GM's Planned Cuts Require Action by Its Suppliers

In the face of what General Motors’ CEO Mary Barra calls a “fast-changing market,” this week General Motors announced its plans to end the production of certain vehicles, reduce its North American work force by more than 10%, and idle five plants in the United States and Canada. General Motors also announced that it plans to cease operations at two additional (but not yet identified) plants outside of North America by the end of 2019. The moves are intended to save General Motors $6 billion by the end of 2020. While the market reacted positively to the news — shares in General Motors were up 4.8% to close at their highest closing price in recent months — this action by General Motors will no doubt have an impact on its suppliers, as well as sub-suppliers within its supply chain.

Barra made the announcement Monday, which was followed later that day by a “Supplier Notice” sent by General Motors to its many suppliers. In that communication, General Motors said that it was “continuing to take proactive steps to strengthen our overall business performance and become more agile, resilient and profitable, while the company and economy are still strong.” In order to do that, the company plans to align its manufacturing capacity with market demand. This action by General Motors comes in the face of a slow-down in new car sales, shifts in consumer demand for pickup trucks and sport utilities instead of smaller vehicles, and increased focus by General Motors on electric vehicles and self-driving technology. “In addition to dealing with capacity and leverage challenges, we are expecting suppliers to face a softening of volumes over the next 18 months. Furthermore, transformation of the existing production capabilities to those suited for alternative vehicles will be a key challenge,” according to Laura Marcero, industrial practice leader and head of the Detroit office for Huron Consulting Group.

Approximately 3,300 production workers in the United States, and approximately 2,500 production workers in Canada, are expected to be affected. In addition, General Motors plans to reduce its salaried staff by approximately 8,000 (only 2,250 of its white collar workers recently accepted a voluntary buyout, so additional cuts must be made to reach the 8,000 target). By the end of 2019, General Motors plans to idle three assembly plants — Detroit-Hamtramck, Lordstown (Ohio), and Oshawa (Ontario). In addition, General Motors plans to idle two propulsion plants — Baltimore Operations (Maryland) and Warren Transmission Operations (Michigan).

General Motors’ announcement to its suppliers includes the following specifics regarding affected programs and end of production dates:

Importantly for suppliers, General Motors announced that any “applicable claims” should be submitted within 90 days. These include termination and due diligence claims, and obsolescence or prototype. For example, termination claims apply where a supplier has not yet shipped parts to General Motors but has incurred development costs. Due diligence claims involve suppliers affected by the acceleration of volumes and the end date for production. Both allow suppliers to pursue recovery of certain development costs such as tooling and ED&D. Suppliers also may submit obsolescence claims to recover for inventory and WIP through General Motors’ standard procedures for submitting an obsolescence claim.

General Motors’ requirements for the submission of claims are extensive, and may be subject to specific terms of the supplier’s contract with General Motors. Suppliers also should review their agreements with affected sub-tier and material suppliers to ensure compliance with any notice and termination requirements, as well as other obligations such as union contracts, leases, and other contracts that may be impacted by the closures.  The resolution of submitted claims is often the result of extensive negotiations between General Motors, its suppliers, and affected sub-suppliers.