GM recall saga triggering a new reality for suppliers

Dustin Walsh
CRAIN'S DETROIT BUSINESS

Published: June 23, 2014 11:59 am ET
Updated: June 23, 2014 12:04 pm ET

Image By: Crain's Detroit Business Dan Sharkey

Related to this story

Topics Automotive
Companies & Associations General Motors Co.

DETROIT — The General Motors Co. recall saga is triggering a new reality for automakers and the supply base. Automotive manufacturers must — because they can’t afford not to — protect themselves from liability in every aspect of production.

Attorneys around metro Detroit have been in overdrive since the GM recall scandal broke in January, either assisting the automaker or working with suppliers as recalls spike across the industry.

Companies are feverishly working to correct potentially harmful language in documents, identify legal liabilities and prepare for the possibility of increased regulation.

“Everyone is running scared because they don’t want to take any chances,” said Dan Sharkey, partner at Birmingham-based Brooks Wilkins Sharkey & Turco PLLC. “I’ve dealt with more client calls about recalls in the last few months than I’ve dealt with in the 10 years prior.”

As of June 18, GM alone had issued a record 44 recalls of 18 million cars in the U.S., although some of those were counted more than once because they are being called back for multiple fixes. GM has set aside $1.7 billion to cover recall-related expenses this year.

It’s the legal ramifications for GM that has the industry scrambling. The Detroit-based automaker has already been slapped with a $35 million fine by the U.S. Department of Transportation, is under a criminal investigation that could lead to fines and several civil lawsuits related to the faulty ignition switches linked to at least 13 deaths.

The civil suits have already dragged in suppliers Delphi Automotive plc, maker of the ignition switch, and Continental AG, which supplied airbags to the defective cars. The lawsuits allege Continental and Delphi knew of the issue and didn’t fulfill a duty of reporting them to the National Highway Traffic Safety Administration.

“The fear of liability is growing,” said Tom Manganello, partner and co-leader of the automotive industry group at Warner Norcross & Judd LLP in Southfield. “A lot of suppliers think they are covered if they notify the OEM, but NHTSA may be taking a closer look at the participants in the reporting system.”

Image By: Crain's Detroit Business Tom Manganello

Manganello said he’s now recommending that clients go their customers first, but if they “drag their feet” on reporting, then go directly to NHTSA to avoid getting caught in the middle of an investigation.

Attorneys said the U.S. Department of Justice is eager to expose alleged wrongdoing in large industries. Automotive is already in the middle of the largest antitrust investigation in U.S. history.

The antitrust investigation, which as led to $2.35 billion in fines, alleges dozens of suppliers engaged in discussions to rig bids of wire harnesses, airbags, and several other automotive products. The scandal has led to several civil lawsuits as well.

“The DOJ is fishing for deep pockets,” Manganello said. “If you’re unsure of your obligation ... report it.”

Sharkey said the GM situation has increased attorney oversight into intercompany communications. Last month, the now infamous 68-word list of “banned words” at GM became public. Sharkey said this is becoming more mandatory for the supply base as well.

“There are certain buzzwords that I don’t like my clients to use; you don’t guarantee things,” Sharkey said. “Engineers like to use certain language, but without knowing any better, they are opening the company up to liability.”

Those words include: “failure,” “defect,” “dangerous,” “completely safe” and others. Comparisons between safety and price are also off limits, Sharkey said.

“Saying something like, ‘If we spend $5 million we could make this product 1 percent safer’ is innocuous at the time, but looks terrible after an incident. But the reality is people make those decisions everyday, otherwise we’d all be driving Sherman tanks.”

Image By: Crain's Detroit Business Daniel Rustmann

Daniel Rustmann, partner and co-chair of the global automotive practice at Detroit-based Butzel Long PC, said the “era of recalls” is causing an increase in training on liability, from top to bottom in organizations.

“The best advice I give to clients is to get their people well-educated about the laws, how to handle reporting and requests from outside the company,” he said. “This is a communication issue at its root and needs to be handled effectively.”

Rustmann said that too often engineers identify and try to correct the problem themselves without elevating the issue to create a team to review internally.

Externally, Rustmann fears, the GM recall issue will erode communication between automakers and suppliers.

“The best way to go would be to share information more freely and work new systems to communicate better,” he said. “But because of the litigation atmosphere, I fear it will result in less collaboration and more isolation.”


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GM recall saga triggering a new reality for suppliers

Dustin Walsh
CRAIN'S DETROIT BUSINESS

Published: June 23, 2014 11:59 am ET
Updated: June 23, 2014 12:04 pm ET

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