Smaller car makers face squeeze from China's 'lemon law'

Mon Sep 30, 2013 7:32pm EDT
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By Norihiko Shirouzu and Samuel Shen

BEIJING (Reuters) - A beefed-up vehicle warranty law that takes effect in China on Tuesday is unlikely to burden global automakers, but will likely raise costs for smaller local players that may add to pressure for eventual consolidation in China's fragmented car industry.

The new "lemon law" gives Chinese consumers nearly as much protection as enjoyed by their counterparts in the United States to obtain free repair of faults or replacement of defective vehicles.

Big global manufacturers such as General Motors Corp (GM.N: Quote) or Toyota Motor Corp (7203.T: Quote) are well-equipped to take the regulations, which are no more stringent than those they already face in their home or international markets, in their strides.

But for some indigenous players, especially smaller, little-known car makers with less rigorous quality control, the tougher requirements could sharply increase warranty-related costs.

"This will add pressure on many low-quality local brands in 2015 onwards," said Jeff Chung, a Hong Kong-based analyst with Daiwa Securities, adding warranty costs could double for some.

"I do not see this new regulation driving those smaller and weaker players into the ground in the next 12 months, but yes, they could be in trouble longer-term because industry consolidation is the ultimate goal for the central government."

China has more than 70 registered automakers, most competing for just a thin sliver of the world's biggest car market. Many are already feeling the pressure from a slowing economy and tougher fuel economy requirements due to be implemented.

As in other manufacturing industries, such as steelmaking and shipbuilding, policymakers in Beijing are trying to encourage automakers to merge and combine operations to create bigger and more globally competitive homegrown firms.   Continued...

Employees work along a Geely Automobile Corporation assembly line in Cixi, Zhejiang province in this June 21, 2012 file photo. REUTERS/Carlos Barria/Files