Welcome to the newest edition of Foley’s MarketTrends newsletter. In this issue, we focus on key legal issues facing the Automotive and Manufacturing industries in 2020.
Given the value of developing new technologies and the capital requirements to fund them, it is likely that 2020 will bring an increasing number of partnerships and joint ventures—in addition to outright mergers or acquisitions. However, just like M&A, these alternatives offer benefits and challenges that need careful consideration if the arrangement is to be successful.1
Some of the primary legal components to keep in mind:
Keep in mind that there are different types of contracts for each type of partnership—one size does NOT fit all. Provisions will vary depending on a variety of factors, including who has the most leverage and what each party brings to the table. Remember: contracts should pave the way for a successful business relationship; always consult your lawyer before finalizing any agreement.
Navigating Tariffs and Trade Wars
Tariffs are an increasingly important part of the supply chain landscape for manufacturing companies, including automotive suppliers. One way to reduce tariff risk is to apply for exclusions for the product your company wants to import. Currently, only 1-2% of such applications are being granted. To properly classify your import, it is crucial to know your product, its components, the sources of each component, and the process and location of production.
Another potential strategy is to ‘substantially transform’ your product by changing its country of origin to a more tariff-favorable destination. If possible, businesses may then be able to change its sources of supply to those in jurisdictions not subject to tariffs.
What can businesses do if they do not qualify for exclusions and cannot avoid regulation? Everything must be done in conjunction with current contracts, so looking at what these contracts allow is important. If you have a supply chain dispute, how will issues relating to tariffs play out in litigation? Specifically, courts have determined that increased tariff costs are not a force majeure event because tariffs do not make contractual performance impossible—just more expensive. Can being subject to tariffs be claimed as commercial impracticability under section 2-615(a) of the Uniform Commercial Code? The answer is likely that, in today’s political climate, potential tariffs are very much contemplated by the parties; thus, commercial impracticability is increasingly difficult to prove. It is important to note that both force majeure and the doctrine of commercial impracticability serve only to excuse performance—not facilitate a price increase negotiation.3
To summarize, here are some Supply Chain best practices for managing tariff risk:
Foley and Huron Consulting Group hosted a “2020 Automotive Update: State of the Market, Cost Recovery, and Market Disruption Opportunities” program on Tuesday, February 4th featuring keynote speaker Michael Robinet, Executive Director, IHS Markit Automotive Advisory. Michael reported on the current and projected state of the automotive industry as it faces some of the greatest challenges of our time. Whether driven by autonomous and electric-powered vehicles, slowing demand, or other external forces, the industry is expected to undergo change which will affect suppliers in 2020. Foley and Huron discussed how these changes would impact warranty claims and cost recovery, as well as the commercial and investment opportunities presented by a distressed business environment.
For an in-depth analysis of The Top Legal Issues Facing the Automotive Industry in 2020, Foley’s Automotive Industry Team has prepared a comprehensive report examining what the legal landscape is likely to look like in 2020 and beyond.
2 Legal Safeguards (and Potential Pitfalls) in Joint Development Relationships, Foley & Lardner – OESA Program May 2019
3 Foley & Lardner LLP and Association of Corporate Counsel Program, November 2019