Protection In Question

The chief of purchasing at General Motors Corp. would like to guarantee that a supplier's intellectual property is safe with his company, but he can't.

Bo Andersson's global organization has about 4,000 employees, and he has taken disciplinary action in the past against buyers who violated confidentiality agreements with suppliers over technology.

He and Jim Queen, GM's vice president-North American engineering, have put their organizations on notice that compromising suppliers' IP will not be tolerated. Still, Andersson knows GM must do better if it expects parts producers to offer up their latest, most innovative technologies.

To eliminate potential problems, Andersson has some advice for suppliers with technology that's ready for production: Take the time to get it patented.

“If they come to us and say, ‘We'll give you this,’ it's very, very hard for us to make sure that no one else is dipping into their technology,” Andersson tells Ward's. “Since it's hard for us to guarantee in a large organization that we will protect their technology, it's not a disadvantage if it's patented to make it much more simple.”

This blunt admission contrasts with the early 1990s, when GM's purchasing chief, Inaki Lopez, was known to shop product data to other suppliers, hoping to get the same goods for a lower price. Andersson knows this dark legacy is hard to bury.

“There is a lot of cocktail talk that if you bring technology to GM, they will not honor it,” he says. “If there are cases, we investigate them. If something was done wrong, we make the decisions and say we cannot tolerate that because it's against our policy.”

The 29th Annual Ward's Supplier Survey confirms IP protection remains a sensitive topic, and that the U.S. auto industry need not look only to China for violations.

More than 28% of 447 supplier respondents to the survey, conducted this spring, say their companies' IP has been compromised by at least one Detroit auto maker within the past five years, and nearly 60% say their companies have been involved in a component pricing dispute with Detroit within the last two years.

Ward's readers participating in the survey from the OEM ranks admit there's a problem. “The drive for low cost blinds us all to innovation,” an OEM participant writes. “Only innovations that save money are taken.”

“What Detroit has done to their suppliers is sad,” another OEM participant writes. “Years of greed and contention have finally taken their toll and it's hurting the entire industry.”

Supplier participants in the survey hold little back. “Domestic OEMs typically leverage discussions around suppliers' innovations and then ask them to spec the innovation,” a respondent writes. “Once done, they plagiarize the supplier-provided specification to various other suppliers in an attempt to beat down the price.”

“They all say they will pay for new innovations, however, then they proceed to hammer you on the costs,” another supplier writes. “They all want the innovation without paying for it.”

Bernd Bohr, chairman of Robert Bosch GmbH, the world's largest auto-parts producer, did not participate in the survey but in a recent interview with Ward's, he does not dodge the question about the safety of intellectual property.

“We see some negative trends in the U.S. as far as terms and conditions are concerned,” Bohr says, referring to the language, generally drafted by auto makers, that govern parts contracts and are heavily skewed in favor of OEMs.

“There are no examples where I can say, ‘IP went away.’ But if I take the terms and conditions just by the words and sentences that are written, the IP protection is rather marginal.”

In 2006, Bosch spent more than €2.5 billion ($3.4 billion) on research and development for new products, equal to about 10% of Bosch's €27.2 billion ($37.4 billion) in automotive sales.

“We are investing more in the future, and the industry expects us to do this. Not everyone is doing this,” Bohr says. “So if you're not protecting the guys who are actually investing and paying big dollars into R&D, something will change.”

The Original Equipment Suppliers Assn. drafted its own model terms and conditions in 2004 to afford more protections for parts producers, but Detroit's Big Three balked.

Ford Motor Co.'s terms and conditions say any part designed or modified by a supplier for vehicle applications must grant Ford a permanent paid-up non-exclusive worldwide license. That essentially enables Ford to shop designs to other suppliers, hoping for a better deal.

With its model terms and conditions, OESA wants to build in some compensation, so a supplier is rewarded for creating IP, even if the supplier must surrender it to an OEM.

This fall, an OESA committee is revisiting the model terms and conditions and will encourage suppliers to adopt them.

Although Andersson admits IP protection is a problem, his colleagues at competitors Ford and Chrysler Group see less of an issue.

“We ensure that everyone at Ford has a good understanding of the needs to protect a supplier's intellectual property,” Andrew Hinkly, Ford's executive director-Americas production purchasing operations, tells Ward's.

“We have a general education program, which is Web-based, but everyone at Ford that is dealing with a supplier is required to go through it. Where there have been issues, clearly we investigate them and make sure appropriate actions are taken to address any IP concerns.”

Robert Schott, vice president-procurement for Chrysler, says protection of a supplier's IP “is a fundamental black-and-white ethical issue. We will not and do not practice giving other suppliers' technology to their competition or to any other supplier. That's not the way we operate.”

He says Chrysler has never had to take disciplinary action against an employee who violated a supplier's IP rights, and that the issue occasionally surfaces in supplier town hall meetings. Each time, Chrysler reiterates the company policy of no tolerance.

“We do the best we can from a policy stance to make sure that's enforced,” Schott says. “It's an integrity issue.”

Although survey respondents identify Detroit's handling of IP as occasionally problematic, they say other auto makers are not immune, either.

About 16% of supplier respondents say at least one transplant auto maker in North America has compromised its IP within the past five years.

The number is surprisingly high, given the general perception that Japanese OEMs operating here are much more collaborative with suppliers, less focused on price and more willing to compensate for innovation.