Commercial Genuine Oil Demand Seen Rising


Commercial Genuine Oil Demand Seen Rising
A tractor-trailer truck parks outside an office building in Rossyln, Virginia. © Daniel J. Macy

Although OEM genuine oil brands constitute a small portion of heavy-duty motor oil demand, sales in the category are projected to grow gradually to 2027, according to findings highlighted in a Kline & Co. webinar earlier this month.

“We expect light growth by 2027,” David Tsui, a project manager in consultancy Kline & Co.’s energy practice, said during a Nov. 14 webinar about navigating trends in the commercial genuine oil market. “Overall, we expect genuine oil sales to outpace that [HDMO] demand growth, and we expect genuine oils to continue to grow.” However, growth is linked to economic growth, he added.

Kline found that heavy duty motor oil demand generally was on the decline from 2018 to 2023. A freight recession in the United States this year and slowdown in Europe have been driving a decline in new commercial vehicle sales, he said. Very stringent emissions regulations from the Environmental Protection Agency in the U.S. and upcoming Euro 7 emissions regulations in the European Union will drive new internal combustion engine technology in commercial vehicles.

The webinar highlighted findings in the company’s “OEM Genuine Oil Brands in the Heavy-Duty Commercial Segment” study, which covered six key country markets – China, the United States, India, Japan, Mexico and Germany. China was forecast to consume the most commercial genuine oil this year.

He said that while in the consumer segment, many dealerships will throw in lifetime oil changes, based on the concept that whatever costs are incurred in oil changes the dealerships can earn back in sales and other repairs they perform on the consumers’ vehicles. That doesn’t tend to happen so much in the commercial segment, he added.

“In the commercial segment, we see other types of services that they offer, where sometimes if you use genuine oil, that one is certified for a longer drain that is still warranted by OEM, whereas if you use traditional product they will not warrant it for the longer drain interval,” he said. “So there are certain benefits OEMs will continue to try and build in, to try and drive customers back.”

Tsui explained that the way genuine oils tend to work is that a lube marketer will bid on the tender for OEM and supply – usually factory fill – and then generally speaking, the factory-fill provider gets either to supply the service fill or at least get a first crack at service fill. “If it’s in another market, in another country, and they don’t have that reach, the service fill might go to another blender, but generally speaking OEMs have traditionally given service fill to the factory fill supplier,” he added. The supply then can be handled either by the lube supplier’s distributor network or by the OEM’s own parts distribution warehouses.

He pointed out that for lubricant supplies, dealership service fill tends to be more profitable than factory fill. Some lubricant suppliers can work with OEMs of either vehicles or engines to co-brand their products, he explained, which can help both the OEM and lubricant suppliers to build their market shares.

Tsui noted that distributor functions for genuine oil in the commercial segment perform differently, depending on if they service the off-highway or on-highway markets. Commercial distributors of parts and engine oil may also perform service and maintenance on vehicles. It could also involve on-site workshops, he said, but also mobile service trucks that perform service at the job sites.

In some instances, he said, OEMs will hold the genuine oil inventories and sell them as well as genuine parts to their authorized repair centers and dealerships. That’s more common in the off-highway segment than in the on-highway segment, he noted.

Lubricant branding reflects the differences between genuine oils, co-branded oils and the popular merchant oils. “Genuine oils will only have the OEM branding on the front label, so generally there is no mention of who blends it or another lube marketer on there,” he said. “Co-branding can see both OEM and lube marketer – one could be superior to the other in label placement. It will be clearly visible on front who the lube marketer is, and who the OEM is. Merchant brand is what we’re familiar with – typically, products just branded by lube marketer.”

OEMs have a variety of reasons to provide benefit oils. “They want to bring customers back to their franchise workshop channels,” Tsui said. “It’s a mult-billion dollar market – the service of vehicles after sales.” He explained that economic factors – such as inflation, cost constraints, wage costs creeping up, and cost of materials, means that despite vehicle prices increasing –OEMs are not really profiting that much more.

“What they’re doing is trying to bring some more of the revenue back to them through their dealerships,” he said. “But when they take some of the dealership profit, the dealerships need their own revenue to survive. So what they’re trying to give the dealers is a little bit more of the service work. In order to do that, they have to draw the customers back, and they need something more exclusive.” He noted that using the typical merchant brand for dealership service work means completing purely on price.

Tsui noted that most OEM-branded products are very controlled and are not generally let out into retail channels or independent workshop channels, aside from some exceptions such as Ford and on the agricultural and industrial automotive side, John Deere.  Most OEMs control the product markets of their genuine oils, he said, limiting their availability only to their dealerships. “If a customer wants to use a genuine fluid, or concerned anything else might not be suitable for their vehicle, then they’ll bring them back,” he said.

He noted that nearshoring trends in the aftermath of COVID-19 are shifting manufacturing locations and logistics. As a result, selected country markets will boost commercial transport. “Where a lot of companies might have sole-sourced out of China or built a giant plant in Asia and relied on shipping parts and vehicles, now they found themselves between ports that were shut down, countries in lockdown, things that hurt their supply chain,” Tsui said. “So they have been looking to nearshore and spread out manufacturing, where they might do two to three smaller plants, bring things closer to where market is.” In the United States, he said that could mean seeing more companies locate production and parts manufacturing closer by, adding more commercial transport. “Whether they make it on U.S. shores or close by in Mexico, Central America, Canada, remains to be seen,” he said. “Mexico is a country that has a lot of genuine oil demand, but a lot of it is factory fill because a lot of vehicle production takes place in that country.”