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).
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.
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.