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Fred Hubacker: GM’s New Terms and Conditions – Crain’s Detroit Business

Crain’s Detroit Business recently quoted Fred Hubacker in this article.

Supplier executives are breathing easier after General Motors Co. announced last week it was terminating controversial parts of its terms and conditions, according to local experts.

GM rolled out new terms and conditions in July, to a roar of malcontent suppliers and their attorneys.

Suppliers interpreted the conditions as giving GM far broader authority to recover warranty and safety-recall costs, take over suppliers’ intellectual property rights and access their financial information.

Several suppliers, including TRW Automotive Inc., Inergy Automotive Inc. and American Axle & Manufacturing Inc., declined to comment or didn’t respond to inquiries on the subject.

The automaker struck most of the contentious parts from its contracts after consulting with its 11-member supplier advisory council, said John Henke, president of Birmingham-based Planning Perspectives Inc., which measures the relationship between automakers and its suppliers. GM is a client of Henke.

GM was “very, very surprised by the reaction because they had no idea how suppliers were going to interpret the changes; it was a big revolt,” Henke said. “GM, historically, has never looked to suppliers before they did anything, but they realized quickly this was not consistent with what sort of relationship they want with suppliers.”

In Henke’s annual supplier relationship index study of 441 suppliers, published in May, GM achieved its highest score ever in the study’s 13 years. However, Henke boiled that down to a letter grade of a C-minus.

Henke, also a professor of marketing at Oakland University, told Crain’s in May that many automakers were returning to “the same old ways” of poor communication with their supply base.

GM global purchasing chief Grace Lieblein told Automotive News last week that the overhaul of the supplier contract framework was a misstep by the OEM.

Julie Fream, president and CEO of the Troy-based Original Equipment Suppliers Association, said the organization rallied GM’s unhappy supply base and delivered a list of the contended portions of the conditions to the automaker.

By the time Lieblein took the stage at the OESA 2013 Outlook Conference and 15th Annual Meeting of Members on Nov. 12, GM recognized changes needed to be made, Fream said.

“They recognized they would rather spend time on innovation and technology rather than specific terms and conditions or negotiations,” she said.

GM implemented the following changes to appease suppliers, as told to Automotive News:

  • Eliminating a sentence that said suppliers’ parts will “not, at any time (including after expiration or termination of this contract), pose an unreasonable risk to consumer or vehicle safety.” Many suppliers and their attorneys interpreted that as creating an open-ended liability, beyond the usual warranty on supplier parts, which generally expires at the same time as GM’s consumer product warranty.
  • Clarifying that GM’s audit rights — the automaker’s right to access a supplier’s books — are limited to business between GM and the supplier. The 2013 contract language had left the impression that GM wanted broad access to suppliers’ income statements, balance sheets and other proprietary information. Some suppliers feared GM could use that information to demand price cuts.
  • Deleting a provision that required suppliers to ensure uninterrupted supply during “any foreseeable or anticipated event,” whereas the old contract applied only to labor disruptions. Some suppliers worried that this language would leave them responsible for flagging problems at an upstream supplier, for example.
  • Clarifying a provision that grants GM license to a supplier’s intellectual property only during limited periods when the supplier isn’t able to ship products. Suppliers said that the terms enacted last summer posed a broader risk to their IP rights.

Matthew Stover, an analyst at Boston-based Guggenheim Securities LLC, said GM miscalculated how fresh the wounds of the 2009 industry fallout were for suppliers He said the July terms would have crippled the supply base’s willingness to expand with GM as sales rise.

Fred Hubacker, managing director of Birmingham-based consulting firm Conway Mackenzie Inc., said GM realized it couldn’t operate with an unruly supply base.

“They need their suppliers as much as they need them, and clearly this was a major problem,” Hubacker said.

Dan Sharkey, a partner at Birmingham-based law firm Brooks Wilkins Sharkey & Turco PLLC, helped his supplier clients contest the GM terms. He said the suppliers’ win is part of a cyclical power shift.

“I thought GM was going to stick with the terms and duke it out, but to their credit, they did the right thing,” Sharkey said. “But they still moved the ball a long way; these are still tough terms.”