Pay the supplier who tells you first

In every vehicle company I have worked for, the supplier quality agreement rested on the same principle. If a supplier's part is defective, the supplier pays: for the parts, for sorting stock at our plant, for the labour of repair, for any recall and often for a share of the disruption to production. The principle sounds like accountability. For most of my career I enforced it, first as a supplier's quality engineer on the receiving end and later as the joint-venture director who signed the chargeback letters.

I now think the principle, applied without distinction, makes vehicles less safe. It treats a supplier that discovers a problem and tells us exactly like one that discovers a problem and hopes nobody will notice. Both pay the same. In practice the second sometimes pays nothing, because the problem is never traced back to it.

Chargebacks teach silence

Consider a quality manager at a tier-one supplier who finds, on a Tuesday afternoon, that a batch shipped last week may be defective. Perhaps a moulding machine's temperature controller drifted; perhaps a sub-supplier changed a resin without notice. The parts are already at our plant and some are already fitted to vans. If she telephones us, her company will pay for containment, sorting and possibly a field action, and she will spend the next month explaining why her controls failed. If she says nothing, there is a fair chance the defect never shows, or shows in a way nobody can trace to that batch.

I was that quality manager once, at a brake supplier in Zhuzhou, and I telephoned. My managing director stood behind me, but I remember the calculation everyone in the room was making. Not every supplier has a managing director who would make the same choice, least of all after two years of being asked for annual price reductions.

The price war in China's vehicle industry has made this worse. Carmakers under margin pressure have asked suppliers for repeated price cuts and, until public commitments in 2025 to pay suppliers more promptly, had stretched payment terms as well. A supplier squeezed on price and cash has fewer engineers, thinner inspection and a stronger incentive to keep quiet. A full chargeback policy applied to that supplier raises the price of honesty at exactly the moment honesty is worth most.

What we changed after the recall

Our own lesson came in July 2023, when one of our vans caught fire while charging at a customer's depot. The cause was a batch of high-voltage connector housings with internal voids. Our harness supplier had not known. Its moulding sub-supplier had seen unusual scrap on that batch and said nothing. We recalled 7,900 vans at a cost of RMB 64 million, and the harness supplier bore 60 per cent of it.

Afterwards we rewrote our supplier quality agreement around one distinction: who found the problem first. If a supplier reports a suspected escape before it reaches us, or before we detect it ourselves, the cost of containment and repair is shared, normally in equal parts, and the event does not count against the supplier in that year's sourcing decisions. If we find the escape first, or a customer does, the supplier pays in full as before and its rating falls. Concealment, where we can show it, ends the relationship.

We asked for something in return. Suppliers of high-voltage and safety-critical parts now share lot-level process data with us, such as moulding temperatures, weld currents and test results, instead of a certificate of conformity. That gives our engineers a chance to see drift for themselves, and it gives the supplier's quality manager evidence to support her telephone call.

The results after two and a half years are encouraging but not conclusive. Supplier-initiated reports of suspected escapes rose from 9 in 2022 to 64 in 2025. Most proved minor and several were false alarms, which is what an honest reporting system ought to produce. Incoming defects across our 410 production suppliers fell from 186 to 61 parts per million over the same period, and high-voltage connector failures in the field fell from 41 to 5 per million. I cannot prove how much of that came from the agreement rather than from X-ray inspection and better data, and I would distrust anyone who claimed to know.

Where the reward stops

The obvious objection is that we are subsidising poor quality. Our procurement director made it forcefully: a supplier that pays only half when it confesses has less reason to prevent defects in the first place. I accept the point, and the agreement has limits to meet it. Sharing applies only to the first event of its kind in a year; a repeated failure from the same cause is charged in full. Ratings still reflect defect rates, so a supplier that reports often because it fails often will lose business. And the reward is for timing alone. A supplier that reports early but contains badly pays for the share of the damage its poor containment caused. We review these rules each year with the twenty suppliers who report most often, and two of the limits above came from their suggestions rather than ours.

A second objection is commercial: sharing costs means we pay more for quality failures. In 2025 our share of supplier-reported events came to about RMB 7 million. Set against one recall that cost RMB 64 million and roughly 1,100 lost orders, I regard that as an inexpensive form of insurance.

The third objection is cultural, and it matters most. Some of my own engineers felt the new agreement made them look soft in front of suppliers. A chargeback letter is a satisfying thing to sign. Yet the people who gain most from early disclosure are our engineers, because a problem reported on a Tuesday afternoon is contained by Thursday, while one discovered by a customer can take months and a public notice to resolve.

My recommendation to other operating chiefs is simple. Read your quality agreement and ask whether it charges a supplier that tells you more, less or the same as one that does not. If the answer is the same, you are paying for silence, and silence is what you will receive.