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.
What GM needs to do is pass up lower prices for better quality. For years the problem has been that the people allocating the contracts are usually a bunch of people with no practical experience in the auto parts business at the plant or shop level. This leads to suppliers being able to con the buyer on both quality and cost.
Unhappy taxpayers, unhappy dealers, unhappy suppliers, unhappy workers. Is there anybody out there GM hasn’t put the screws to? No wonder the cars are lousy.
Just another good reason not to buy GM, as if another is needed!
Means nothin’ to me.
Not buying from Obamamotors now.
Not ever.
I’m not an auto industry guy so I may have this wrong – if I do, perhaps some of the guys in the industry can straighten out the story – but here’s how I remember things.
1. Inaki Lopez became notorious for squeezing General Motors’ suppliers.
2. Quality -which hadn’t been all that great before- fell to a lower circle of Hell. GM quit making design improvements since newly designed parts not only cost more, they have a bigger chance of containing flaws in design or manufacturing.
3. GM continued to squeeze the suppliers to cut costs, regardless of expenses, till many of them quit the business or went bankrupt. (See Delphi.)
4. Customers stopped buying GM’s cars because their poor quality has become the perceived truth.
5. GM follows its suppliers into bankruptcy.
6. GM gets bailed out but doesn’t share the ‘wealth of nations’ with the suppliers.
7. Now GM wants to keep prices stupid low, but pass on the responsiblity for the quality they’re not willing to pay for to the suppliers.
Here’s a quote that sticks in my head from somewhere that pretty well sums up the situation.
The Japanese make money the old way: They design, build, and sell cars. Detroit makes money the new way: They force profits out of their suppliers.
Excellent summary. Absolutely! excellent.
Cheers Lokki, great post.
“Detroit makes money the new way: They force profits out of their suppliers.”
That’s the Walmart model and will likely work out the same way. Parts production will move to the places that can make ’em the absolute cheapest way possible in both materials and labor.
In the long run it might work out for the stockholders and execs. Will suck for the rest of us….
“Detroit makes money the new way: They force profits out of their suppliers.”
The D3 has been doing this in one form or another for decades. I was a manager for an abrasive manufacturer in the Detroit area during the 80’s and 90’s and saw first hand how dishonest the D3 is. We supplied plenty of small shops (5 – 50 man operations) who did work for the D3. The D3 screwed those small guys every chance they could, forcing more than a few out of business. So for me, GM and Chrysler’s bankruptcy was karma (but Ford was just as bad).
Think of it as an incentive to produce high quality parts that don’t break or have other problems in the first place. :-)
That’s a sound theory on the surface, though it ignores GM’s culpability on flaws directly caused by its UAW “don’t buy a car built on a Friday” workforce. I’m curious to know how many parts might not have failed, had the astute union workers (ha!) bothered to tighen those bolts another 1/2 turn as designed?
I’m thinking an 80/20 split is more like it, and is what we’ll end up with. In any case, when Gov’t Motors builds better cars, it’ll need better workers to build them.
In a perfect world “YES”. As others have already alluded to earlier, the reality is that the buyers involved are mostly focused on price since it is easy to measure and quantify. Therefore, better quality (but higher priced)parts don’t make it into the vehicle.
Tex
Aside from the points made above about GM simply being a victim of it’s own purchasing practices, I see this as being a very slippery slope.
I can see obvious things where an entire assembly is sourced from a single supplier, but, honestly, how often does that happen? What about a failed sub-component? Take it to an extreme… a bearing fails inside an engine and causes catastrophic failure of the whole thing, connecting rod goes out the side of the block, pistons hit valves, dogs and cats living together etc.
Are the going to bring in the crew of CSI to re-create exactly which part failed first? If they do, do they then make the bearing supplier cover the cost of all the parts? Go after the supplier of the rods for not building them strong enough to handle a seized bearing? etc. etc. it goes on.
Any “savings” from this process would quickly be eaten up by all of the extra paper pushers needed to administrate it… which might be the point, actually…
This agreement actually brings GM in line with other OEM’s. As one that works on the warranty side as a supplier, this is actually welcome. Typical OEM agreements are 50/50 of all warranty from SOP until the supplier can prove that their true warranty responsibility is less than 50%…..that is when negotiations and payment disputes kick in. The GM 50/50 agreement states that the supplier pays only 50% of their responsibility, GM picks up the other half. This means that if GM is design responsible, then GM is responsible for defects due to design, not the supplier. Eliminating the supplier covering dealer mark-up is also good news.
Conceptually, this does make sense. If the supplier cuts the quality so it no longer conforms to spec, they should cough up since they cut the quality to make more profit. Sounds good to me. But, and its a damn big one, are the parts really defective? A number of years ago I was buying (yet) another MAP sensor for my late ’80s Mopar at a stealership and a tech turned in a part for a new one. When the counterman made a comment about his rate of parts use, his response was “It’s what the book calls for” and the turned-in part was tossed into a rather substantial pile of parts. How many of these parts are actually defective? I’m willing to bet plenty are just fine. One of the big ECM rehab houses (OurECMs IIRC) noted that over half of the units turned in as defective test out just fine. Also, what if the part is fine but the connection is to blame? The “don’t buy a Friday” car myth is as outdated as vacuum tube computers, but errors can happen. In order to finger the supplier, are all the “defective” parts going to be tested? Sounds like a nightmare to me.
“…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.
Sorry for the typos. It should have been “your bank” and “red-light-district enterprises”, of course.