While total vehicle recall campaigns are likely to be less in
\n2019 compared to prior years, it is likely that the recent trend of
\nelevated numbers of lower volume recall campaigns will continue,
\nincluding those increasingly involving electrical system
\ncomponents.<\/p>\n
The increased pace of the introduction of new technologies and
\nsoftware integrated into new vehicles also will create new areas of
\nrisk for automotive suppliers in the coming years. As a focus of
\nliability shifts away from human drivers and toward electrical
\nsystem components and their software, managing warranty and recall
\nrisk will be key for suppliers of these components.<\/p>\n
Electrical system components and networks that provide advanced
\ncontrol systems, collision avoidance, adaptive cruse control,
\nlane-keeping assistance, vehicle-to-vehicle communication, and
\n“hands off’ steering are increasingly being integrated in
\nmore new vehicles. The more complicated these components, systems,
\nand networks are within the vehicle, the possibility of
\ndefects\u0097and their associated warranty and recall
\ncosts\u0097increase.<\/p>\n
Because OEM purchase orders and corresponding general terms and
\nconditions contain highly OEM-favorable terms, exceptions and
\nlimitations to supplier warranties are difficult to negotiate.
\nWarranty risk management should start at the contracting phase.
\nSpecifications to which the component or system is to be designed
\nand\/or manufactured should clearly be set forth in the contract
\ndocuments, and any inapplicable warranties, including warranties
\noutside the scope of design responsibility, should be the subject
\nof efforts to limit or disclaim. Consider documenting suggested
\nalternative designs for a more robust or superior performing
\ncomponent or system that is declined by the customer.<\/p>\n
Automotive suppliers should document their responsibilities for
\ntesting electrical system components, systems, and networks, and
\nclarify the limits of their responsibility for testing and
\nvalidation, at the component, system, and vehicle level.
\nResponsibility for design and validation of components, software,
\nand systems is not always clear, especially when multiple suppliers
\nare involved in supplying various hardware and software components
\nand systems within the vehicle. Allocation of responsibilities and
\nassociated warranty and recall costs for failures within these
\nsystem components may be especially difficult to manage.<\/p>\n
If a warranty issue arises, the supplier needs to react quickly
\nto identify the root cause(s), implement containment procedures,
\nand establish clean points. Protocols should be established for
\nanalyzing root causes for dealer repair codes that could implicate
\nthe product. Protocols for handling warranty claims, including
\nproduct return, inspection, and determining the root causes for the
\nfailure must also be established. The supplier must also understand
\nthe warranty period that will apply to the product, when the
\nwarranty period commences, and what obligations exist.<\/p>\n
If the claim involves multiple parties, the tier 1 supplier
\nshould work closely with the OEM to identify and document quality
\nissues early and promptly communicate responsibilities. If the
\nclaim involves a lower-tier supplier, notice of the warranty claim,
\nnotice of a breach of applicable agreements, documentation of root
\ncause(s) and documentary evidence supporting the damages are
\ncritical should litigation arise. These steps are key to ensuring
\nthat the supplier has the ability to demonstrate its obligations,
\nincluding that the tier 1 supplier has the ability to pass through
\nany costs that are the responsibility of the tier 2 supplier, or
\nthat it should only be responsible for paying a certain portion of
\nthe total recall costs.<\/p>\n
Automotive suppliers also should ensure that they have internal
\nsafety review procedures in the event the supplier makes a safety
\ndefect determination concerning its component or system that
\nrequires reporting to the National Highway Traffic Safety
\nAdministration (NHTSA). When a potential defect may involve
\ncomponents supplied by a lower-tier supplier, the supplier must
\nreview all relevant purchasing contracts for provisions relating to
\nrecalls, decision-making, reporting, cooperation, design
\nresponsibility, and allocation of cost recoveries. Suppliers also
\nshould update their purchase order terms and conditions to ensure
\nthat they contain the appropriate contractual protections from
\ntheir lower-tier suppliers.<\/p>\n
If NHTSA commences a defect investigation, it is likely the OEM
\nwill be asked to submit confidential information relating to design
\nand engineering documents, as well as test data. The supplier
\nshould consider the confidentiality of such documents and request
