There are many issues for companies to address when contracting for the manufacture and supply of automotive industry products. In this blog post, we highlight several of these key considerations.

GLOBAL NATURE OF THE SUPPLY CHAIN

Because companies often source products via a global supply chain, contracting parties should consider applicable laws, regulations, and requirements regarding manufacturing, logistics, and use of the products. The parties should also pay close attention to geopolitical factors, including existing and potential international conflicts between countries in the supply chain, international relations, and climate change, and what effect those factors might have on the underlying business deal and the ultimate supply of the products.

While the COVID-19 pandemic pressure-tested—and ultimately changed in some respects—how parties contract with each other in connection with supply chains, a global supply chain all but ensures the need for ongoing vigilance in terms of potential legal and operational issues.

PRICING AND EXCLUSIVITY

Pricing is another significant consideration in supply chain agreements. Parties in the auto industry often negotiate separate pricing agreements detailing the agreed-upon pricing and any protections around, and ability to change, pricing since it often requires more specificity than could be provided in an exhibit and also may need to be adjusted in the future. Generally, buyers desire (or require) fixed and/or competitive pricing over a certain period of time. In order to provide such fixed and/or competitive pricing, suppliers will desire (or require) certain commitments such as volume, length of term, and/or exclusivity.

The parties should consider each party’s needs and build in flexibility for negotiating or implementing changes based on an agreed-upon formula or language regarding cooperation, reevaluation, or modification of pricing based on predetermined factors. Exclusivity can be helpful from a relationship and pricing perspective because it gives the supplier the ability to guarantee certain pricing based on the buyer’s commitment to purchase from supplier, but, as was seen during the pandemic, buyers do not always want to keep all their eggs in one basket in terms of suppliers in the event something happens (e.g., the aforementioned geopolitical factors), and as such they may be less likely to agree to exclusivity or large volume commitments.

One way to reach a middle ground with respect to pricing and exclusivity is to allow the buyer to have a backup supplier or have the buyer commit to certain minimum volumes without granting supplier exclusivity.

LENGTH OF AGREEMENT

Many automotive supply agreements will require supply of parts or products and guarantee of backup stock for an extended period of time. If the term of the agreement is of considerable length or is able to be extended, suppliers should consider whether they can guaranty large backup stock and continuous supply over a long period of time and how that obligation might make more business sense if agreed upon in exchange for commitments on the buyer’s side such as minimum volume purchase requirements, exclusivity, and/or inability to terminate for convenience.

Another potential issue in a long-term supply chain relationship is that it can become more informal, and patterns of practice tend to grow legs. To combat this, it is important to have clear terms and processes set forth in the agreement that match how the parties work together operationally and set forth how the parties document and implement changes.

AVAILABILITY OF SPARE PARTS AFTER TERM OF AGREEMENT

Despite the term of the agreement, automotive supply agreements often have provisions regarding the availability of spare parts for the buyer (and potentially its subsidiaries) long after the agreement has ended (e.g., 15 years after purchases of a part for production have ended). Suppliers should factor in this potential obligation and determine whether they can commit to such availability over an extended period, especially after the initial relationship has ended.

CURRENT ISSUES

Auto companies and suppliers are currently going through changes in how they operate in terms of building in new efficiencies, adjusting to employee and staffing issues, implementing new transportation and warehouse schemes, managing time pressures, and complying with data security obligations. When contracting in this space, it is important to consider each party’s needs, obligations, and costs (and pain points) related to the use of new and cutting-edge technology to manage and optimize management and flow of the supply chain.