When General Motors introduced tougher warranty liability provisions for suppliers last July, it caused angst among suppliers.
But GM is hardly the only automaker that wants to cut warranty costs — not only for run-of-the-mill defects, but for repairs mandated by recalls.
According to the Original Equipment Suppliers Association, warranty claims reported by publicly traded companies range from $11 billion to $13 billion a year.
That's a powerful incentive for automakers to hold suppliers liable, and they generally find ways to do so.
It's true for everyday warranty defects, and it's also true for high-profile safety recalls, said Sheldon Klein, a lawyer who studies purchasing contracts for the OESA, an industry group based in suburban Detroit.
GM's new terms-and-conditions contract drew suppliers' ire because it expanded their liability for warranty defects.
For example, GM now holds suppliers liable for safety recalls after the consumer warranty on a GM-built vehicle has expired — a so-called "perpetual warranty."
Other automakers don't have such language in their standard purchasing contracts, says Klein, but they typically reserve the right to make so-called indemnity claims.
"There isn't a bright line between General Motors and other automakers," Klein said. "Many automakers allow recovery of recall expenses after expiration of the warranty period."
Who is liable?
For ordinary warranty costs — when dealerships replace parts that have worn out — automakers often favor cost-sharing provisions to avoid time-consuming disputes with suppliers. But for recalls, the supplier is held responsible for the cost.
Such arrangements might seem straightforward, but things can get tricky when a Tier 2 or Tier 3 supplier screws up.
Automakers sometimes instruct a Tier 1 supplier to purchase a key part — often a safety component — from a particular subvendor. In these cases, the Tier 1 vendor will be held responsible for the subsupplier's defects.
Suppliers don't especially like this practice. "This is a major source of heartburn for companies stuck in the middle," said Klein. "It's very difficult to manage a supplier that knows you didn't select it."
To solve this problem, Ford, GM and other automakers developed standard contracts for so-called "directed suppliers" that exempts the Tier 1 vendor from liability. But it's still a touchy issue, and OESA has formed a task force to study the problem.
Despite automakers' efforts to devise airtight contracts, it's not always clear who is at fault for a defect.
In some cases the vehicle's design is clearly at fault, rather than a defective part. In August, for example, Chrysler Group recalled 1.6 million Jeep Grand Cherokees and Libertys to install a trailer hitch to provide added protection for the gasoline tanks.
But sometimes it's not so clear who's at fault. When government regulators discovered in 2000 that the Ford Explorer was prone to rollover accidents, Ford Motor Co. and tire marker Firestone blamed each other.
To handle such disputes, automakers and suppliers typically take their case to arbitration.
That keeps the dispute out of the courts and out of public view. But if the stakes are high enough, an arbitrator may not suffice.
In 2007, for example, Ford sued Navistar after the two companies disputed warranty costs incurred by the 6.0-liter Super Duty diesel engine.
In an SEC filing, Ford acknowledged that its warranty costs had ballooned by $500 million in the first nine months of 2005, when more than 12,000 consumers filed warranty claims for engine trouble.
Ford withheld payments from Navistar to make up for the money the automaker felt it was owed. Navistar retaliated by halting engine deliveries.
That's a good example of a worst-case scenario, says Klein: "Was there a problem with my part, or was it the vehicle's design? A contract can't eliminate that dispute."