General Motors has adopted a new purchasing contract that calls for a supplier to compensate GM for the cost of safety recalls while giving it access to a supplier’s financial information.
The new agreement, which GM began implementing on July 15th, would place the burden of paying for a recall on the supplier whose parts pose a safety risk to consumers, even if a component originally met GM’s own specifications. The new contract presents a clear financial risk to suppliers by making their business dealings with GM, for all intents and purposes, uninsurable.
What’s more, GM’s new contract states that the supplier’s components “will not, at any time (including after expiration or termination of the contract), pose an unreasonable risk to consumer or vehicle safety”, thereby presenting a situation without a specific end date to a supplier’s liability.
GM spokesperson Tom Henderson told Automotive News last Friday that the automaker “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.”
While the new terms went into effect for all purchasing agreements signed after July 15, suppliers will likely desire changes. For instance, Detroit-based turbocharger maker BorgWarner is “studying [the contract] right now with groups like the Original Equipment Suppliers Association, and is not in a position to comment on it directly at this time,” said spokeswoman Erika Nielsen.
Outside of liability-related stipulations, GM’s new contract also requires suppliers to provide The General with their “most current income statements, balance sheets, cash-flow statements and supporting data…”. That marks a noticeable departure from The General’s previous supplier agreement, which furnished GM with the ability to ask for limited supplier data to ensure proper billing. The new section would allow GM to observe suppliers’ financial affairs in case the supplier has trouble delivering parts due to financial troubles.
According to Auto News, GM’s new contract contains even more stipulations, including:
- 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 subsupplier’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 says 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 Klein, GM could hold suppliers at least partially responsible for such defects. The old contract did not address this issue.
The GM Authority Take
The reason behind GM’s efforts here are fairly conspicuous: it wants to protect itself financially against any kind of recall-related liability. The real question is if suppliers will accept the new terms, and how much they will push back.
To note, the Original Equipment Suppliers Association has tried to solve the warranty liability problem with a model contract that limits the supplier’s liability to the period covered by the automaker’s limited vehicle warranty. No automaker has accepted the organization’s model contract as of this writing.
In addition, GM’s ability to access a supplier’s financials — the reasoning behind which is understandable, yet onerous — has resulted in suppliers fearing that the automaker will use the information to negotiate better terms (read: price cuts) for itself.
Perhaps what GM should conciser doing is becoming its own supplier, integrating its operations horizontally. The efforts would allow GM to completely control the parts, quality, and their specifications, and might even prove to be a more profitable endeavor, over time, than sourcing parts from a supplier. Guess which competitor does this successfully? Hint: it’s headquartered in Wolfsburg, Germany.