Relocating production to a new supplier: Legal challenges in the supply chain (upstream and downstream)

Global industrial value chains are under great pressure to adapt. This is due to a variety of factors, including geopolitical conflicts and uncertainties, trade disputes and government incentives, restructurings, plant closures, and strategic realignments — for example, in the context of the electrification of the powertrain in the automotive industry. Against this backdrop, companies are reconsidering how they utilise and distribute their production sites and supply chains and are relocating production.

Outsourcing ongoing series production to a supplier or transferring it from one supplier to another is a complex task, also from a legal perspective. A key objective of all parties involved is to avoid interruptions or delays in the supply chain and to maintain continuous production quality. From a legal perspective, negotiations often centre on how to address the risk of delays when relocating and restarting production, and the extent to which the new supplier should be liable for defects in the parts produced, especially if they are to adopt a specific product design or certain production processes. Finding fair and appropriate solutions is usually challenging. Additionally, numerous other points need to be negotiated between the previous supplier, the future supplier and the customer within their respective legal relationships. 

A key element that is frequently disregarded, despite its substantial importance in relocating production smoothly, is the effective management of contracts with sub-suppliers, meaning the existing supplier base for the production that is set to be relocated. In case of doubt and unless otherwise agreed, the new supplier bears the risk of (sub-)supplier management regarding agreed delivery quantities and dates and regarding its calculated production costs. Legally, however, sub-supplier contracts are not 'attached' to the production line; they are in place with the previous supplier and are not automatically transferred to the new supplier when production facilities are transferred individually. Also, the previous supplier cannot simply 'assign' the contracts with its sub-suppliers to the new supplier. Instead, the consent of each individual sub-supplier is required for the contracts to be transferred. This can lead to difficult and time-consuming negotiations if sub-suppliers make their consent dependent on favourable contractual conditions being retained, and on disadvantageous conditions, particularly prices and price adjustment mechanisms, being renegotiated. While solutions can be found for these legal risks and challenges, they should be considered well in advance of executing the contract for the relocation of the production and the new supplier undertaking specific delivery obligations.

Given our extensive project experience, we are happy to support you in all legal aspects of production relocation, whether you require assistance with the implementation of a project or wish to include relevant 'opening clauses' in contracts with your suppliers in preparation for any future relocations. Please feel free to contact our team!