Stellantis: Suppliers bear all the risk - Greater Cincinnati Automobile Dealers Association

Stellantis: Suppliers bear all the risk

Stellantis shifts risk of disruptions, higher costs to suppliers

Stellantis shifts risk to suppliers

Stellantis’ new purchase contracts declare “all future events are deemed foreseeable” by suppliers, yet require price reductions when any savings are found.

Stellantis’ new purchase contracts declare “all future events are deemed foreseeable” by suppliers yet require price reductions when any savings are found.

DETROIT — The automotive supply chain has been wracked by a multitude of events almost nobody saw coming, whether it be the pandemic, the global semiconductor shortage or the huge container ship blocking the flow of goods through the Suez Canal last year.

But Stellantis now says its suppliers must bear the full risk of such disruptions in the years to come. Updates to its purchase order terms and conditions declare that “all future events are deemed foreseeable” by a supplier, which must “assume such events will occur.”

That language is particularly jarring for suppliers considering new contracts at a time when the industry has suffered through a confluence of crises, said Jonathan Jorissen, a lawyer at Brooks Wilkins Sharkey & Turco.

“A key defense that you have under the law is the force majeure concept, or the commercial impracticability, that if something happens that’s unforeseeable at the time of the contract, you’re excused from your performance,” Jorissen told Automotive News. “That’s been huge with this global semiconductor crisis.

“There have been force majeure and commercial impracticability letters going all up and down the supply chain,” he continued. “But the inclusion of that little provision says you’re not going to get those defenses anymore. No matter what happens, you are going to be responsible.”

It’s among a number of changes Stellantis has made to its global and North America terms that have made some suppliers wonder whether they should sign a new contract with the automaker. The terms apply to all direct material request for quotations issued by Stellantis as of Jan. 1, nearly a year after the company was formed by the merger of Fiat Chrysler Automobiles and PSA Group of France.

Stellantis declined to comment last week.

Jorissen said the suppliers he has spoken with are trying to push back on many of the changes in the hopes of continuing to do business under the previous terms or at least finding some middle ground. Stellantis altered the direct materials global terms and conditions that are common to suppliers in all regions, and an addendum called Exhibit A that covers North American suppliers.

On top of the foreseeable events rule, the new terms make suppliers responsible for all capacity constraints they experience.

“The pairing of those two provisions is you’re liable for every part that comes through the supply chain, and nothing that happens in the world is going to excuse your performance,” Jorissen said. “That’s a big one-two punch, especially in today’s climate.”

Passing on cost savings

A former Stellantis insider who did not want to be identified told Automotive News the latest moves are driven by “unrealistic savings goals” sought by the automaker. The changes are being implemented as Stellantis experiences considerable attrition in its purchasing department, resulting in new hires replacing many FCA veterans.

Lawyers at Foley & Lardner who also studied Stellantis’ updated language assembled a list of suggestions for how suppliers can cope with the changes.

The firm noted that suppliers now must immediately pass on any cost savings they achieve to Stellantis, yet there’s no corresponding allowance for suppliers to charge more when their costs go up. Suppliers have to provide a written plan for implementing cost savings and productivity improvements by Oct. 1 every year.

“They expect their suppliers to absorb those hits,” said Nicholas Ellis, an attorney at the firm who specializes in manufacturing and supply chain disputes. “That’s the source of a lot of friction in the supply chain these days. Given the inflationary environment we’re in these days, and rather than trying to accommodate that, Stellantis essentially has kind of run in the opposite direction and doubled down on this idea that all of the risk of any cost increases remains on you.”

Suppliers’ options

The Foley report was compiled by Ellis, Amir El-Aswad, Regina Gilmour and Vanessa Miller. Miller, a partner at the firm, said about a dozen suppliers contacted the lawyers to express concerns about the changes and seek clarification about the implications on their business.

Auto suppliers typically avoid criticizing their customers publicly. Some suppliers contacted by Automotive News said they were studying the changes and did not want to comment. A spokesman for ZF said the transmission-maker was “still reviewing these terms and working with Stellantis.”

An executive at a significant supplier to Stellantis said the updated terms and conditions make suppliers’ liability “potentially unlimited.” The executive spoke on condition of anonymity because of the companies’ ongoing business relationship.

“Any supplier that signs up for this is basically at the stage where you cannot calculate the rate of return on your investment,” the executive said. “You have potentially unlimited liability on all kinds of different things, and you don’t know how much you’re going to make.”

The executive said the answer for frustrated suppliers is to not sign a new contract with Stellantis with the updated terms and conditions. Some companies may not be able to give up such work, but others can afford to take a stand and potentially get Stellantis to reverse course.

“We’re living in a world where we don’t have a great surplus of suppliers,” the executive said.