GM Wants Suppliers To Shoulder Half Of All Warranty Costs, Suppliers Say "No Thanks"

Automotive News [sub] reports that GM has made a bold new request of its suppliers: to assume responsibility for 50 percent of all warranty costs. The move comes as GM overhauls its post-bankruptcy supplier relations, which includes previously-announced measures to share cost-savings between GM and its suppliers. The obvious question when that plan was announced was: how do you stop suppliers from cutting all the quality out of GM components? The answer to which is apparently “by making suppliers share warranty costs.” But the solution is by no means a done deal…

Though some suppliers have apparently already signed the new agreement, others are extremely skeptical. And the biggest problem is not the theory,it’s the practice. A supplier contract lawyer explains the crux of the problem to AN [sub]:

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. 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.

GM won’t comment on the new contract, but according to a copy obtained by AN [sub] and Crain’s Business News

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

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 previously-quoted lawyer though, the contract’s language is sufficiently vague to potentially leave suppliers on the hook for warranty costs that are not even associated with the components they supply. And with over $3b in GM warranty costs expected next year, he says clients have every incentive to fight this measure.

This 50-50 split is really a bad idea for suppliers. If GM begins abusing this process than suppliers should learn quickly to price in anticipation of unjustified warranty costs being pushed down on them

Typically GM negotiates warranty-cost reimbursements from each supplier on a case-by-case basis, a practice it is eager to discontinue due to the high legal fees associated with its lengthy negotiations. And this reality should not be overlooked, when considering opposition from lawyers who stand to profit from the continuation of this practice.

Still, GM’s assumption that it can simply standardize all of its supplier relations simply doesn’t seem realistic. After all, suppliers were hardly treated even-handedly during the so-called “supplier bailout.” And even if GM is able to ram a 50-50 agreement through, it will be a chilly day in Hades before an OEM passes costs on to suppliers without some kind of a fight. And with commodity-cost conflicts between OEMs and suppliers looming [via AN [sub]], GM’s going to have to remain engaged– and flexible– with suppliers anyway.