Lemon law may squeeze small carmakers

A beefed-up vehicle warranty law that takes effect in China on Tuesday is unlikely to burden global carmakers but will likely raise costs for smaller local players that may add to pressure for eventual consolidation in the country’s fragmented car industry.

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

Big global manufacturers such as General Motors or Toyota Motor are well-equipped to take the regulations – no more stringent than those they already face in their home or international markets – in their stride.

But for some indigenous players, especially smaller, little-known carmakers 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. He said 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.”