‘Nuclear option’ keeps suppliers on their toes
By Robert Sherefkin
6:00 am, July 17, 2006
This weapon is a right-of-access agreement. It’s a legal tool that gives automakers the right to seize a faltering supplier’s factory if the flow of parts to the assembly plant might be disrupted. General Motors Corp.’s lawyers created this agreement in the 1980s; other automakers, such as Ford Motor Co., DaimlerChrysler and Nissan Motor Co. Ltd., have adopted the practice, too. And now some big suppliers, such as Visteon Corp., Lear Corp., Delphi Corp. and Tower Automotive Inc., are starting to demand right-of-access agreements from their vendors. Industry experts say as many as 300 right-of-access agreements exist. For example, General Motors has negotiated about 20 deals, twice as many as it had two years ago. Lear President Doug DelGrosso says his company has negotiated about a dozen agreements with suppliers. Lear’s right-of-access agreements are similar to those of its customers, DelGrosso says. “We mirror our customers’ conditions on our suppliers,” he said. These agreements are so draconian that they are rarely invoked — just six times in the past 15 years, industry insiders say. That’s because their mere existence is enough to convince a supplier not to disrupt an automaker’s production. The growing use of such agreements underscores the financial stress faced by a burgeoning percentage of the North American supply chain. No vendor would sign such an agreement unless it absolutely had to. But signing such an agreement still could bring financial stability and avoid a bankruptcy. “The untold story of these agreements,” says restructuring expert Kenneth Dalto of Kenneth J. Dalto Associates in Farmington Hills, “is that they have stabilized the otherwise shaky financial structure among smaller suppliers.” While other industries such as steel, airlines and coal mining have had their own financial crises, only automakers have demanded right-of-access agreements from suppliers. The National Association of Manufacturers, which tracks nearly two dozen industrial sectors, has never seen anything like right-of-access, association spokesman Hank Cox says. It is the auto industry’s just-in-time inventory system that raises the stakes. Even a small supplier can cause a crisis if it can’t maintain daily deliveries of key parts. A factory takeover can be triggered by events such as a supplier’s quality problems, delivery delays, a Chapter 11 filing or a foreclosure by the supplier’s bank. In 2003, GM was worried about the impending collapse of plastic-trim supplier Venture Industries Corp., then in Chapter 11 reorganization and a key supplier for the Pontiac G6. GM’s lawyers had negotiated a right-of-access agreement, but the automaker never pulled the trigger. GM instead chose to go to court. The bankruptcy court approved GM’s request to allow Plastech Engineered Products Inc. to produce parts instead of Venture. Right-of-access “is an ace in your hand,” says a source familiar with the event, “but you never want to use it.” It’s rare for anyone to invoke right of access because of the liability they could assume through the seizure of a supplier plant, says workout specialist John Groustra. The automaker could effectively become the legally recognized employer and in some cases could be construed as a guarantor of the supplier’s debts, says Groustra, a partner with the firm Conway MacKenzie & Dunleavy of Birmingham. Right-of-access agreements allow an automaker to take over the supplier’s factory and operate it to assure a continuing supply of parts. The agreement is secured by a lien on the supplier’s assets. Suppliers can refuse to grant an access agreement, says Dalto. But automakers can entice them with a financial carrot called an “accommodation agreement.” Agree to the right-of-access, and the supplier can get loans, prepayment for parts and other help. For example, Visteon was willing to provide financial help to a struggling supplier in 2002. A draft of a 13-page accommodation agreement obtained by Automotive News required that supplier to accept an access agreement with Visteon. A Visteon spokeswoman confirmed that the company has signed a “small number” of such agreements, but she could not confirm that the draft agreement from 2002 was signed because she had not seen it. She said execution of such agreements is rare. “We would only consider such actions when a supplier has defaulted under its contracts, forcing us to assist them to maintain supply of parts,” Visteon spokeswoman Kimberly Goode wrote in an e-mail response to questions. Lindsay Chappell and David Barkholz contributed to this report. From Automotive News |
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