This guide was last updated in April 2014
However, perhaps the biggest risk to organisations is in having to disclose business know how as part of complying with the regulatory regime. Car makers operating in China need a recall plan to manage their regulatory duties and reduce the risks associated with non-compliance.
The regulations and who they apply to
The Chinese automotive recall regulations refer to the recall of automobiles and trailers manufactured or sold in China. They do not apply to those automobiles and trailers manufactured in China and exported abroad.
A number of other players and stakeholders in the automotive industry are also affected by the recall regime, which is overseen by the Chinese State Administration of Quality Supervision, Inspection and Quarantine (also known as SAQSIQ).
The rules do automotive businesses need to follow
Manufacturers located in China are obliged to keep records on information in relation to design, manufacturing, logo labelling and inspection of the cars they make, as well as information of the owner of the vehicle upon initial sale, for at least 10 years.
The companies are obliged to submit detailed information on the technical parameters of vehicles as well as information on the repair, replacement and return of cars to SAQSIQ. The requirement to disclosure detailed technical information about vehicle design and manufacturing presents a significant risk to manufacturers about losing control of their know-how.
Manufacturers must also provide some information to SAQSIQ about recalls which have been carried out abroad. This is the mechanism by which foreign manufacturers, who are actually excluded by the Chinese recall regime, becoming tangled up in the Chinese recall regime.
Any entity or individual is able to raise a complaint about defective automotive products with SAQSIQ. They are not obliged to be owners of the vehicles to be eligible to raise a complaint.
How an investigation into a possible defect may be carried out
Generally, when SAQSIQ becomes aware of any possible defects it will inform the manufacturer about the possible defect and ask it to conduct its own investigation. If the manufacturer fails to investigate, SAQSIQ will itself perform an investigation.
If SAQSIQ anticipates that there are defects which could trigger serious consequences, the investigation will be initiated and carried out by SAQSIQ.
The legal parameters around SAQSIQ's ability to instigate direct investigations have not been clearly defined and SAQSIQ has wide ranging powers. For example, employees of SAQSIQ are able to enter the production site and into the offices of the manufacturer and may make copies of the relevant information and records. The recall regulations emphasize that SAQSIQ must keep all information in relation to the investigation strictly confidential.
If SAQSIQ classifies a defect of the car, the manufacturer is obliged to cease the production, sales and import, and to recall the involved cars.
Manufacturers should note that the term 'defect' has been very broadly defined under the regulations. For example, there is a risk that an imported car, for example from UK, will be recalled in China, although this car complies will all standards in UK.
Manufacturers have a right to object against the recall within 15 days of receiving a recall notice from SAQSIQ. An objection must be supported by evidence that there is no defect. In those circumstances, SAQSIQ will appoint independent experts who shall undertake assessments and, if necessary, run technical tests. If a defect is confirmed, the recall will be executed and implemented.
What if I do not comply?
If ordered to undertake a recall of defective vehicles, manufacturers could have to undertake repairs, provide for replacements and return vehicles, depending on the individual defect and legal situation. As a general rule the costs of these remedy actions shall be borne by the manufacturers.
Manufacturers can be held liable for fines or other sanctions if they fail to comply with the regulations.
For example, if the manufacturer fails to exercise a recall as required under the recall regulations or refuses to exercise the recall, a fine can be imposed of more than 2% and up to 10% of the value of the defective automotive product.
There are a number of additional financial and regulatory penalties that manufacturers could face for non-compliance. In very serious cases the business license of the manufacturer can be revoked.
Given the strong presence of social media in China, there is also a significant risk to brand reputation if information about ongoing investigations into possible defects are leaked on social media before those investigations have been concluded.
Having a plan for dealing with recalls
Implementing a recall requires manufacturers to develop and follow a recall plan. The manufacturer must ensure that the recall plan complies with the expectations of the Chinese regulator, and reflects the right balance between all stakeholders, including their Chinese joint venture partner and the parent company abroad.
The manufacturer is obliged to inform the distributors of the recall plan for ceasing the sale of the involved cars. Moreover, there are reporting obligations towards the public and the owner of the cars.
With the Chinese market being one of the most attractive places in the world for the automotive industry to grow their business, foreign-based manufacturers need to focus their attention on the risks of operating in this market.
If you would like further information from Pinsent Masons on the automotive recall regime in China, please contact Bernd-Uwe Stucken or Philipp Senff.