Top legal issues facing the automotive industry
With the rise of sustainability regulations facilitating more interest in electric and hybrid cars, and against the backdrop of trade wars and rising tariffs, the global automotive industry is seemingly at a crossroads in 2019.
The global automotive industry recovered impressively from the impacts of the 2008 financial crisis, and after eight years of sustained improvement, the sector saw record-breaking revenues for both carmakers and suppliers in 2017.
Now, though, the old ways of manufacturing and designing are going out of favor with consumers at the same time regulators are getting stricter and more fearsome. The US threat of a 25% tariff on cars on national security grounds, combined with the continued uncertainty over Brexit and slowing growth in China, is impacting the automotive industry across the world.
Deloitte’s annual Global Automotive Consumer Study – which has explored consumers’ changing automotive expectations and the evolving mobility ecosystem since 2009 – this year found that consumer trust in autonomous vehicles was stalling, failing to keep pace with the level of investment in the sector, while consumers are increasingly interested in electric vehicles. Consumers are also looking to governments to increase regulation in the automotive industry, with an overwhelming percentage of consumers in most countries indicating they want “significant oversight” of the sector.
So, with consumers crying for more regulation, and with governments looking to get more tax revenue in the doors, the automotive industry is facing a mounting compliance challenge. In this article, we’ll explore some of the top legal issues facing the automotive industry and how the sector could mitigate some of those risks.
Tariffs and other tax challenges
You can’t escape the news that the US is mounting a protectionist-driven trade war based around tariffs – a war that has seen global manufacturing take a hit this year. Germany, the UK, Japan, South Korea and even the US itself have all posted declines in manufacturing over the summer.
The figures have come after President Donald Trump’s newest round of tariffs kicked in, affecting billions of dollars’ worth of consumer goods. And a slumping US economy will likely lead to issues in most manufacturing sectors, including the automotive industry.
It’s not just domestic US manufacturing that’s under threat here. Europe’s largest economy, Germany – also a big player in the automotive industry, and home to Audi, BMW, Volkswagen, Mercedes-Benz and Porsche – has not only faced tariff wars, but is also dealing with the uncertainty of Brexit hanging over the continent. In Asia, Japan – home to the likes of Toyota, Honda, Nissan, Mazda, Subaru and Mitsubishi – is also trying to work out how to deal with the threat of a 25% tariff on imports into the US. Local manufacturers have warned about the damaging impact of imposing tariffs on imported cars and parts, and share prices have been volatile across the automotive industry as a result.
A study by the Ifo Institute for Economic Research in Germany estimates that imports to the US would drop dramatically if an additional 25% tariff were imposed. And the uncertainty over the tariff’s start date is creating headaches across the board, with organizations unable to plan output with any certainty or to take measures to mitigate the risk of a downward trend in the automotive industry.
The environment and automotive industry manufacturing
While the threat of tariffs is causing short-term volatility, the automotive industry is facing another more long-term top legal issue: that of environmental regulation. Lawmakers are making fuel efficiency a higher priority, with a set of national standards called the Corporate Average Fuel Economy (CAFE) in place since the 1970s getting a recent upgrade to increase fuel efficiency goals.
Car makers also face increasing scrutiny of emissions laws. It takes a lot of research and development money to test and mass produce emissions-limiting devices – organizations often set up a specific entity to separate R&D in the subsidiary structure. Plus, the automotive industry in Europe is not just facing regulation around the end product, but also the manufacturing process itself; the EU Industrial Emissions Directive seeks to regulate pollutant emissions from industrial installations, which means entity managers on the Continent must work with teams keeping track of both production processes and the environmental and sustainability impact of the production itself.
Entity management in an increasingly complex regulatory environment
Automotive industry players are likely to have a subsidiary structure set up to make a complex supply chain and a desire to import and export easier to manage. It’s also possible that this subsidiary structure will have established entities in jurisdictions considered tax-friendly for international businesses, which, while good for the bottom line, can be a burden for compliance teams.
Free trade and global supply chains make production more efficient and cost-effective, but it also exposes an organization to an ever-increasing set of regulations with which they must comply. For example, manufacturers must know the ultimate source of every component that goes into their product, in case conflict minerals are included in sourcing or the ultimate beneficial owner of a supplier is questionable.
When an organization is facing mounting regulatory challenges and an increasing tax burden, it’s essential that it keeps on top of its entities to ensure all things are operating as they should. Keeping all the plates (or hubcaps) spinning can be time-consuming on its own, without the additional challenge of watching the markets for tariff increases, new sustainability measures and the ever-encroaching commercial threat of autonomous vehicles.
Under these circumstances, it makes sense for any player in the automotive industry to manage its compliance through entity management software. Such software helps a compliance team to centralize, manage and effectively structure the corporate record, creating a single source of truth for all entity-related information. This helps to improve entity governance by better ensuring compliance, mitigating risk and improving decision-making, as everyone in the business is looking at the same data.
Entity management software, such as Diligent Entities, acts as a central repository for entity information, documents and organizational charts, which helps the company secretary, general counsel and related compliance managers to visualize the entire subsidiary structure and see any gaps or potential challenges before they become major issues. Compliance calendars, reminders and workflows help to ensure better, more accurate data, while the highly secure cloud-based platform helps to surface the right information to the right people at the right time in order to complete routine business processes.
To manage the increasingly complex corporate governance ecosystem, Diligent Entities seamlessly integrates with Diligent Boards and a secure file-sharing platform, enabling legal operations in the automotive sector to have the full picture from end to end.
Get in touch and schedule a demo to see how Diligent’s suite of compliance and governance platforms can help the automotive industry to manage the sector’s top legal issues.