Tough new vehicle warranty laws are likely to raise costs for smaller players, forcing consolidation in China's auto industry.
The new laws, which came into effect in September, require dealers and automakers to repair defects and malfunctions free of charge. Consumers will also be eligible for a full refund or a replacement car if their vehicle is found to have a serious safety issue.
While the regulations are unlikely to affect larger international carmakers, such as General Motors or Toyota, who already have similar policies in their home markets, or large domestic carmakers, like Zhejiang Geely Automotive, who have sufficient funds to buffer any repair costs, smaller carmakers are likely to suffer.
It is unlikely that many of the nation's 72 registered automakers will fail as a direct result of the policy this year, however Jeff Chung, an analyst at Daiwa Securities, reckons industry consolidation may start to speed up around 2015 as warranty costs increase.
Consolidation in the auto industry would have a mixed impact on the nation's lubricants producers. Smaller automakers, which typically produce engines requiring lower quality lubricants, would either be purchased or would simply go bust. This would be detrimental to domestic producers who chiefly sell low-to-mid quality lubes.
Conversely, larger international firms would reap the rewards of industry consolidation. Foreign carmakers, producing high quality engines, may benefit from reduced local competition and increased consumer spending power. This would profit international majors as well as China's larger lubricants producers who are able to produce better quality lubes.
Ultimately, consolidation in the auto industry and cleaner fuels and lubricants is the government's objective. Carmakers and lubricants producers alike would do well to prepare for a contracting low-quality sector.