Top Challenges: Mergers, Environment, R&D


PALM BEACH, FL — Maneuvering the rough waters of industry consolidation remains a key challenge for the lubricants industry today, says Alex McLean of Ethyl Petroleum Additives. For example, of the company’s top 13 customers three years ago, only six remain, “and who knows where it all will stop?” he asked.

Other drivers include the needs to embrace environmentalism and properly allocate research and development dollars, he told the National Lubricating Grease Institute’s 68th annual meeting here Monday. As senior vice president of petroleum additives at the Richmond, Va., company, McLean noted that mergers and acquisitions have created a very different landscape for the lubricants industry, dominated by behemoths. Ironically, McLean was introduced as the executive who spearheaded Ethyl’s purchase of Texaco Additives Co. in the mid-1990s.)

“The consolidation has been even more intense in the original equipment manufacturer community,” he observed, adding that it’s close to impossible to tabulate all the mergers, acquisitions, alliances, and joint ventures that have occurred in the automotive industry around the globe. The urge to merge is driven by a vital need to capture any synergy that can lower costs and increase competitiveness, and that’s true for lubricants, additives, the auto industry and others.

The Ethyl exec also sees “a profound shift” in the attitude business has today regarding environmental initiatives. As examples he cited Ford President and CEO Jacques Nasser, who was ousted Tuesday but had promised to boost fuel economy of sports utility vehicles 25 percent by 2005; GM’s Harry Pearce, who boasts that his company’s light trucks are already 4 percent better in fuel economy than its competitors’; and Jurgen Schremp of DaimlerChrysler (“perhaps the most ‘green’ and aggressive of the three,” said McLean), who vows to lower emissions and make mobility more environmentally sound.

“Frankly, I no longer see these as empty words,” McLean told the audience. “There’s a real commitment behind them.” As he told Lube Report later, OEMs have a growing sense that environmentalism is and will continue to be good business, and are eager now to stake out a market position.

The oil industry and to some degree the chemicals industry have lagged in embracing this philosophy, not without reason, McLean said. Environmentalism for these industries basically means investing millions of dollars in order to decrease demand, “and it’s hard to take this philosophy to your shareholders,” he said dryly. “Commercially, this is not an appealing proposition.”

Turning his attention to research investing, McLean said R&D spending for the additives industry is “out of whack” and has “a high level of inefficiency.” Fully half of the spending in this area goes for testing to qualify new products, not to create new technology and products, he charged.

Up to 10 percent of a lube additive company’s annual revenues are plowed back into R&D, a similar level of spending seen in far more profitable industries such asbiotechnology. (By contrast, R&D spending averages only 2 percent of annual revenues in commodity chemicals, he said.)

In Ethyl’s view, commercial and industrial lubricants offer more opportunity to differentiate products and hold out a bigger prize for those who can leap the technical hurdles. “The further you get away from the consumer, the greater the level of return,” McLean advised. This is because OEM specifications have suppressed innovation and led to commoditization of engine oils.

“There are opportunities to become more efficient and to devote more resources to genuine innovation. If we can do that, then good technical solutions will be rewarded,” he concluded.

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