DETROIT -- Auto suppliers signing new contracts with General Motors Co. are seeing a curveball: a contract provision that makes suppliers liable for half of GM's warranty costs.
The provision could put suppliers collectively on the hook for more than $1 billion in annual warranty costs. GM expects to owe $3.1 billion for policy, product warranty and recall campaign liabilities in 2010 and another $3.2 billion in 2011, according to its most recent 10-K filed with the U.S. Securities and Exchange Commission.
GM announced the new policy in mid-April and began to roll out the program to suppliers in North America.
Dan Flores, GM news relations manager, said in a statement that the automaker does not comment on supplier arrangements, noting “generally speaking, we are always looking for ways to improve the working relationship with our suppliers. Those efforts are broad in nature but certainly include exploring ways to improve product quality, reduce costs and improve the way to do business.”
The provision is a move by GM to standardize how it shares its warranty costs with its suppliers. Until now, GM has recouped warranty costs from its suppliers on an ad hoc basis. If GM attributes warranty costs to a supplier's part, GM makes a claim against the supplier, leading to an often protracted back-and-forth to assign responsibility and decide who will pay.
“If GM has designed a way to streamline the process of allocating warranty cost responsibility, God bless them, but in 100 years of automobile manufacturing, automakers and suppliers have not been able to do that,” said William Kohler, senior attorney at Detroit law firm Butzel Long. “They have historically argued and sometimes litigated over who is responsible for warranty costs, because those are very complex and sometimes extremely high-stakes issues.”
But standardizing the process could put suppliers on the hook for regular, hefty bills, so many suppliers are skeptical.
50% of what?
Part of the fight is going to be determining the total of the warranty costs that will be split 50-50. So, while the rule is 50 percent, the question is, 50 percent of what?
Ann Marie Uetz, a partner with law firm Foley & Lardner in Detroit, says some of her clients have agreed to the provision, but many are skeptical about signing the document, saying it's unclear exactly what GM plans to include in the warranty costs to be split.
Suppliers whose parts must be repaired or replaced and are under warranty will pay half of the cost of repairing and replacing those parts, and the cost of supplying replacement parts to be used by dealers in warranty repairs, according to a copy of the contract language obtained by Crain's Detroit Business, an affiliate of Automotive News.
Suppliers will not be on the hook for costs related to recall campaigns, the price markup of service parts, dealer goodwill costs or diagnostics that end up showing no problems, according to the contract.
“Suppliers want a clear understanding of exactly what is going into those warranty costs if they're going to agree to split it 50-50,” Uetz said.
Said Kohler: “This 50-50 split is really a bad idea for suppliers.”
Putting on the hook
Kohler, whose clients have been presented with the contract, said the language is ambiguous and could put suppliers on the hook for warranty costs that were not caused by their components.
The issue could also work its way further down the supply chain. Uetz said that, as a general matter, purchasing practices employed by the automakers are often also employed by their top tier suppliers with their own supply base.
Kohler said the provision may backfire on GM.
“If GM begins abusing this process than suppliers should learn quickly to price in anticipation of unjustified warranty costs being pushed down on them.”