Legal Success Strategies for your post-UAW Strike Auto Startup

[Transcript]

Welcome to the Automotive Leaders Podcast, where we help you prepare for the future by sharing stories, insights, and skills from leading voices in the automotive world with a mission to transform this industry together. I'm your host, Jan Griffiths, that passionate, rebellious farmer's daughter from Wales with over 35 years of experience in our beloved auto industry and a commitment to empowering fellow leaders to be their best authentic selves. Stay true to yourself, be you, and lead with Gravitas, the hallmark of authentic leadership. Let's dive in.

Joining me today is Dan Rustmann. Dan is the co-chair of the global automotive practice at Butzel he focuses on the suppliers' issues in the supply base, not the OEMs. He's very much focused on the supply base, and he has been working in this space for over 30 years. Dan, welcome to the show.

Thank you, Jan, I'm very pleased to be here with you today. Appreciate the opportunity.

We've got some issues in front of us now, don't we?

We certainly do just another in a long string of difficulties that the supply chain has faced. But I'm sure as the suppliers have overcome the prior challenges, they'll be able to overcome this one also, confident.

Because that's what I keep saying too right, we've come through COVID, we've come through the chip crisis. We'll get through this. And we've been talking a lot about dealing with operational perspective and managing the people side of this and keeping good relations with the suppliers. But I want to take a bit of a turn in this episode and look at it from more of a contract legal perspective. From my supply chain days, Dan, I can see the startup being a bit of a nightmare, quite frankly. So I see a ton of issues out there. So what are some of the issues that you have seen maybe in the past or you think that are coming at us for the supply base right now?

Well, there's no question, as you've discussed in your prior shows, Jan, we can expect that when an agreement is reached, the OEMs will want supply to start up immediately. And they're going to push very hard to have everybody up and running yesterday with very little notice. So that's certainly going to be the largest obstacle that everybody faces. How can we get up and running? You know, as you said, from a contractual perspective, can our contracts provide us any protection against this rapid ramp-up? That's what we're talking about today, in part, but I think that's going to be the biggest issue is how can we get up and running, get things going back to normal as quickly as possible, and hopefully avoid the debits and the calamities and the disruptions that would come from, you know, certainly likely to come from a rapid startup without much notice.

Can they do that, Dan? From an OEM perspective? Can they demand, can they turn on those releases without any notice? I mean, the only notice period we'll have is the ratification period, right?

Well, I think you have to look at it from two perspectives. One is the legal perspective, that's what you've asked me to come on to talk about. The other is the practical perspective. I mean, they're absolutely going to push as hard as they can. Typically, the way the relations go even regardless of although the contracts are very slanted towards the OEMs, very slanted towards all the purchasers in the automotive industry, they're going to do what they're going to do, and they're going to push against you. And so what's your remedy? If you're unable to comply, and they start making massive debits, are you going to go to a lawsuit battle against your customer? Possibly, but more likely, you're going to try to find some way to work it out. But you know, of course, the starting point is the contracts. And to answer your question in a short way, yes, the contracts probably do allow them on their face to have a startup with very little notice. The terms say that the OEMs can suspend deliveries at any time they want, and by implication, they can start them back up again. Now, the suppliers will probably have some arguments, they'll have some legal arguments that they can try to rely on. Some will try to argue that this is a force majeure event. It's very factual. It depends on the particular circumstances. It depends on the language of the contracts; possibly, they can claim impossibility, you know, and each of those arguments only goes so far, and it's really only what a judge would accept. If the OEM doesn't accept the argument, which they won't, they'll reject it, then you're still back at the same place that you started with, having to find some way to meet their demands. So, the pushback will be against the debiting against the bullying tactics that the OEM so often employ to get what they want from the suppliers. It depends on the language of your contract and the facts of your situation, perhaps you have some good language about lead times. And maybe you can make an argument that you have a certain amount of lead time that's required by the contract. But this is an interruption. So, presumably, you already have the materials that you need at least to start back up. So I'm not so sure how far that will go.

