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New China warranty law may hurt small car makers

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Small Chinese auto manufacturers are likely to feel the stress from a new, stricter warranty law that is being introduced by the Beijing government.

Reuters reports that the new laws, which concern safety issues, will give consumers almost as much protection as consumers here in Australia or in other Western countries.

As a result of these beefed up regulations, it is likely that many of China’s 70-plus registered auto makers will feel the stress of rising costs. The result will be consolidation of the fragmented industry.

Such small manufacturers and dealers currently have no obligation to buy back or replace cars with safety defects such as faulty steering or brakes. And these companies are already feeling the pressure from a slowing economy and tougher fuel economy requirements which are due to be implemented.

In contrast, global manufacturers such as Toyota and General Motors are unlikely to be too worried about the new regulations. This is due to the fact that they already face such laws elsewhere in the western world and are able to meet stringent standards.

Jeff Chung, a Hong Kong-based analyst with Daiwa Securities said, "This will add pressure on many low-quality local brands in 2015 onwards," 

"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."

The Beijing government is also aiming to encourage local firms in several other industries, such as steelmaking and shipbuilding to merge. The aim is to make local companies larger, stronger and more globally competitive.

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