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

Edward Niedermeyer
by Edward Niedermeyer
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.

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  • Herb Herb on Jun 01, 2010

    "...suppliers should learn quickly to price in anticipation of unjustified warranty costs being pushed down on them..." Sure. But even doubling the prices for notoriously ill-managed companies like GM would leave you on the risky side. Just ask you bank. @1996MEdition: "This means that if GM is design responsible, then GM is responsible for defects due to design, not the supplier." Optimistic view. So you will need a bunch of expensive lawyers to get a court to find out that a company that is broke owe you some money that you will never get? I'd rather work for red-light enterprises than for GM and the like. At least, they have a convincing business model and some cash.

  • Herb Herb on Jun 01, 2010

    Sorry for the typos. It should have been "your bank" and "red-light-district enterprises", of course.

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  • William I think it's important to understand the factors that made GM as big as it once was and would like to be today. Let's roll back to 1965, or even before that. GM was the biggest of the Big Three. It's main competition was Ford and Chrysler, as well as it's own 5 brands competing with themselves. The import competition was all but non existent. Volkswagen was the most popular imported cars at the time. So GM had its successful 5 brands, and very little competition compared to today's market. GM was big, huge in fact. It was diversified into many other lines of business, from trains to information data processing (EDS). Again GM was huge. But being huge didn't make it better. There are many examples of GM not building the best cars they could, it's no surprise that they were building cars to maximize their profits, not to be the best built cars on the road, the closest brand to achieve that status was Cadillac. Anyone who owned a Cadillac knew it could have been a much higher level of quality than it was. It had a higher level of engineering and design features compared to it's competition. But as my Godfather used to say "how good is good?" Being as good as your competitors, isn't being as good as you could be. So, today GM does not hold 50% of the automotive market as it once did, and because of a multitude of reasons it never will again. No matter how much it improves it's quality, market value and dealer network, based on competition alone it can't have a 50% market share again. It has only 3 of its original 5 brands, and there are too many strong competitors taking pieces of the market share. So that says it's playing in a different game, therfore there's a whole new normal to use as a baseline than before. GM has to continue downsizing to fit into today's market. It can still be big, but in a different game and scale. The new normal will never be the same scale it once was as compared to the now "worlds" automotive industry. Just like how the US railroad industry had to reinvent its self to meet the changing transportation industry, and IBM has had to reinvent its self to play in the ever changing Information Technology industry it finds it's self in. IBM was once the industry leader, now it has to scale it's self down to remain in the industry it created. GM is in the same place that the railroads, IBM and other big companies like AT&T and Standard Oil have found themselves in. It seems like being the industry leader is always followed by having to reinvent it's self to just remain viable. It's part of the business cycle. GM, it's time you accept your fate, not dead, but not huge either.
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  • Marvin Im a current owner of a 2012 Golf R 2 Door with 5 grand on the odometer . Fun car to drive ! It's my summer cruiser. 2006 GLI with 33,000 . The R can be money pit if service by the dealership. For both cars I deal with Foreign car specialist , non union shop but they know their stuff !!! From what I gather the newer R's 22,23' too many electronic controls on the screen, plus the 12 is the last of the of the trouble free ones and fun to drive no on screen electronics Maze !