Yeah, let's look through the lens of the entire supply chain, right? So we started talking about the OEM, so you start to get into the tier one. So, the tier ones now are looking down at their tier twos. And then tier two is under the tier threes. So, as the tier ones who look into the tier twos, as a recovering supply chain person, I know that part of my mission would have been to cut those releases off as quickly as possible and not to hold inventory. We all know that this situation is about cash conservation. And nobody wants to have a ton of inventory for a number of reasons. Its cash tied up in inventory that's not being used, but also maybe its inventory that could deteriorate over time, there's so many different issues, you know, you have to store this inventory. And where is this inventory? And is it reflected in the ERP system? We'll have issues go on and on. So, as a tier one, now starting back up and communicating with their tier twos, what's that gonna look like?

Well, there's no question. I mean, you've talked about it previously, Jan. The most critical point in all of this is maintaining as robust communication as you can, both downstream to your suppliers and upstream to your customers. You mentioned, for example, that the inventory could have a short shelf life; perhaps there's something that can be worked out in advance with the customer or downstream with the supplier to provide for a rolling production of the inventory in a way that there's some compensation, maybe that flows upstream or downstream to shorten the time for a startup. You know, for example, if it's a material that you have to formulate, and then it has a shelf life, maybe there are some arrangements that can be made to help shorten the time. But it all requires close communication with the downstream suppliers and the customer. In terms of what could be accomplished, what kind of compromises can be reached? How can people be creative in addressing the challenges and reducing the obstacles presented by a rapid startup?

One of the things that Thomas Kowal brought up from the President of Seraph, in the last episode, we were talking about payments, and often, in the tier one supply base, payments are pushed or held. And I don't know, can I say that publicly? I guess I can, I just said it. But it happens, right? Extending payment terms. And I could just see this battle right with a tier two is like, okay, pay me, pay me first, and then I'll turn it back on. Those battles are coming you think?

Well, I think likely. I mean, this is one of the questions about the terms and conditions in the contractual rights. If you're outside of terms, you have a legitimate position to say that we can't comply until you comply with your obligations. If they're slow-walking payments, or they're outside of payment terms, that's arguably, that not arguably, that's a material breach of the contract and would entitle you to suspend performance until it's remedied. So there's no question that those types of activities will have to occur.

What should suppliers be doing right now, Dan, in terms of looking at their contracts? Where should they be honing in their attention?

Well, reviewing the contracts is definitely one of the actions that I recommend in terms of preparing for the startup. I mean, you've talked quite a bit about the practical realities of a startup; I really listened to your podcast with Thomas from Seraph. And I thought he had some excellent ideas. I love the idea of doing a startup FMEA. And practicing, rehearsing, getting ready for this. I mean, there are some very practical measures that all suppliers can and should be taking to be ready for this rapid startup. But you know, I would add to the list, review your contracts, discuss with your lawyers, where are your rights and where are your obligations? What arguments can you come up with? And together with the communications upstream and downstream, you can be starting to talk posturing in terms of your legal rights papering the file to a certain extent; I mean, I don't recommend being aggressive, and you know, jumping up and down and shouting out about your legal rights, but I'm talking about creating a paper trail so that later on, you can have something to hang your hat on to say, listen, we gave you notice this is not a surprise to you that we have a product with a short shelf life, it's not shouldn't be a surprise to you that we had to layoff workers. And we know we're going to have difficulty getting them back. You know, we've let you know of all this. If you have a good paper trail, it can provide some protection later on. I mean, whenever a dispute, if you do get into a dispute, and there's a large debit, and you end up in a fight with your customer, whoever had the white hat often comes out in these fixed. I mean, yes, the contracts govern, the legal rights are what they are, and they're in black and white. But any fact finder is definitely going to look at the equities of the situation if you've done what you need to do, if you've communicated clearly, if you've established a paper trail, if you've taken very aggressive actions to try to do what you can, you're going to be in a lot better situation when a dispute arises than if you've just let it go and not engaged in those preparatory actions.

