Stellantis contract changes could raise costs for suppliers

Stellantis N.V., the parent company of Chrysler, Fiat and PSA Group, has made controversial changes to its purchase order terms and conditions for 2022 that can force North American auto suppliers to reduce prices whenever they achieve any cost savings and to remain locked into unfavorable contracts for as long the auto maker wants.

The terms do not include language allowing suppliers to pass on increased costs for materials.

Lawyers who have analyzed the new language say those are just some of the modifications that have raised concerns among suppliers they’ve been in contact with. They say some suppliers weren’t even aware that Stellantis had reworked the terms and conditions they’re required to follow.

The changes took effect Jan. 1, nearly a year after Amsterdam-based Stellantis was formed by the merger of Fiat Chrysler Automobiles and PSA Group of France.

A former Stellantis insider said the moves are driven by “unrealistic savings goals” sought by the auto maker.

For suppliers that received “requests for proposals in December, we had heard that there were new terms and conditions being included, but there was not a real formal announcement that these terms were changing,” Vanessa Miller, a partner at Foley & Lardner L.L.P. in Detroit, told Automotive News, a sister paper of Rubber News. “That’s different than what we saw in 2021 with a couple of other OEMs that provided not just advance notice and a heads-up to the supply base, but they also provided a lot of lead time.”

Ford Motor Co., for example, delayed the effective date of new terms last year in response to feedback from the supply base, Miller said.

Miller and colleagues Nicholas Ellis, Regina Gilmour and Amir El-Aswad studied the updated Stellantis NV and FCA US L.L.C. terms and assembled a list of suggestions for how suppliers can cope with the changes.

The lawyers said 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.

The lawyers’ report says identifying the changes is only the first step. Second is determining “whether these terms are acceptable for existing business or whether certain objections should be raised.”

Miller said the law firm has had “back-and-forth discussions” with about a dozen suppliers that reached out saying “they’re concerned about how this going to play out, and just wanting more clarity into what the practical implications are of these changes.”

Stellantis declined to comment.

The attorneys said there’s now a rule in place in North America that suppliers must immediately pass on cost savings they achieve to Stellantis. The auto maker’s terms say suppliers also must provide a written plan for implementing cost savings and productivity improvements by Oct. 1 every year.

The firm said this creates a problem for suppliers because there’s no corresponding rule allowing a supplier to pass along cost increases to Stellantis. They’re expected to absorb unexpected costs while giving Stellantis the benefit of any savings they find.

“They expect their suppliers to absorb those hits,” Ellis said. “That’s the source of a lot of friction in the supply chain these days. Given the inflationary environment we’re in ... 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.”

Miller said Stellantis has added provisions that expand its ability to prolong the life of a contract.

The Foley & Lardner analysis says the auto maker now can unilaterally extend North American purchase orders across multiple vehicle programs and extend vehicle programs more than once. In addition, the terms say purchase order agreements that don’t specify an end date, or have an end date of “9999,” will last for the life of the vehicle program.

“The traditional model in the automotive industry is usually what’s called the life of the program term,” Ellis said. “The supplier has to supply the part for as long as that particular OEM program is in effect. That’s typically been a source of friction. How long does that program really last for?

“But here, Stellantis really has added some language that goes much beyond the traditional model, allowing them to roll over the contract to new or successor programs or additional programs, potentially locking in the supplier for very long time if they have favorable pricing on the part.”

Auto suppliers typically avoid criticizing their customers publicly over such matters.

Some suppliers contacted by AN said they’re studying the changes and did not want to comment. A spokesman for ZF said the transmission maker is “still reviewing these terms and working with Stellantis.”

An executive at one significant supplier to Stellantis said the updated terms and conditions make suppliers’ liability “potentially unlimited.” The executive requested anonymity due to the sensitive nature of the topic.

“Any supplier that signs up for this is basically at the stage where you cannot calculate the rate of return on your investment,” he 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 suppliers frustrated with the changes is to not sign onto a new contract with Stellantis under the new terms and conditions.

“Either use the old T’s and C’s or not do business at all,” the executive said.

Stellantis could be at risk of losing future business from suppliers that are not dependent upon it to remain afloat financially, he said.

“We’re living in a world where we don’t have a great surplus of suppliers,” the executive said. “The suppliers that are in business are good, but they’re all challenged in terms of getting people to work, getting supplies and making a return. And the industry is trying to fill capacity. Demand is there, but we have production shortages. So, any supplier that has the ability to choose among customers is not going to do business with Stellantis.”

A former Stellantis insider with knowledge of the automaker’s North American purchasing operations said the changes are the sort of behavior that shows why Stellantis and predecessor FCA consistently receive low scores in the annual Plante Moran supplier satisfaction survey.

The person said nearly half the staff in Stellantis’ purchasing department has left over the past two years, resulting in many company veterans being replaced by inexperienced new hires chasing “unrealistic savings goals.”