The auto industry is rapidly changing in Detroit, Tokyo and markets around the world where EVs and autonomous vehicles are dominating the conversation. A large part of that conversation is being driven by the Silicon Valley tech industry where automotive isn't simply changing – it’s emerging, and emerging with a wallop!
One of the challenges for tech companies in this emerging new market is to understand the long established rules of the game. I was pleased to speak at the OESA Mobility Supplier Forum in Silicon Valley to discuss one particular area of concern, "Directed Buy Agreements."
Directed buy agreements are fairly common in the automotive industry, but virtually unknown elsewhere. These are the relationships where an OEM directs its Tier One supplier to contract with a specific Tier Two or Three supplier as a condition of the agreement. While on the surface this might seem to simplify matters, and it can, it can also significantly complicate life for the suppliers.
Directed buy relationships are like arranged marriages. As part of a survey conducted by OESA on this subject, 88 percent consider directed buy relationships to be a problem. Here are some of the reasons:
- You’re forced to work with a company you may not know. You don’t know their work ethic, their quality, their cost controls, their capacity, their on-time delivery record, or importantly, their people;
- Your directed partner may assume the business is automatically awarded and refuse to negotiate;
- The OEM may refuse to get involved if problems occur (and you don’t want to be caught in the middle anyway); and
- You can’t simply re-source on your own if problems arise.
Nevertheless, directed buy agreements are an integral part of the industry and will undoubtedly continue with new Silicon Valley suppliers as they have in Detroit in the past. Ford, GM and FCA all have directed buy programs in place, although the programs differ in both their approach and effectiveness.
Here are some things a new auto supplier can do to build a common understanding and agreement that will help to avoid problems and clear the way for a successful marriage in directed buy situations.
First of all, consider and discuss all the important supply issues up front and come to a common understanding before you sign any agreement. Who’s responsible for what, especially when it comes to warranty and pricing issues? What happens in the case of a production snafu or slowdown that impacts delivery schedules? How about component non-conformance? Who eats those costs?
While it is difficult to anticipate every issue that may arise, we recommend suppliers create a RASIC (Responsible, Approve, Support, Inform, Consult) chart for every directed buy contract. This chart should list specific responsibilities for each company to help define how the relationship should ultimately play out. The RASIC chart will emerge from in-depth, upfront discussions and will provide a tangible guide to help keep your relationship on track or get it back on track if it falters. In turn, the RASIC covenants can help form the basis of the ultimate contract. RASIC charts of varying types aren’t new, but they are too often pushed to the side or not fully completed by the start of production.
An old Peruvian saying suggests “it is better to prevent than to cure.” A RASIC chart will go a long way to preventing problems down the road and keep your future partnerships healthy, so that ‘curing’ them never becomes an issue. As a related saying goes, “an ounce of prevention…”
Warner Norcross attorneys consult clients every day on these matters and understand how different OEMs and suppliers approach directed buy agreements. To learn more about protecting your company during these three party agreements, please contact me or any one of our Automotive Industry Group attorneys.