The pressures of the automotive industry will increasingly lead to innovative structures for production, distribution and R&D. The scope of manufacturer’s vertical integration continues to decrease and co-operation and outsourcing will be the best instruments to save costs and to gain further synergies in difficult times. This relates to both co-operation among suppliers and between suppliers and original equipment manufacturers (OEMs).  

Co-operation agreements  

Long-term and high-volume supply and service contracts are at the heart of these co-operation projects and receiving specialist legal advice on these structures is key to their success. Particular contractual mechanisms are available to address the challenging demands, including:

  • term and termination provisions, which ensure predictable long-term costs and provide a strong incentive for the suppliers to keep to delivery dates and quality requirements;  
  • the right balance between the security of dual sourcing and the upsides of exclusive supplier relations;  
  • change-management procedures, which keep costs foreseeable and ensure state-of-the-art technology;  
  • open book clauses and benchmarking mechanisms to keep long-term co-operation in line with market prices;  
  • ‘design to cost’ as a steering tool of modern R&D cooperations; and
  • the right mix of flexible offtake processes and minimum commitments.  

Carve-outs  

Other hot topics are the sale of production plants and joint ventures with OEMs. As production plants do not usually operate as self-contained entities, the most important pre-requisite for these projects is the separation from the manufacturer’s group. Given the multiple ties between the plant and the group, this carveout is a rather complex exercise. To avoid the risk that efficiency decreases instead of increases as a result of the carve-out, it is crucial to carefully unwind the closely knit production facilities system. Notably, the new company will remain linked to the manufacturer by means of a production-and-supply agreement, which must be designed more cost efficiently and flexibly than the former intra-group supply arrangement.  

The key issues relating to carve-outs are:  

  • how to ensure access of the new company to the manufacturer’s intellectual property rights (in particular, patents and knowhow) and at the same time to protect the manufacturer’s proprietary technology;  
  • how to preserve economies of scale for the new company in purchasing materials and components; and  
  • how to balance reliability and flexibility in the new company’s supply agreement with the manufacturer.  

Co-operation, outsourcing and carve-outs in the automotive industry are subject to complex contractual arrangements that require an early involvement of legal advisors with relevant deal expertise.