And one of the things, Dan, from my experience, is the connectivity between the contracts and the terms coming into your organization if you're a tier one from the OEMs, and then the flow through of those terms back out to the supply base. There's always a disconnect there. I'm just gonna put it out there because there just is, and sitting in the MEMA terms and conditions review the other day, listening to some of the changes coming through from the OEMs. We tend to look at these things in isolation. Oh, well, this is the Stellantis. Well, this is General Motors; well, this is Ford. But the reality is there's some poor VP of purchasing a supply chain out there in tier one trying to figure out how to take all of these terms and then flow them back into the supply base. I mean, that's a much broader issue than strike-related terms. But if there's a disconnect in tier one, my thought is that this is a great time to start thinking about the connectivity between your customer terms and your supplier terms. So, when you are in a dispute, don't wait until there's a dispute to figure that out. Now's a good time, right?

No, that's absolutely correct, Jan. I mean, I think anytime is a good time to take a look at your terms and make sure they're updated, make sure they meet. The law is constantly evolving, situations develop, and people find ways to get around particular terms. That's why the terms now are 30 pages that used to be 10 pages. People find ways to address them. And there's no question that you should harmonize your terms with your downstream suppliers so that their obligations to you mirror your obligations to your supplier. And it all should, and you should also, as a supplier, have terms of sale; we've talked about that at MEMA, at our conferences, not just your purchasing terms with your downstream suppliers and making sure you flow down the obligations. But to potentially set up an argument with your ups with your customers, having terms of sale that maybe fill in some gaps that aren't addressed by the customer's terms maybe sets you up for a possible battle of forms is also a good idea. But I mean, the reality of the situation is that the leverage and the economic situation between downstream suppliers and tier ones and the customers are different. And tier one and tier two suppliers very often are stuck not just because of a disparity in their terms but they're stuck because maybe they can weather a storm, but their customers might not be giving them the relief that they're asking for that they need. But they don't often have a choice in terms of giving some relief downstream because they have to keep the downstream suppliers, which are smaller companies, solve it. I mean, the contracts only provide so much help. You can't squeeze blood from a stone. If a supplier is going to close its doors, you have to provide some relief. And you know, the upstream customers don't always recognize that they won't necessarily compensate for it. But that's the sandwich that the tier ones and tier twos find themselves in where you have to provide some relief, but you're not necessarily getting relief. This is one of the places where you know I'm a strong believer that the supply chain and the automotive industry need to become more collaborative and more civilized. You've promoted this since day one on your podcast. People need to learn to work together more. We lawyers can create terms nonstop that address every loophole, and they're the hardest terms possible. And sometimes we feel like we have to protect the rights and, as you say, to flow it down. But there has to be a transformation In the way the industry operates, it has to become more collaborative, more communicative, and more willing to work together to solve these problems. And not just short-term shareholder gains, squeezing every penny, squeezing every cost, it's not going to be the brightest and best for the industry if they don't start changing the model for how they approach these issues.

You're right, and there's this idea that the contract is supposed to represent every possible conceivable thing that could go wrong or could happen. And if anybody thinks there's a document out there that can do that. I'd love to see it. Because it is just absolutely ridiculous to think that you could have a document that clearly will cut through without any dispute or argument whatsoever and say, in this situation, we are right, and he's right. I know that that's what we tried to do. We tried to put us in the best possible legal position. But if it was that clean-cut, you wouldn't have a job.

