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Ahead of the Curve Auto Supplier Blog

January 12, 2015

Surviving Recalls: A Six-Point Plan to Help Automotive Suppliers Avoid Financial Ruin

More than 60 million vehicles were recalled in 2014, more than three times the number of cars and trucks that were sold. This occurred despite the fact that vehicles are safer and more reliable than ever.

Government agencies and automotive manufacturers issued more than 500 separate and distinct recalls in 2014, covering virtually everything: ignition switches, transmission cables, electrical systems, seat belts, air bags, headlights, gaskets, power steering, wiring, faulty systems, even floor mats that can slide out of position.

These recalls, which often target items that pose potential safety hazards, can be financially devastating for automotive manufacturers and suppliers. Here is a six-point plan that suppliers can follow to better protect themselves from the collateral damage of an OEM recall, or a recall of their own product:

  1. Recognize that the game has changed. OEM warranty terms are often onerous, unclear and have an increasing tendency to shift liability to suppliers. In signing contracts, suppliers need to keep one key fact in mind: The devil is in the details. Terms and conditions are the focal point of a contract, but they are not the only point. Smart suppliers will make sure their obligations are clearly specified and that their warranty responsibilities cover only things they actually control.
  2. React quickly when a problem develops. Meet as quickly as possible with the manufacturer to determine the exact nature of the problem, what your company’s role in it may be, your liability and exposure, and whether there may be similar problems with your product in other customers’ hands.
  3. Rely on legal counsel. All of this will likely go much more smoothly and efficiently if you’re joined at the hip with your general counsel, or outside counsel, and if these attorneys have been involved since the inception of the contract. Counsel may drive you crazy about what seem like niggling details while you’re writing a contract, but these “details” may save your company’s bacon when it comes to potential recall or repair costs, fines and incalculable damage to your company’s reputation.
  4. Assign a team to conduct the investigation once a problem is discovered or a recall initiated. Select someone with stature in the company, someone who is knowledgeable and respected and will establish the most appropriate and efficient plan of action, to lead the probe. Include counsel and outside counsel if required and establish immediate attorney-client privilege so that you can get all the detail you need in anticipation of litigation. This approach allows for an unvarnished investigation without fear of disclosure.
  5. Start the investigation with a root cause analysis. This may require outside experts as well as internal engineers. Outsiders provide objectivity, a new set of eyes and sometimes a whole new level of expertise. To get at the answer, the investigation must include not only the product but also the system within which it operates. Preserve every piece of evidence you uncover during the investigation because you’ll need it. Evidence will be challenged by your customer, the government and attorneys for third parties in potential future litigation.
  6. Finish the investigation as quickly as possible. Avoid the temptation of a perpetual investigation mentality. There will always be new facts. Complete the investigation and file your report. And in that document, report all the facts — the good, the bad, the ugly. It’s better for negative information to come from you than from the other side. An alleged cover-up is always worse than an unintended bad act.

Finally, do not shift blame onto others if the problem is yours to accept in a recall situation. But be sure you know if it’s really your problem or how much of it is your problem before accepting responsibility for fixing it. Suppliers can lose millions of dollars on product recalls—enough to put many companies out of business. Don’t let it happen to you.

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