Contract obligations often clarify responsibility, but multiple competing obligations can represent a new level of challenges. All manufacturers and services providers want to keep their clients happy and bring in new clients, but these interests can put a strain on existing agreements. A case in point is dealing with recalls when there is already a supply shortage of essential parts as in the automotive industry.
Computer chip shortages have been impacting a wide range of industries, but they are not the only shortages facing automakers. Electric vehicles rely on chemical batteries to store energy as a substitute for hydrocarbon fuels used in internal combustion engines. Many of the newer batteries are based on lithium-ion technology similar to the batteries found in modern smartphones. A recent recall by General Motors, out of an abundance of caution, has implications for the electric vehicle supply chain. The recall was due to a fire risk in the battery packs of Chevy Bolt electric vehicles. Replacement of the batteries for customers presents at least two problems – the supply shortage in battery materials and reduction in production capacity while conducting the recall.
When a vehicle is recalled, it often requires one or more replacement parts. If the replacement parts are also being used in current production vehicles, then every recalled vehicle reduces the parts supply for producing another vehicle that is compatible with that same part. If the replacement part is not being used on current production vehicles, then the production of replacement parts may take up capacity that would have otherwise been used for current production parts. In this instance, the replacement part is a battery pack. Not only does General Motors face a demand for replacement parts for the Chevy Bolt in order to get its customers back on the road, but General Motors’ new line up of electronic vehicles are planned to use different battery technology, which means that two different sets of battery packs need to be produced in order to satisfy the demands of the recalled vehicles and new production units.
At one level or another, the automaker is challenged to balance the market demand for new vehicles and obligations to owners of current vehicles subject to the recall.
These stresses on the supply chain give reasons for automakers to take a closer look at their legal obligations and supply contracts for addressing widespread shortages. What can be done if a link in the chain cannot handle the additional strain of a recall? Do the contracts address a process for addressing a shortfall in the sourcing of essential parts? What are the safeguards provided for in the supply contracts if the strain results in the insolvency of one of the vendors central or ancillary to the recall? These considerations and more should be addressed whenever a supply contract is drafted or renewed.
The ability to influence supply and take advantage of alternatives is paramount. Automakers with the flexibility to balance existing customer obligations and new customer demands will have far greater staying power in a market where shortages are the new normal.
