OEM Tie-ups Offer Foot in Door

In September, Castrol India announced it had extended an agreement to develop, market and supply engine oils for passenger cars made by Tata Motors. The following week, Hindustan Petroleum Corp. Ltd. also announced a deal to supply factory and replacement fill automotive lubes for cars made by Tata.

Castrol and HPCL were not alone. Between September 2015 and June of this year, four other companies - Shell, Petronas, Indian Oil Corp. Ltd. and ExxonMobil - also announced deals to supply engine oils to Tata. From press releases and news coverage of the announcements, it was difficult to say if they were all distinct or overlapped in some way. ExxonMobils deal covered commercial vehicles, and Shells covered passenger cars and commercial vehicles, while the rest specified just cars. Castrol said its deal covered lubricant development, but most of the rest only mentioned marketing and supply. Total Lubrifiants also landed a deal to supply lubes for Tata vehicles internationally.

Tata, which is one of Indias largest automakers, declined to say specifically if these deals involve different vehicles, different tiers of oil or different geographic areas the deals, or if any of them are in any way exclusive. Tata Motors develops its own formulations in collaboration with high quality base oil and additive companies, as per the vehicle needs, a spokesman told Lube Report Asia. We create suitable co-branding agreements for various vehicle and market needs. We have separate oil portfolios and branding for our passenger and commercial vehicles.

What is clear is that there is no shortage of lubricant marketers interested to enter OEM tie-ups. Industry insiders say these deals are popular despite lower margins because they provide ways for oil companies to strengthen brands and boost market share.

Margins are generally less for lube companies in OEM tie-ups, but they gain volumes and a foothold in the retail market, said Sabri Hazarika, oil analyst in Mumbai for PhillipCapital (India) Private. In the bazaar segment, if you dont have a proper brand positioning then customers will not take your products.

An executive with a major oil company said OEMs prefer to have tie-ups with multiple marketers because it gives customers choices. He added that each oil company needs to comply with the engine oil quality and performance standards set by OEMs to have their products approved for use in its vehicles. OEM approvals generally take one to two years of work to obtain.

The executive, who spoke on condition that he not be identified, noted that technical parameters for oil remain the same for a particular type of engine, but the OEMs get to judge and select the best performing engine oil for their vehicles. The primary objective is giving customers multiple choices, and the second is that it also provides an avenue for these OEMs to generate non-core revenue in the form of royalty, he said.

Swaminathan Iyer, head of technical services, at Gulf Oil Lubricants India Ltd., said that the requirement of each OEM differs, and lube companies not only provide lubricants but also offer expertise in marketing and establishing drain intervals.

We see it as a mutually benefiting exercise. The consumers trust level goes up when they see that a particular brand is endorsed by the OEM and comes at an assured price, Iyer said. The benefits are very clearly illustrated, and it is backed by the company warranty. Gulf Oil, a part of Hinduja Group, has OEM tie-ups with Ashok Leyland, Mahindra and Mahindra, L&T Komatsu and Schwing Stetter, among others.

According to PhillipCapital, the compensation to OEM makers is in the form of royalties for after-market sales, though factory fills are tendered at competitive prices and low margins. Japanese and Korean OEMs are less attractive than European and American counterparts due to high royalty rates and preference for oil makers of their region, Hazarika said.

The brokerage said that OEM tie-ups in specialized industrial applications can be very advantageous for lube suppliers. Multinational companies have an edge on imported machines with pre-approvals due to global tie-ups and hence, players like Castrol are targeting these segments for volume growth. PhillipCapital noted that companies like Valvoline Cummins, Mobil, and Shell have leadership positions in niche markets like diesel gen-sets, marine and aviation space respectively due to OEM support.

Therefore, it wont be surprising if lube marketers and OEMs continue to explore new tie-ups and strengthen their existing partnerships to boost growth in India and elsewhere.