China is the fastest growing consumer lubricants market in the world, said David Pirret, executive vice president for lubricants with Shell International. Shell is the worlds leading lubricant brand. Growing our business in such an important market is critical to extending that leadership.

Terms of the dead were not disclosed. The investment by subsidiary Shell China Holdings BV creates a new joint venture, Shell Tongyi Petrochemical Co. and gives the energy giant control of a dynamic company that has grown rapidly since starting up just 13 years ago. Tongyi, which is based in Beijing,reported sales of 300,000 metric tons and Yuan 2.15 billion (U.S. $260 million) for 2004. By then it was already Chinas third-largest lubricants marketer, behind nationally owned PetroChina and Sinopec, and Monarch was already the nations top-selling motor oil brand.

Tongyi officials have said the company continued its fast pace of growth last year. Shell did not disclose Tongyis current size, but said the deal would makeShell the largest international lubricants marketer in China (it had been second) and boost its global sales of branded lubes by 8 percent. Shell was already the worlds biggest marketer of branded lubricants and now claims a global market share of 16 percent.

Shell officials seemed just as excited, though, about the joint ventures prospects for the future. Tongyis sales have grown at an average annual rate well into double digits ever since its creation. Chinas lubricant market has grown quickly to become the worlds second-largest – behind the United States – and, as Shell noted, it is projected to continue growing 8 percent per year, according toKline and Co. consultants.

Shell also believes it can streamline Tongyis operations and ensure availability of raw materials needed to continue growing.

Both Tongyi and Shell have been expanding in China and this acquisition strengthens both brands growth platform, Pirret said. At the same time, Shell can realize synergies in the manufacture of lubricants and procurement of base oils, additives and other materials, so increasing efficiency and improving our service to customers. Tongyi also has access to our cutting-edge technology.

Tongyi officials expressed concerns in the past about the companys ability to obtain base oil needed to keep up with burgeoning sales volumes. In January 2005, management expressed hopes of linking with a foreign base oil supplier to guarantee supply. Officials also said at that time that they planned to conduct an initial public stock offering within two years. Yesterday TongyiChairman Huo Zhenxiang, said that for all of its success, the company had to make major changes to continue growing and to compete against the growing presence of international companies.

To continue to compete effectively we needed to achieve a step change in our brand and market development against the international competition we face, Huo said. Our alliance with Shell sets the conditions for the Tongyi brands sustainable growth in China.

Shell said Tongyis management will remain intact – Huo becomes vice chairman of the joint venture – and that Tongyi and Shell brands will be marketed separately. Tongyi sells Monarch oils mostly in Chinas mass market, which features lower quality than the high-end of the market that is dominated by international players. Many companies selling lubes in China have complained that competition is fierce and margins slim, especially in the low end, but Shell maintained that Monarch is profitable.

The Chinese lubricants business is profitable, said a Shell spokesman. We would not pursue business if we were not satisfied with the returns. This is a strategic acquisition for us.

A Kline official agreed that the joint venture is a coup for Shell, saying the energy giant will benefit from the access to Chinas mainstream market and also from Tongyis sales and distribution network, which has extensive penetration throughout the interior of the country.

Through the tie-up with Monarch, Shell gets a readily available sales network in second-tier and third-tier cities, said Flora Liu, a consultant in Klines Shanghai office. Kline is headquartered in Little Falls, N.J. As the coastal area has tended to be saturated and intensely competitive, undoubtedly this will bring Shell significant market share in the future.

Tongyi has a network of 2,000 distributors and 90,000 retailers across the country, along with a reputation for innovative marketing and sales strategies. It became the first lubricants supplier in the country to advertise on national television as part of a strategy to develop national awareness for its brand.

Tongyi should also help Shell sell passenger car motor oils to carmakers, according to Li Wang, managing director of Klines Shanghai office.

More automakers are starting to focus on non-technical issues such as cost, delivery and sales service, he said. As the technical entry level is not high in this sector, Shell could see its position dwindle as local producers such as Sinopec are becoming more aggressive. But through its cooperation with Monarch, Shell can be very competitive by offering technical advantage and the other miscellaneous things.

Tongyi has three blending plants with capacity to produce 600,000 tons per year. Shell has two wholly owned plants and one joint venture plant in China with combined capacity of 200,000 tons per year.