Vehicle recalls prompt attention to supplier warrantiesVehicle recalls prompt attention to supplier warranties

A new editorial from Plante & Moran notes that product recalls by Toyota and GM for vehicle safety issues have raised the issue of warranty claims and the financial risk to auto suppliers. "While warranty claims haven't traditionally been the hot topic for discussion in the automotive industry, they'll garner much more attention in the future," write Jason Carano and Daron Gifford, of Plante & Moran. "On top of the current recalls, the automotive industry is scrambling to handle a record number of new vehicle launches over the next five years, with increasing risks of future product problems emerging in recalls and warranty claims. For any supplier, these risks have the potential to result in significant financial liabilities that were unforeseen when the part of was originally designed, produced, and sold."

Carano and Gifford note that actually assessing costs for warranty claims on parts that perhaps were made many years prior to the recall is difficult because the data isn't available. "This difficulty in analyzing historical product information has resulted in many OEMs simplifying warranty cost and sharing as 50/50, even when it's not clear that the supplier has any responsibility for the problem!"

I'm sure none of this would surprise any molder or moldmaker who has worked with the automotive market for any length of time. Carano and Gifford noted that when "assessing costs resulting from recalls and warranty claims, there are a multitude of charges than can result. Suppliers need to be aware of the potential flow-down impact of OEM cost claims . . ." that can impact them.

Cost inaccuracies can result in cost-sharing agreements becoming much more expensive than expected, say Carano and Gifford. "Compounding the difficulties in identifying accurate information on recalls and warranties is the inconsistency among OEMs in their procedures for tracking product information as well as inconsistencies in their supplier procedures and agreements," they write.

Regarding the ignition switch in the latest GM recall, Delphi made the parts, and according to a USA Today article in the March 30 issue, "a Delphi executive told investigators that GM accepted the switches despite knowing they did not meet the company's specs."

So did GM sign off on a deviation to the switch that was not to spec? Often, when a dimension is out on a plastic part, but the part's fit and function is not hampered by the out-of-spec dimension, the OEM will sign off on a deviation for the dimension and the parts will be molded and used as is.

Two engineers just got put on paid leave and, according to a FOXBusiness report by Matthew Rocco, documents provided by Delphi said that "Ray Giorgio, the project engineer, approved a redesigned part that didn't receive a new part number. That forced GM to expand its recall to include vehicles that may have been improperly repaired with old, defective parts."

Rocco also noted in his report that in November 2004, GM engineers looked at the part in question but four months later made the decision that "tooling cost and piece part price are too high" to make changes.

Gee, does that have a familiar ring? The automotive OEMs—and especially GM—are well known for beating up on suppliers over the cost of tooling (including molds for plastic components) and molded parts. Yet, could the cost of that tooling and the piece parts be any higher than the cost of recalling 2.5 million vehicles? I really doubt it.

Are Tier 2 and 3 molders and mold manufacturers likely to get dragged into these recalls? There's always that potential. Obviously, the big OEMs will go after the deep pockets suppliers first but you-know-what flows downhill. So even if you're at the bottom, it could get messy.

Carano and Gifford offer some advice: "The extra effort expended by suppliers to be more disciplined in gathering and analyzing data regarding issues will serve them well in protecting the company's financial interests during a recall or warranty claim process. Generally it will lead to fewer surprises in reported results."

If you're an automotive supplier—or a supplier to any industry—you should read Carano and Gifford's article, "Warranty Claims: A Hidden Financial Risk for Auto Suppliers."

As Carano and Gifford conclude, "in today's safety-conscious environment, the cost of warranties to suppliers is growing dramatically." You might want to take their advice and be prepared.