But as original equipment manufacturers, lubricant purchasers and major marketers move to global lubricant specifications and simplification, we see the commoditization of lubricating products accelerating across all lines of business. This puts increasing pressure on product margins and the ability to reinvest in the business.

Atlantic Counsel

In North America, the American Petroleum Institute and the International Lubricants Standardization and Approval Committee jointly devise specifications that are used as a baseline lubricant quality level across different market tiers. Solely claiming an API or ILSAC specification for a lubricant leaves little room for differentiation. For example, older API claims, such as API CH-4 or CJ-4, are widely used as a recognition of base performance capability for heavy-duty diesel lubricants. Such lubricants, and the additive packages used in them, have been developed and optimized over many years.

The European Automobile Manufacturers’ Association’s specifications form the baseline quality level in Europe and some markets beyond. However, ACEA’s specifications themselves also provide little differentiation, and it is European OEM specifications that drive a higher value market. Also note that ACEA has struggled to incorporate new engine tests and quality upgrades into its specifications and relies upon some key API tests.

“It is important that ACEA specifications are not set too high. A high ACEA baseline would not allow additive companies and oil marketers to build more differentiated products with specific OEM claims,” United Kingdom-based industry expert Ian Field told Lubes’n’Greases.

Complex Specification Development Process

A case in point in the lengthy and complicated development of specifications is that of ILSAC GF-6. GF-6’s needs statement to meet evolving technology and efficiency targets was issued in 2011. However, the first allowable use for lubricants meeting the specification was in May 2020.

The lubricants industry has invested many millions of dollars in engine test and specification development over this nine year period. Despite this, market indications are that GF-6 lubricant and additive prices will show no significant premium over the previous GF-5 specification. The long development period ensures additive and lubricant companies have sufficient time to develop products, creating multiple options and tending to commoditize the market.

Europe also has a complex specification development process for ACEA, which is a joint activity between ACEA representing the OEMs, the American Chemistry Council on behalf of additive suppliers and the Technical Association of the European Lubricants Industry in the lubricant marketers’ corner. Funding new tests remains a concern, as OEMs have limited research and development support for this and the profitability of baseline ACEA oils for additive and lubricant suppliers is lower than for more differentiated products. Given the lack of financial returns, industry players will now seriously consider whether to invest in such future specification developments.

Off Spec?

Obsolete performance claims continue to be made for lubricants in some markets lacking strong industry oversight or a government brand registration scheme. API SH and below for passenger cars and API CG-4 and below for HDD are obsolete, as are ACEA specifications before its latest 2016 standard. These specifications go back many years, and many engine and performance tests used to generate them are no longer maintained or available. Performance claims are now based upon technical judgement, potentially referencing chemical and analytical data from originally approved lubricants or additive packages.

“The industry has seen an upswing in so-called fake claims. There are have always been examples where oils claim to ‘meet the requirements of’ older specifications, such as obsolete ACEA claims. However, what we are seeing now are more oils making apparently unsubstantiated claims against current ACEA quality levels. The presence on the market of cheaper oils with current claims accelerates the process of commoditization,” Field said.

In reality, it is not possible to judge absolutely whether current products do or do not meet obsolete specifications, and product labelling lacks clarity, confusing customers. For leading global marketers, fighting the proliferation of these oils has diverted resources and has made the growth of premium products more difficult. For additive suppliers, in the absence of any testing or verification, additive treat rates have been minimized and lubricant costs pared down, commoditizing this part of the market.

Driving On

OEMs are looking to push lubricant quality higher through specifications. They also have a need for supply security and may market their own so-called genuine service fill oils. Having multiple approved factory fill suppliers creates a more competitive pricing environment and offers greater supply security. Genuine oils allow OEMs greater control of the lubricant used in their hardware, but they also create more buying power for them. While OEMs work with suppliers collaboratively on new lubricant developments, multiple approved products contribute to more transactional behavior.

To illustrate greater commoditization in the service fill market, Steve Haffner of U.S.-based SGH Consulting, explained to Lubes’n’Greases that the old General Motors GM 4718M specification was a significant challenge to blenders, which few products were able to meet. It was replaced by GM dexos1, a higher-tier specification above the basic ILSAC GF-6 specification developed in 2007 and rolled out in 2009.
“Dexos1 is now met by all the additive companies and lubricant marketers, making it more difficult to differentiate and deliver a premium for higher performance. [It] has become a ‘must have’ claim for full synthetics in North America that all products are able to achieve, making it more of a commodity!” he said.