\nthat the OEM seek confidential treatment of the information in
\naccordance with NHTSA’s regulations. In many cases, this will
\nrequire an affidavit in support by the supplier setting forth the
\nbasis for the confidentiality of the information under relevant
\nFreedom of Information Act (FOIA) exemptions.<\/p>\n
The supplier should develop its own position concerning whether
\nthe component or vehicle contains a safety-related defect within
\nthe meaning of the Highway Safety Act and NHTSA’s regulations,
\ntaking into consideration past NHTSA recalls and investigations
\ninvolving similar components and circumstances. The supplier also
\nshould monitor new recalls and investigations, including OEM
\nsubmissions and regulatory developments that may affect the
\nsupplier or its products, such as proposals for new safety
\nstandards or amendments to existing standards.<\/p>\n
Automotive suppliers also can take other simple steps prior to
\ncontracting to reduce the risk of litigation. For example,
\ncompanies should confirm the specific corporate entity that will be
\nthe counterparty in the contract. The counterparty’s litigation
\nhistory, credit history, and reputation in the industry should be
\nreviewed. Companies should also confirm that the written contract
\naccurately defines all relevant prior agreements, negotiated
\nrights, and obligations. If the contract involves parties from
\ndifferent jurisdictions, a forum selection clause or arbitration
\nclause should be considered. Additionally, for long-term
\nagreements, the supplier should confirm that the risks of early
\ntermination have been addressed.<\/p>\n
During performance of the contract, the company should ensure
\nthat a point of contact has been tasked with ensuring compliance
\nwith the contract, and that applicable contract documents and
\nrelevant communications are readily accessible if, and when,
\nneeded. When a dispute arises, important conversations or meetings
\non the subject should be carefully documented, and confirming
\nemails on the subject sent to the counterparty. If the dispute
\nescalates into a claim, a point of contact should be designated as
\nthe lead for the claim and an early assessment of the claim should
\nbe performed. The company should also ensure that it has gathered
\nall documents relating to damages, including documenting all costs
\nand time spent addressing the dispute. While the above steps cannot
\neliminate the risk of litigation, they can reduce the likelihood of
\nlitigation and can better position the company for success when
\nlitigation is unavoidable.<\/p>\n
Managing Supply Chain Disputes Arising From Aluminum and Steel
\nTariffs<\/h3>\n
Trade issues and tariffs likely will be an important issue for
\nautomotive suppliers and manufacturers to manage in 2019 and
\nbeyond. On March 1, 2018, a 25 percent tariff was imposed on
\nimported steel and a 10 percent tariff on imported aluminum under
\nSection 232 of the Trade Expansion Act of 1962 (19 U.S.C. \u00a7
\n1862). Because automotive suppliers typically purchase raw
\nmaterials and supply components and assemblies to OEMs under
\nlong-term agreements with fixed prices, suppliers without
\nappropriate clauses addressing such cost changes for raw materials,
\ncomponents, or assemblies may have limited ability to pass on
\nincreased production costs related to the tariffs.<\/p>\n
These suppliers will need to ensure that they are examining
\ntheir contractual relationships to determine their ability to pass
\non increased costs related to raw materials
\nand\/or tariffs. Force majeure clauses and commercial
\nimpracticability under the Uniform Commercial Code (UCC 2-615)
\nshould be reviewed but it may be a difficult avenue for relief.
\nSuppliers must also review duration, termination, and quantity
\nterms to determine leverage points for discussions on revised
\nterms. Additionally, suppliers should ensure that they are using
\nrisk mitigation strategies such as excluding or adjusting tariffs
\nand duties in the product price, as well as indexing, considering
\navailable raw materials, or hedging programs.<\/p>\n
Indexing avoids the renegotiation of prices every time the raw
\nmaterial price fluctuates by allowing component part prices to
\nfluctuate with the cost(s) of their raw materials monthly,
\nquarterly, or annually. However, some raw material such as plastics
\nand rubber are not traded on commodity exchanges and, therefore,
\nare not able to be indexed. OEM raw material programs allow the
\nsupplier to participate in the OEM’s supply arrangement with
\nraw materials suppliers. Hedging strategies also can be used to
\ntransfer risk to third-parties.<\/p>\n
The content of this article is intended to provide a general
\nguide to the subject matter. Specialist advice should be sought
\nabout your specific circumstances.<\/em><\/p>\n<\/div>\n
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