industry-specific regulation. Jodi Bartle reports on
the pressures facing TI Automotive
Three years ago, TI Automotive was spun off from its newly-formed parent company Smiths Group when Smiths decided it wanted out of the automobile industry. Smiths Industries, an aerospace and medical devices group, had acquired its rival TI Group, largely to the dismay of its shareholders. TI’s automotive focus was not part of Smiths’ overarching gameplan and so Smiths demerged TI, retaining just under a 20 per cent share. Undaunted, the Oxford-based company picked itself up and last year boasted operating profits of £74m. The company, which produces braking and fuel systems, claims that 57 million cars produced each year rely on its technology.
Things were not always so rosy, however. As a result of the demerger in 2001, TI Group’s head office function decamped and TI was left with no internal legal and managerial infrastructure. “TI’s automotive management team suddenly became the management team of a fledgling independent new organisation,” says David Ludlow, director of legal affairs for Europe and Asia-Pacific.
Ludlow joined TI from an in-house position at piston ring maker T&N after beginning his career at Edwards Geldard. At T&N, Ludlow met Tim Guerriero, now company secretary, general counsel and main board director, at TI. Ludlow decided to join Guerriero, and now reports to him in the US.
“As Tim Guerriero says, our legal department is ‘famished’,” says Ludlow. “As such, we have a high dependency on external counsel, especially for work outside the UK, although we do a lot internally. We have a hands-on practical and pragmatic approach. There’s no ivory tower. I think of us in the legal department as being businessmen who have legal training. We provide solutions to a problem and are involved at an early stage. We’re not really seen as a separate legal department but as a part of the business.”
TI is divided into three major divisions: a fuel systems group, accounting for approximately 85 per cent of turnover, a fluid carrying systems group and an industrial group. Ludlow says the most difficult issues facing the industry are safety and environmental. “Things are becoming increasingly onerous from that point of view,” he says. He points specifically to the US Transportation Recall Enhancement Accountability and Document Act (the Tread Act), a far-reaching piece of legislation that dictates whether there is an obligation to make disclosure to the US authorities if a product on sale in the US fails anywhere in the world. When your main business is supplying to the big names of the automobile industry, this obligation takes on heavy legal significance.
The Tread Act emerged as a direct result of the Ford Firestone recall of 2001, which saw Ford lose $3bn (£1.67bn) – half of its projected profit for 2001. In that case, 13 million tyres were recalled after it was discovered that Firestone tyres on the Ford Explorer were blowing out, leading to accidents, vehicle rollovers, injuries and some fatalities.
Further obligations weighing heavily on the industry spring from environmental concerns. The recently introduced End of Life Vehicles (ELV) Directive 2003 is an attempt to get car manufacturers that sell in Europe to take back cars at the end of their lifecycle and recycle a high percentage of the materials used to make them. The directive was put in place in order to help eliminate Chrome 6, a widely-used, highly corrosion-resistant compound that is also an extremely harmful pollutant that can cause nose ulcers and cancer. The directive puts an onus on suppliers to guarantee Chrome 6–free surfaces. Suppliers have to have confidence that the current metal finishers are aware of the obligations contained in the directive and are acting on it in an appropriate and positive manner.
“Our customers need to know that products don’t have these substances. We use the International Materials Data System [IMDS], a reporting mechanism set up to help coordinate the exchange of material information down the supply chain – but, of course, this introduces confidentiality issues. Some of the information we have to report is actually useful to competitors – but our main concern is to avoid liability for inaccurate information from our own suppliers. Luckily, TI has a very good research and development department that looks into these regulatory issues,” Ludlow says.
The legal team faces a constant battle to balance the safety issues, which Ludlow says are “always at the foremost of our minds”, with the pressure from customers to keep prices down. With powerful companies as customers, such as Ford, General Motors and DaimlerChrysler, TI has its work cut out.
“This is such a competitive industry and customers have incredible power,” explains Ludlow. “On the recall side, customers are facing significant legal risk, which they want to offload to their suppliers – and margins are always tight. In this industry, if you stand still then you’re as good as gone. We have to be running hard to be sure we’re profitable and always need to find ways to reduce costs. Car companies are aggressive and successful in reducing material costs.” He says that this pressure means TI has to be clever in more ways with less funds. “We don’t have the largesse of larger legal departments and, as such, it’s difficult to justify extra legal help.”
Globally, TI works with external firms on a two-tier system, working with a big firm on corporate issues and a local firm on the smaller ones. “Allen & Overy were used by the TI Group for corporate work, but on demerger the management appointed Lovells,” says Ludlow. “They remain our main legal supplier for big ticket work. We use them significantly and make the most of their international network. The firm offers us a first-rate service – we work primarily with Marco Compagnoni, who’s seen as a very important adviser to the board.”
Lovells recently worked with TI on an international transaction involving the sale of TI’s Asia-Pacific refrigeration business in Australia, New Zealand and China, together with the capital reduction and sale of part of the company’s shareholding in an existing joint venture in Korea. The transaction included: the purchase of a controlling interest in a Korean company and an internal reorganisation which allowed the sale to proceed; call option agreements; new joint venture agreements for the business acquired and the existing joint venture; trademark agreements; and a supply agreement. Ludlow says the work was undertaken largely in-house, with added help from a third-year Lovells secondee. It also used Lovells Hong Kong for advice on Chinese law and firms Shin & Kim for Korean law advice, Blake Dawson Waldron in Australia and Buddle Findlay in New Zealand.
Leeds-based Lupton Fawcett is used on lower-profile work, where, Ludlow says, “we get great partner access”. TI works with litigation partner Paul Houghton and employment lawyer Louise Bland on employee disputes and property-related matters – work that would be too expensive to outsource in London. In Cologne, TI works with Linklaters on commercial matters. “We’re completing a European review that I instigated in an attempt to minimise the number of legal suppliers we use in order to get economies of scale. I’ve gone through territory by territory, and Spain’s next,” he says.
Ludlow is responsible for general legal work throughout Europe and Asia, is a pensions trustee and forms part of TI’s insurance and risk group. “My work covers the whole gambit: employment, litigation,
risk management, corporate work and acquisitions,” he says. Additionally, he looks after the drafting of terms and conditions, confidentiality and warranty issues, treasury, tax and banking. “With that sort of brief,” says Ludlow, “I have to work very quickly.”
Head of legal
|Employees||22,000 in 22 countries|
|Head of legal||David Ludlow|
|Reporting to||Company secretary and general counsel Tim Gueirrero|
|Main law firms||Lovells and Lupton Fawcett|