It's very true. It's very true, Jan. No, you're right. You're absolutely right. But I would say there's a counterpoint to that. It's true, just like it's impossible to build a perfect part that will never have any possible warranty issue. It's impossible to make a perfect contract that could address every situation, however, you can have a good contract, you know, one that is very clear and negotiated upfront. That spells out in, you know, in the most important areas, what are your rights and obligations? And, you know, people know, and they've been told for years, this is our boilerplate, take it or leave it, we have you have no chance of getting any variation from these terms. While I've been advocating for years that you might have more leverage than you think. And in some particular areas, you may have the ability to provide some protections for yourself. And I'm not talking about doing a massive red line of the terms and conditions. I'm talking about getting to the fundamental issues that are going to have a serious impact on whether you make money or lose money from this contract in the long term: price adjustment, return of capital, and protecting your intellectual property. You have to pick your battle and see which issue is most important to you. But, you know, if you go in from a position of strength and confidence that you have a good product, that you have a good track record of being a good supplier, you have, I believe people have the ability to get better contracts, and not just take what they're handed. And if you can't get a better contract, you can consider another customer, you said for years. And I think this is one of the best points I've heard you make, that the way customers treat their suppliers dictates the type of service and product they will get from the supplier. The suppliers are going to give their best product, their most innovative technology, to the customer that treats them the best. It's a cycle that can and should improve in an upward direction. But people need to stand their ground and be a little more assertive in protecting themselves, I believe.

Yes, and you said it, it's about collaboration, and the agreement should come first, and the paper should follow. And it's not just about price and delivery. There should be a conversation about what happens when there's a quality issue. Well, let me let's talk about that. And have those conversations upfront. Let's talk about what happens when there's a delivery issue. Well, this is how we handle it. And this is how we reflect that in our contract. And maybe it's a blanket PO or a frame agreement, and then there is a release, and this is the lead time, and this is how it works. Those conversations on how the relationship will run need to happen first, then you can point to how that's reflected in the contract instead of treating this contract as this thing. And I've seen it many times with the business people go, "Oh, yeah, that's a legal issue." It's not a legal issue. It's a business issue. It's about the relationship. And I fear that that's what we're going to get into now with the startup. I would not want to see the supply base go, oh yeah, but that's a legal issue, you know, that we'll just throw that over to legal; good for you, Dan, quite frankly, but it should be about the collaboration. And I think that the message around the strike on this issue is to have those conversations early on, as Thomas said, take a FMEA kind of approach, right? Then, start to think about what could go wrong. Where are you with your payments? Are you slow paying suppliers? Those are the ones you probably want to get on top of right away and start to have some conversations with, right? Who's typically late? Who typically has problems with delivery? Who's in a place right now where they've been devastated? Maybe they're hit by all three OEMs, and they're really on the floor financially; they are going to have a heck of a time coming back up. Where is the risk in the supply chain?

It just comes back again to communication.

I talked to a tier one last week, and they're doing all of those things: they're communicating with people, they're talking about a bonus when they come back. Otherwise, people are not going to have a choice. If your income is just completely devastated, and you've been laid off, you have no choice but to make another decision. Even with me with my small business, I've had at least 60% of my revenue since the strike gone, like overnight, boom. Good night, right. That's a hot gap to fill in the short term. And that has implications not only to me, from a business perspective, you know, to my family, but then it also has implications to my ability to spend money, you know, home improvement projects, put on hold, right? Maybe going out to dinner, second-guessing that decision. So this ripple effect is just horrendous, particularly for the state of Michigan, because it's impacting people who have nothing to do with the auto industry.

