General Motors (GM) has announced a new 50/50 warranty share program covering the division of warranty costs between GM and its suppliers. GM says it will require this for all new or renewed purchase contracts. While the new policy may be an attempt to streamline what some describe as an inefficient and sometimes contentious system for allocating such costs, any savings created by the new policy may come at great cost to suppliers who will now be required to shoulder 50 percent of such costs under what amounts to a no-fault policy. The new 50/50 warranty share represents a significant departure from GM's previous policy. GM's previous terms and conditions contained warranties that parts would be built to GM's specifications, were merchantable, of good material and workmanship, and free of defect. If any parts failed to conform to these warranties, a supplier was required, on notice and request, to reimburse GM for any incidental or consequential damage caused by the nonconforming parts.
Under the new 50/50 warranty share, a supplier must agree upfront to reimburse GM for 50 percent of any “Ordinary Warranty Cost” incurred by GM related to parts sold by that supplier. Warranty costs will be considered related to a supplier's part if: (1) they involve replacement of the part, (2) the part is identified by the repairing dealer, or (3) the repair is submitted by the repairing dealer under a labor code that is determined to be linked to the part. Under the new terms, recalls and other extraordinary costs will still be addressed on a separate basis rather than included in the 50 percent split, and suppliers remain potentially liable for the entire cost of such events.
It is important for any supplier entering into (or renewing) a supply agreement with GM to fully consider the potential costs of the 50/50 warranty share and adjust its strategy accordingly. The Ordinary Warranty Cost that suppliers would split under the 50/50 warranty share program is defined as follows:
Expense incurred directly or indirectly by [GM] and its affiliates to repair or replace Covered Products pursuant to express warranties covering such Covered Products to the extent such cost is associated with Covered Components. In addition, Ordinary Warranty Cost shall also include cost to supply replacement parts to dealers pursuant to any program where dealers are supplied parts or components for use in Warranty repairs instead of purchasing such parts from the repairing dealer. Ordinary Warranty Cost does not include “Extraordinary Warranty Cost”, “Service Parts Mark-up”, “Dealer Good Will”, or “No Trouble Found” (NTF).
While certain costs are specifically excluded, the definition remains broad and open-ended. Many questions remain about what will actually be included in the total cost that suppliers are obligated to share. For example, it is unclear what indirect costs GM will seek to include, the price at which the cost of replacement parts will be billed, and even how some of the supposedly excluded items will be calculated.
The new 50/50 warranty share also presents a significant risk that suppliers could incur costs in cases where they may be without fault. Under the new 50/50 warranty share program, a supplier would pay for warranty costs if its part needs replacing or repairing, regardless of whether the part was actually the root cause of the warranty problem. This could require suppliers to contribute for warranty costs where the real problem was caused by another supplier's part or even by a flaw in GM's own specifications. The costs charged to suppliers will depend upon on the way dealerships record the warranty work they perform, and the broad reach of the provisions addressing when a cost will be considered associated with a supplier's part leaves open the possibility that costs may be associated with several parts. The terms and conditions also do not address how costs associated with multiple parts will be handled and provide no mechanism for a supplier to dispute the costs allocated to it by GM.