Auto suppliers signing new contracts with GM are seeing a curveball

Article by Christian A., on August 27, 2010

The new contracts that General Motors Co. is offering to auto suppliers have a contract provision that makes them liable for half of GM's warranty costs.

Because of this provision, it's possible that suppliers would be put collectively on the hook for over $1 billion in annual warranty costs.

In its latest annual report filed on Form 10-K with the US Securities and Exchange Commission, GM said that for 2010, it expects to owe $3.1 billion for policy, product warranty and recall campaign liabilities.

For 2011, it anticipates that it will owe another $3.2 billion. This new policy was announced in mid-April and GM started to roll out the program to North American suppliers.

In a statement, Dan Flores, GM news relations manager, said that GM will not comment on supplier arrangements but that generally, GM is consistently looking for ways to improve its working relationship with suppliers.

These broad efforts include looking for ways to raise product quality, lower costs, and improve how it does business.

Flores added that with this provision, GM aims 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 attaches warranty costs to a supplier's part, GM files a claim against the supplier. This then results to a scenario wherein the responsibility of which company will pay will be a toss-up between GM and the supplier.

William Kohler, senior attorney at Detroit law firm Butzel Long, said that for the past 100 years of automobile manufacturing, carmakers and suppliers have failed to streamline the process of allocating warranty cost responsibility. He added that because these warranty issues are "very complex" and have high stakes, the parties argue and this sometimes leads to litigation.

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