The fact that automotive recalls are finally starting to pick up in China is actually a positive sign.
In 2006, 22 auto manufacturers in China made 39 recalls, a dramatic increase from the previous year (Figure 1). Reaction in China has been split. Some Chinese consumers, experiencing for the first time public admissions about potential safety issues with their vehicles, have understandably expressed worry. Others, still new to the concept of a recall, are delighted when their vehicles are recalled, mistakenly thinking that they will automatically be treated to a brand new vehicle. While serious product safety issues are never a good thing, the fact that automotive recalls are finally starting to pick up in China is actually a sign of health in terms of the ability of the government, and the carmakers themselves, to begin to police the automotive industry to make it safer.
What’s especially striking about the 2006 recall data is that while the number of recalls increased by about 40 percent over 2005, the number of recalls from China domestic manufacturers, as opposed to imported vehicle makers, increased by a factor of almost three, which shows that more and more domestic automakers in China are starting to “Buy In” to the recall system. The automotive recall regulations certainly represent a good start at developing the kind of automotive safety environment that Chinese consumers deserve. But there is still a long way to go. It is disappointing to see that some major domestic Chinese automakers are still conspicuously absent from the list of those issuing recalls. Conservative estimates show that there are more than 17 times more traffic fatalities per car on the road in China than in the US. Yet, if we compare auto recall rates in China with those in the mature US market, there is still a huge gap.
For example, even though recalls in the US decreased again last year, still, about one in every 13 cars was recalled for a safety-related issue. Compare that with China’s rate of less than one recalled car for every 54 on the road and you can see that there are still about four times fewer recalls than one might expect in a mature market (Figure 2). This is despite vehicle quality and safety levels in China that are generally considered to be lower than those in the US. That said, implementing an effective vehicle recall system is one important component to address safety issues. So last year’s growth in the number of recalls actually bodes well for improved auto safety in China.
Recall penalties – Just one part of the economic equation
A major controversy that has followed the development of the Chinese automotive recall policy is the penalties for non-compliance. According to current regulations, automakers are fined anywhere between 10,000 and 30,000 RMB per violation for inadequate compliance with policy. Some worry that such penalties amount to little more than a slap on the wrist for auto manufacturers with revenues in millions, or even billions of RMB. As a result, these people suggest that to be truly effective the recall policy should raise fine levels to the millions of US dollars seen in the US.
Fines are definitely one part of the equation. However, one must take a broader view than simply comparing the level of government fines between China and US. Even in mature markets with established vehicle recall systems government fines are usually more useful for their “Loss of Face” value rather than their actual monetary face value.
Although we would all like to think that everyone involved makes the utmost effort for safety, in reality, automakers make a careful calculus of costs and benefits when considering whether to implement a recall campaign. Aside from the somewhat intangible damage to brand and reputation from admitting to a safety problem, manufacturers also consider two types of tangible, out-of-pocket, costs in their equation: the first is the direct cost of communicating and implementing a recall. These costs can easily reach many millions of dollars and are similar regardless of whether we’re talking about China, the US or another market. The other type of direct costs OEMs consider are expenses from lawsuits and fines. This is where the China situation differs from the US market.
In the US, government fines certainly motivate automakers to comply with safety regulations. But by far the greater motivation is the threat of consumer product liability lawsuits. Car recalls in the US began in the 1960s primarily as a response to the growth in such lawsuits. Some experts estimate that under normal operating conditions US auto companies spend about US$ 500-1000 per car on product liability costs, and substantially more when an extraordinary lawsuit comes up. With this in mind, even government fines over a million dollars can be considered just a slap on the wrist compared with the potential hundreds of million dollar costs of a major lawsuit.
In China, the government has tended to rely on administrative means to accomplish change rather than to channel consumer complaints through an independent court system like in the US. Whether as a cause or an effect, China still lacks a mature legal structure to pressure carmakers through such consumer lawsuits. Because this leg is missing from the economic equation in China, it naturally leads to carmakers having a much lower propensity to disclose safety problems and initiate recalls. However, the Chinese government still has multiple administrative means with which to inflict economic pain or to pressure uncooperative auto manufacturers. For example, the government can restrict market access or cut off import export licenses. The threat of such revenue losses can be a powerful economic incentive in China if used properly. What remains to be seen is whether the relevant government bodies will have the political will to actually use these tools. Although it is still early, the increasing recall volumes of the past few years is a good first sign.
A unique aspect of China’s automotive recall policy is that the quality inspection bureau calls together a group of potentially outside experts to oversee safety evaluations. The conducting of testing and analysis is contracted out to any of the state-sanctioned automotive or materials inspection centers. Some of these centers have ties to domestic automakers.
A key factor in the success of the US auto recall system has been the existence of a clearly independent organization within which all expert analysis is both overseen and conducted. To ensure as diverse a perspective as possible while maintaining independence, the US National Highway Transportation Safety Administration (NHTSA) calls together an internal group of technical and other experts from its automotive, aviation, railroad and other transportation divisions to question and validate findings of the internal full-time staff conducting auto recall investigations.
To ensure that appropriate recalls are made, an authorised body must first cast a broad net to identify potential safety issues. In the US, part of this net is a consumer telephone hotline for safety related complaints, which is published in vehicle owner’s manuals. Other sources include media and industry reports. Complaints and quality issues then have to be separated into two categories:
1) safety related problems, such as steering columns that crack and cause drivers to lose control or wiring problems that could cause fires; and 2) non-safety related defects, such as air conditioning or radios that don’t work. If preliminary evaluation indicates the need for further investigation, an independent body then conducts the investigation and determines if a safety issue exists and a recall is justified. It should then follow up to ensure that the manufacturers implement the recommendations by offering affected consumers the “Three Rs” – Repair, Replace or Refund. The China recall policy as written essentially adheres to this formula, with the notable exception of the existence of a wholly independent body. As China’s recall policy and system matures, this type of centralised and independent approach may serve as an option for consideration.
As mentioned above, because the high legal costs present in western markets do not exist in China currently, the government must use a broad spectrum of administrative actions to exert sufficient economic pressure on manufacturers to resolve safety issues. Therefore, many organisations aside from the quality inspection bureau, such as commerce, public security, taxation, transportation and other bureaus and ministries, must work together to implement a vehicle recall.
As it stands, the Chinese recall regulations do indeed call on these relevant organisations to cooperate and take action during recalls. However, the specific steps required and the delineation of authority to demand actions from these agencies is unclear. This approach of outlining high level principles but leaving the details to be worked out in practice is a common scenario in China with its evolving legal and regulatory framework. The key question for the success of the recall policy will be: Does enough political will exist for all these agencies to take tough measures against large and influential vehicle manufacturers. If the questions of independence for the inspection agency can be resolved, the initial trends of increasing recalls show that there is reason for optimism in the long run.
