With the strong recovery in the automotive industry for the Detroit Three, the U.S. OEMs are growing their footprints in global markets such as Brazil, Russia and China. According to IHS Consulting, 80 million light vehicles were sold globally in 2012; by 2020, that number will grow to 108 million, with about two-thirds of those to be in emerging markets, reported Dykema Automotive Institute in its 2013 report: The Drive Toward Globalization.
Dykema, a national law firm serving business entities worldwide on a wide range of complex business issues, reported that as the automotive industry continues its globalization ramp-up, both the OEMs and the automotive suppliers face some headwinds. Complex legal challenges across the world may affect the productivity of these companies and their bottom line.
The top legal challenge that Dykema uncovered when it surveyed nearly 100 industry executives and other industry insiders from OEMs and supplier companies was data privacy. This is due to the fact that "privacy and security regulations with which companies must comply vary significantly depending on the specific country or region the company (and its executives) are dealing with at any given time or on any given project," stated the Dykema Survey summary.
Only about one quarter of the survey respondents reported that their companies employ in-house "privacy" experts whose job it is to focus on privacy and security challenges. "And while 48% of respondents said their companies rely on general counsel or other in-house lawyers to handle privacy matters, another 16% of them report the privacy function is not even assigned to anyone in particular," said Dykema's report.
Dykema noted that this year's survey also revealed some "surprises related to legal issues not on automotive executives' radars." Collaborations among competitors "often raise legal and operations questions," and automakers are increasingly teaming up with competitors to share costs and brainpower as fuel efficiency and environmental requirements get tougher," said Dykema in their executive summary.
While Dykema declined to comment on the "legal" questions competitor collaborations raise, the issue of price fixing often arises out of such collaborations. In September, nine auto parts makers pleaded guilty to U.S. price fixing of more than 30 different products. All nine companies were based in Japan. Two executives agreed to "plead guilty and to pay almost $745 million in fines for their roles in long-running conspiracies to fix the prices of auto parts sold to U.S. car manufacturers," according to the Department of Justice as reported by Reuters.
"Forty-four percent of OEMs and 49% of suppliers plan to enter into a collaboration in the next 12 months. The desire to fund technological advancements was the top reason given for inspiring OEMs to collaborate, while the desire to expand into foreign markets was the top reason chosen by suppliers."
Supply chain litigation
Other legal issues over which survey respondents expressed concern include litigation, which also ranked a "top legal concern" for automotive companies with some areas of litigation seeing more activity than others. Supply chain litigation (52%), IP litigation (46%) and warranty litigation (39%) were the top three types of litigation faced by respondents' companies over the last year.
Marilyn Peters, managing member of Dykema's Bloomfield Hills, MI, office commented on supply chain litigation in an interview with PlasticsToday. "By and large, there are two areas that we typically see ending up in litigation," said Peters. "The first issue is pricing demands. It may be a case where the supplier didn't lock down his pricing and raw materials got more expensive than anticipated, or OEM volumes got higher and even with a price in their contract the suppliers will come back to the Tier Ones or the OEM and say we can't afford do manufacture for this price, and they threaten to stop-ship. Then the OEM gets an injunction to force the supplier to ship and litigation ensues."
Peters noted that the animosity between OEMs and their Tier 1 suppliers, or between the Tier 1 and Tier 2 suppliers, abated somewhat during the recession, and "everybody made nice." However, over the past two years the disputes have started back up again. "There are fewer suppliers due to the shake-out in the supplier industry and OEMs have reduced the number of suppliers, which means that many parts are sole-sourced," Peters said. "The big OEMs and Tier Ones just can't turn around and quickly replace a supplier after years of testing and PPAP."
The second area of supply chain litigation Peters is seeing more frequently is in the area of warranties in the case of "real recalls" for safety reasons or "silent" recalls, in which there are no safety issues but perhaps an aesthetic issue like a squeaky seat. In those cases the OEM will tell the dealer to fix the problem the next time the customer brings in the vehicle for service to enhance customer satisfaction levels.
"Typically, if the real recall involves a failing part, the OEM will look at what is failing and go to the Tier 1 for resolution," Peters said. "The Tier 1 then might go to the next level down the chain. However, the OEMs look to their Tier 1 suppliers because that is who they have the contract, to get resolution on the failed part."
Another major concern the Dykema survey uncovered is counterfeit auto parts, which is a $12 billion per year business for the fake parts makers. Yet only half of respondents have taken specific steps against counterfeiting, including customer enforcement and litigation, to enforce their brand, and only a few plan to do so in the next year. Dykema points out that there are a number of steps a company can take to fight the counterfeiters, this is an area of concern that is not getting needed industry attention.
Peters noted that this is a big problem for the OEMs because they all warranty the parts, which must meet certain standards of quality. "There are a number of reasons and methods as to these counterfeit parts were able to be made and shipped to the OEMs and Tier 1 suppliers," she added.
Ultimately, globalization of the automotive industry has presented new and greater challenges that must be addressed by the global vehicle makers, not the least of which is choosing the supplier base on which the OEMs depend so heavily. That said, Peters concluded, "There's not as many suppliers as there used to be, and parts and assemblies are getting more sophisticated. The OEMs and Tier Ones are more careful about who they work with."