VIEWPOINT | Post-2009 Strategies for the Auto Industry

The North American automobile industry is beginning to emerge from perhaps its biggest crisis ever. But it won't be a return to business as normal. Profound changes were unleashed in 2009, and they will continue to ripple through the industry for years. To thrive, companies must continue to be proactive. In many cases, the issues facing companies in the industry's traditional Midwest base are very different than those in the "new auto industry" of the South.

Dickinson Wright PLLC provides broad legal counsel for more than 200 automotive clients in both regions from its offices in Detroit, Bloomfield Hills, Grand Rapids, Lansing and Ann Arbor, Mich., Washington, D.C., Nashville, Phoenix and Toronto. The firm has an exceptional understanding of the regional and regulatory issues impacting the industry. Its automotive practice is led by Jim Plemmons. He and several members of his team describe issues facing carmakers and their suppliers in the new year and beyond.

What is the single most important thing for the industry to know this year?

Nobody should assume the worst is over. We will have as challenging a 2010 as what we saw in 2009. Restructurings of suppliers' capacity (decreases) and cost effectiveness (increases) remain to be completed this year and next.

Today's economic conditions continue to push the auto industry to focus on weak processes that have hurt them. Companies are becoming more sophisticated about the legal side of their business, and they want support in many areas beyond consolidation, workouts and liquidation.

Which are the biggest changes to come out of last year's crisis?

Government involvement is certainly one of them. The massive loans Washington made to the industry resulted in much more government monitoring, and it has raised questions about how the government will influence the industry in the future.

Taxes are another big issue. Clients are searching for tax breaks, not just ways to plan future tax liabilities. Washington, D.C.- and Detroit-based Dickinson Wright tax expert Will Elwood recently won a major decision in this area concerning the use of R&D tax credits on tooling manufactured and sold to an OEM. Many large accounting firms were telling clients not to claim tax credits on these items, but the new ruling means there is an opportunity for suppliers to file a refund claim.

Intellectual property issues, which have been somewhat ignored while companies struggled with larger economic challenges, are back. Dickinson Wright IP expert Rick Jones is seeing a significant increase in due diligence in this area among companies that use mergers and acquisitions to gain technology. There is more "patent mapping" checking to see which patents are truly owned by a target for acquisition. Dickinson Wright also helps buyers determine if the technology they seek from another company was developed with government funds. If so, the ability of the acquiring company to capitalize on it may be limited.

International trade issues are another growing area, especially for smaller suppliers who are being pushed to go global. Dickinson Wright international automotive trade and customs expert Bruce Thelen gives an example that an assembly made in Mexico could be treated as Chinese if it contains components from China that define the essential character' of the final product. We help companies make smart sourcing decisions that can help avoid high tariffs and take advantage of NAFTA and other preferential trade arrangements.

What issues are especially big in the South?

The carmakers in the South are relatively recent arrivals, and some of the issues that northern companies have dealt with for years are new to them. Dickinson Wright Nashville-based automotive attorney Kim Stagg notes that OEMs and their suppliers are making new investments in the South. They want to make prudent investments, and they want to make sure they have processes in place now to avoid problems later.

The traditional Big Three carmaker supply base has become expert in dealing with such issues as Chapter 11 and "363" sales, Stagg continues. However, these are newer experiences for many companies and OEMs in the South. Not long ago a carmaker or tier one supplier rarely did much financial due diligence on a supplier that bid on a contract. It has become commonplace in the North and even with certain new domestic OEMs, but many suppliers in the South are just setting up those processes now.

Similarly, Dickinson Wright automotive contract expert Roger Cummings says suppliers are focusing on avoiding gaps between the terms of their purchase contracts with lower-tier suppliers and the terms they have with their own customers. This includes everything from indemnification and IP rights to contract duration and pricing adjustments.

Has M&A activity peaked in the auto industry?

Volume remains high, but it doesn't get as much publicity. Companies are definitely cherry-picking facilities because there are so many plants and other assets on the market. There is significant shifting of machinery from unstable to stable suppliers, for example, but it's mostly behind the scene. There has been a major upswing in stronger tier one and tier two suppliers doing this in the past six months.

To learn more about Dickinson Wright's automotive practice, please contact Jim Plemmons in Detroit at (313) 223-3106 or e-mail jplemmons@dickinsonwright.com.