framework also demands unprecedented access to a supplier's financial information.
Under the new contract, which GM began to implement July 15, suppliers can be held responsible if GM later determines that a component the supplier built to GM specs poses a safety risk to consumers, said Sheldon Klein, a lawyer for Butzel Long, which analyzes contracts for the Original Equipment Suppliers Association (OESA).
This language creates a "potentially catastrophic" financial liability for suppliers, Mr. Klein asserted. "As a practical matter, it's not insurable."
The potential cost of such after-the-fact design-related safety determinations was highlighted this year when Chrysler Group L.L.C. agreed to install trailer hitches on as many as 1.56 million 1993-98 Jeep Grand Cherokees and 2002-07 Libertys. The hitches are intended to protect vehicles' fuel tanks, even though the Jeeps met federal safety specs when they were built.
Chrysler estimates the hitch fix will cost $151 million. The recall was requested in June by the National Highway Traffic Safety Administration, which concluded the vehicles' fuel tanks, positioned behind the rear axle, were unsafe.
National Highway Traffic Safety Administration (NHTSA) Administrator David Strickland told Automotive News afterward that to avoid recalls, auto makers must stay "within the zone of reasonable risk," not only meeting federal safety standards but also keeping up with the state of the art in design and technology among competitors.
Asked whether GM suppliers might be held at least partially responsible in similar recalls involving parts, Mr. Klein responded: "It fits the scenario to a T."
The new GM contract has open-ended implications, stating that the supplier's components "will not, at any time (including after expiration or termination of this contract), pose an unreasonable risk to consumer or vehicle safety."
Warranty costs have been a traditional source of tension between suppliers and auto makers, which have sought to expand suppliers' liability.
Asked for comment, GM spokesman Tom Henderson said Aug. 2 that the company "remains committed to the safety of our customers and the quality of our vehicles. One important goal of our terms and conditions [contract] is to ensure that our supply base is aligned with that commitment."
It's not clear yet whether suppliers will accept the new terms—or how hard they can or will push back.
GM's contract is supposed to be in effect for all purchasing agreements signed after July 15. But some big suppliers may demand changes, said Tom Manganello, a lawyer for the suburban Detroit law firm Warner Norcross & Judd.
"The bigger the supplier is, the more bargaining power it has," Mr. Manganello said. "If a large global supplier has cutting-edge technology, it's in a better position to negotiate."
One such company might be BorgWarner Inc., but the Detroit turbocharger manufacturer—like other suppliers contacted last week—declined to comment.
The company is "studying [the contract] right now with groups like OESA and is not in a position to comment on it directly at this time," said spokeswoman Erika Nielsen.
Open the books
Aside from warranty costs, Mr. Klein said GM's new terms and conditions contract extends the auto maker's rights in several key areas:
• The supplier must provide, upon request, "its most current income statements, balance sheets, cash-flow statements and supporting data...." Under the old contract, GM could request limited supplier data simply to verify that it was billed properly. The new clause would help GM to monitor suppliers that might have trouble delivering parts because of a financial crisis. But some suppliers fear GM might use this data to demand price cuts, Mr. Klein said.
• The supplier must ensure an uninterrupted 30-day supply of parts during any "foreseeable or anticipated event." For example, such an event might be a sub-supplier's financial crisis. The old contract language applied only to labor disruptions. However, the new language does not hold suppliers liable for natural disasters such as earthquakes, floods or tornadoes. Two years ago, an earthquake hobbled various suppliers in Japan.
• GM said it is not obligated to keep a supplier's data regarding vehicle technology confidential unless the two parties sign a separate agreement. The old contract did not assert such a right.
• A supplier must inform GM of any defects or quality problems that it discovers, including any deficiencies in GM's component specs. According to Mr. Klein, GM could hold suppliers at least partially responsible for such defects. The old contract did not address this issue.
In recent years, OESA has tried to defuse the warranty issue by developing a model contract that limits the supplier's liability to the period covered by the auto maker's own consumer warranty.
No auto maker has adopted OESA's model contract, said David Andrea, the organization's senior vice president of industry analysis.
This report appeared on the website of Automotive News, a Detroit-based sister publication of Tire Business.