Eric R. Johnson of General Motors Powertrain, North America, said his company made the change to a flat annual fee in response to feedback from oil marketers.

Oil companies have indicated that a flat fee helps dramatically reduce the logistics that would be needed to comply with the required reporting under the per-gallon fee structure, Johnson told Lube Report. Oil companies have indicated that this gives them the freedom to tailor a Dexos rollout program that fits within their individual marketing and manufacturing plan. It also frees the oil company to match production with demand, on a manufacturing plant-by-plant or region-by-region basis. We agree with the oil companies that this is a more user friendly process.

None of the oil majors contacted by Lube Report about the Dexos fee change had replied by deadline yesterday. As of press time, GM officials had not provided Lube Report with more detail on how the flat fee is calculated.

According to industry sources familiar with Dexos, GM will calculate the flat fee by using the total passenger car motor oil market in gallons, GMs market share percentage and the oil marketers market share percentage. GM uses those three numbers to calculate the potential number of gallons of an oil marketers PCMO – everything, not just Dexos – that could end up in GM vehicles. The automaker does this individually for each region, sources indicate, though an oil marketer has to buy a global license.

GM then charges a per-gallon fee on the resulting number, sources said.

Sources suggested GM considers the fee a flat one in that GM looks at market shares today, and then calculates what an oil marketers fee will be over the next four years.

Previously, GMs Eric Johnson said the royalties were needed because a number of engine sequence tests are soon going to need replacing, as they become obsolete or the hardware becomes unavailable. He noted that GMs costs for engine test development will be huge, and the company needs to prepare for that.

The Dexos licensing fees are far beyond what the lubricants industry is used to paying to the American Petroleum Institute. Currently, licensees pay a flat fee of $1,250 per company ($250 more for non-API members), and an annual royalty of $0.002 per gallon for volumes exceeding 1 million gallons a year. The fee entitles the qualifying oil to show APIs donut and/or starburst trademarks.

In a November 2009 letter to GM, Independent Lubricant Manufacturers Association officials stated their opposition to the royalty system. ILMA firmly believes that GMs substantial per-gallon royalty charge is a barrier to entry for independent lubricant manufacturers and poses serious competitive problems.

In the letter, ILMA pointed out that because there are four Dexos viscosity grades, the basic annual licensing fee paid to GM would be $4,000 per company. Accordingly, ILMA questions why GMs royalty is and needs to be approximately 240 percent higher than APIs royalty (not including the first 1 million gallons without a royalty under the API license).

ILMA General Counsel Jeffrey Leiter yesterday said its unclear whether GMs fee change addresses those concerns, especially the vast difference compared to APIs system. When looking at APIs license fee, the way thats set up is such that we think its very fair in terms of minimizing any entry barriers you might have, he told Lube Report.

Leiter said ILMA remains concerned about whether GM dealers will have the same royalty fees included in their purchase price of Dexos oil. Ive been led to believe by some industry folks Ive talked to that GM does not intend to pass the royalty or licensing fee through to the dealers, he continued, which would give them a competitive advantage over quick lubes and other places where folks could buy product. ILMA members would be selling to the quick lubes and people like that, so that becomes the other concern wed still have and would want to see addressed.

ILMA has been approached by organizations other than API and quick-lube groups about concerns over Dexos, according to Leiter. We still havent been able to come to any sort of agreement with these other groups about a particular strategy to approach GM on addressing all these concerns.

The Center for Quality Assurance, part of the Midland, Mich.-based Savant Group, serves as program administrator for Dexos licensing. Dexos 2, designed for use in passenger car diesel engines, launched last year in Europe. The company plans to make its gasoline-fueled counterpart, Dexos 1, available globally for its 2011 model year vehicles.

Dexos uses performance tests from ILSAC and Europes ACEA, plus some proprietary GM tests.

Some formulators who have reviewed the Dexos specification say they can only achieve it through heavy use of API Group III or polyalphaolefin base oils, due to its low Noack volatility limits. GMs Johnson has said the specification is designed around GMs performance needs, and not to exclude other base oils.