You know, I want to make a point. I mean, we're talking about business; we're talking about legal issues. But I'm a Lutheran, and I believe strongly that you should have a little faith. I mean, our industry has recovered from many things in the past, and we as individuals have recovered from many things in the past, and we have to have a certain amount of positivity about our approach. I'm not talking Pollyanna positivity, I'm talking about, there are certain things that we don't have control over. And we have to be able to turn it over to a certain extent and think, how is this gonna, you know, maybe I can come out of this stronger and better. And I think God has a lot of grace if we look to Him, if we have certain faith, you know, he can respond in ways it might, might not be the way we expect. But it's amazing how things can turn out even if you're not religious, just having a certain outlook of saying a positive approach; look at how you could turn a negative into a positive. I mean, yes, there's going to be tier two and tier three suppliers that maybe don't whether it through this storm; I believe we're gonna see insolvencies and bankruptcies. But, you know, for those companies that are in that position, maybe it's an opportunity for a fresh start, maybe there are some remedies that you can find in the bankruptcy code, or otherwise, you know, maybe this pushes and precipitate something that should have happened anyways. From the buyer's perspective, maybe it weeds out the supply chain. I know for a fact from my practice that there are many suppliers that are not operating as efficiently as they should be or could be, and the buyers are reluctant to resource them because there's so much effort involved in resourcing. Do the revalidation, and there's a lot of risk and uncertainty. Well, if you have an event like this, it could force people to realign their supply chains. I think maybe Thomas even mentioned it, this could be an opportunity to look at your supply chain; maybe you could take advantage of this time to really start looking not just at, well, how can I treat my suppliers better? What am I going to do to pay them? Maybe it's time to start looking and saying, How can I realign to become, you know, use this opportunity to become more efficient and productive in the long term?

I hadn't thought about that, Dan. I honestly hadn't thought about that, that this really is an opportunity. You know, we tend to think that bankruptcy is such a dirty word. But it's called bankruptcy protection for a reason to give you an opportunity to reorganize. Maybe this is the nudge, I had not thought about it from that perspective. But you bring this back really to leadership when you're talking about looking at this from a positive lens. And good authentic leadership is about seeing the positive in this and communicating that to your team at bringing calm to the chaos because there will be chaos when we get into a startup mode. This really is on you, leaders of the automotive industry. And as many of you out there, listen to this podcast, how you see this and how you see the path through it will have a massive impact in your success.

I agree completely. It's an opportunity. I mean, every time we face a serious challenge, that also comes with a serious opportunity. And this is an opportunity for people to step up and show their leadership and show their poise, show their creativity, show their grit to be able to get through the situation like we always do, like the industry always recovers. But maybe this is an opportunity for transformation; the industry and various aspects of it need some transformation. And I'm not just talking about ICE to electric. It needs some transformation in the way we do business, interpersonal relationships, some more positivity to the approach, and some more collaboration. And maybe this will be some how, at the end, a helpful nudge in that direction. We can only hope.

As Stephen Covey said, you cannot win in the marketplace without also winning in the workplace.

That's right.

Two have to go hand in hand: the product and the people. So, Dan, to wrap this up today, three things, three tips for suppliers right now, as they're looking at contracts. Three things that they should be doing right now.

Well, absolutely; you should be talking to your lawyers, look at the terms, and see what type of arguments you might be able to come up with. If you are in a situation where, despite all your best preparation, you've done everything that you could do to prepare, you've done the startup FMEA, you've done the practice, you've communicated with your players, you've done everything, but you're still not going to be able to meet the OEMs aggressive demands, what are your rights? What are your obligations? Know that in advance, it's just part of the preparation. And communicate, set that paper trail upstream and downstream, you know, engage in communications, don't just write some form letter that says, you know, here's what our rights and obligations are. I've seen several of those in this. And I don't think they accomplished very much. I'm talking about having a real discussion with your suppliers and your customers about the specific challenges you're going to face and trying to find creative solutions to them. So it's all part of preparation, part of communication. And as I said, have a little faith, adopt some positivity and creativity to how you can turn past, you know, what seems to be a terrible situation, and is a terrible situation, into something positive. I know there are opportunities for transformation; people look for them.

What a great way to end this on a positive note. Dan, thank you so much for joining us today.

Thank you, Jan. It's been my pleasure to be with you.

Thank you for listening to the Automotive Leaders Podcast. Click the Listen link in the show notes to subscribe for free on your platform of choice. And don't forget to download the 21 Traits of Authentic Leadership PDF by clicking on the link below. And remember, stay true to yourself, be you, and lead with Gravitas, the hallmark of authentic leadership