Marketplace Changes

Lubricant markets are evolving, and many, including China and North America, are seeing the growth of oil change service providers together with a decline of the do-it-yourself market, as engines become less accessible.

“Service providers look for the least expensive product that meets their needs, putting pressure on premium branded oils. Brands still do well in the DIY market with many consumers. However, profitability for the service providers is driven by rapid turnaround and service provision and not the value of the lubricant. Many service providers do offer premium brands as an upgrade that appeals to more knowledgeable consumers,” Haffner said.

To date, major global lubricant marketers have dominated in the U.S. and Europe, where customers seek trusted service providers to use the right oil for their vehicle.

Large lubricant procurement groups, such as OEMs and secondary auto parts “bundlers,” have become adept at minimizing requested claims and frequently tendering their business to drive down pricing. Lubricant marketers have responded by minimizing complexity and reducing supply chain costs. This includes simplifying their product needs, seeking rationalization of products across a range of API grades and also tendering the related additive business more frequently. This drives the specification driven market to a more transactional, commoditized approach rather than investing in long-term collaborative developments.

Lubricant buyers continue to have wide range of choices, making supply security a minor concern. OEMs buying lubricants for factory fill and genuine oil and lubricant marketers buying additives have a much stronger need for supply security. They remain concerned about having a single source or supplier.

OEMs require multiple approvals for their lubricants and additive suppliers have been requested to ensure greater interchangeability of additive components. Whilst improved supply security favors purchasers, it creates less diversity of additive solutions and reduces differentiation.

Reasons to Be CheerfulDespite the pressures pushing the market toward commoditization, there are also upsides. The addition of specific OEM performance claims above ACEA’s provides a higher level of complexity and more differentiation options. As OEM needs become more specialized, this creates opportunities for dedicated lubricants and more bespoke solutions.

“With the drive to further improve fuel economy and lower emissions, the industry will create some new OEM niches in the next five years,” Haffner said.

HDD OEMs are under even greater pressure to reduce emissions but cannot yet electrify like passenger cars. This leaves HDD lubricants with the potential to be more differentiated, as the need for more sophisticated fluids grows. As margins are squeezed, companies will make more selective investment decisions on development programs, reducing the available purchasing options.

Marketers also have the chance to be more creative around adding services, such as oil monitoring, or adding non-specification claims, like field tested in a specific market. Lube change service providers also offer upgrades to more premium products which are more profitable and leverage brand value.

“The forces of commoditization have been at play for decades, spreading from the U.S. and penetrating developing markets and then parts of Europe, as second-tier marketers and independent brands fought for position in global growth markets,” Suzan Jagger, vice president of research firm IHS Markit’s oil, midstream and downstream consulting unit, told Lubes’n’Greases.

In recent years, this trend has accelerated as independents can leverage a lower-cost structure, speed-to-market and acquire the necessary technical support from additive companies, Jagger explained.

“However there is plenty of room to find areas of differentiation where the growth of premium and synthetic products is accelerating, particularly in evolving markets as Africa, Central Asia, India and China,” she said.

What We Find

Overall, there are clear drivers pushing parts of the market toward a more commoditized approach.

“Intense competition in the marketplace, combined with a relatively flat growth trajectory for the overall global market, is placing pressure on margins. As a result, everyone is fighting for a slice of the same pie,” Jagger said.

With other increasing cost pressures on the industry, such as rising engine testing and chemical registration costs, margins are being squeezed. The industry could help itself by wider agreement to minimize or eliminate the use of obsolete specifications and rethink how industry specifications and standards are developed. Some drivers are difficult to resist, such as better supply security or greater use of OEM-genuine oils. However, many lubricants and additive packages can create differentiation and support improved profitability as markets upgrade and OEMs seek further benefits.

Jagger predicts that across the entire value chain of the global lubricants business – from additive suppliers and base oil refiners to marketers, distributors, retail channels and business-to-business customers – the pace of consolidation will drive down costs.

“Even before demand disruption caused by the Corona-19 virus, it was becoming harder to support technology investments to address the needs of new OEM specifications let alone the development of EV and low-carbon product technology,” she said.

Jagger concluded that only the nimblest players with the financial strength to take advantage of markets where they can truly differentiate their products will succeed. In the next five to 10 years, we will see more change than the past 30 to 50 years put together.

Philip Reeve is a chemist with 40 years of experience in the global lubricants and additive industry. He’s held positions at Afton, Infineum and ExxonMobil and is now a director of ADLU Consultancy.