Return on investment must remain healthy for the industry to continue investing, Vice President of Sales John Pilley said.

Suppliers of lubricant additive packages serve a couple key roles for the industry. First, they develop formulas that meet performance specifications for engine oils and other lubricants, although some lube marketers do this themselves. Additive companies also sell the ingredients for those formulas – minus most of the base stock – in packages that consist of chemical additives in base oil diluent.

Specifications consist of both laboratory bench tests and tests run on engine stands. The latter are much more expensive, and their number has increased in recent years. When the American Petroleum Insitute adopted its CH-4 specification for heavy-duty diesel engine oils in 1998, the price tag for running tests on one formula was nearly U.S. $300,000 (230,000), Pilley said. By the time the organization adopted API CJ-4 eight years later, the bill approached $500,000.

The trend is clearly continuing. Mercedes-Benzs latest update of its engine oil specifications, announced in March, included several new engine tests. The CEC (the Coordinating European Council for the Development of Performance Tests for Fuels, Lubricants and Other Fluids), which develops procedures for industry standards employed by the European Automobile Manufacturers Association, is working on four new tests gauging the effects of biofuels.

But engine tests tell only part of the story, Pilley said, and not even the biggest part. Formulators also face rising costs for complying with chemical regulations. Regions and individual countries around the world have adopted nine different schemes requiring companies to register chemicals that are manufactured or sold within their borders. All of these programs have the same general intent – to ensure chemical safety – but costs must be borne in each location. As Pilley noted, the price tag depends on the volume of material supplied. In China, for example, companies pay up to $500,000 to register products if they supply less than 10 metric tons per year. For those falling in the range of 100 to 1,000 t/y, the bill can be as high as $2.4 million.

Costs for product approvals and chemical registrations come on top of development of lubricant technology – the core of what additive companies do. As Pilley noted, automakers have in recent years demanded significant improvements in several performance parameters. For example, engine oil formulators had to develop new antiwear technologies because traditional levels of a long-time standby – zinc dithiophosphate – were deemed harmful to vehicle emissions control systems.

Automakers also asked for engine oils that improve fuel economy, and the crux of this challenge, Pilley said, has been to reduce friction during engine start up. The task has been made more difficult by rising levels of contaminants in oil sumps – biofuel that migrates there during engine operation and soot that is dumped there as part of emissions control strategies.

The push for fuel economy has resulted in a general reduction in oil viscosity, and this required more protection against wear during cold starts and at critical contacts where component surfaces are exposed to highest pressures. Some OEMs have begun incorporating new materials in the manufacture of components, and these have required their own additive solutions. Meanwhile, some oil marketers continue asking for products that excel in certain areas, and formulators are expected not only to provide such performance but also to develop tests that prove it.

All of these activities require extensive research and development and all that comes with it, including laboratories with advanced equipment and tools; testing on laboratory rigs, engine test stands and in the field; and intellectual property support.

Lubrizol, which is headquartered in Wickliffe, Ohio, U.S., estimates that R&D spending by lubricant additive companies has grown an average of 5 percent per year for the past several years and reached a total of $610 million in 2011. An estimated $250 million of that total was spent on industry registered drivetrain and engine tests.

Other major additive suppliers agreed with Lubrizols general analysis. Infineum, which is based in Abingdon, Oxfordshire, U.K., actually pegged the current annual rate of escalation in R&D spending at between 5 percent and 7.5 percent.

This comes from a combination of factors, Infineum Crankcase Business Manager Chris Locke told LubesnGreases. The same tests become more expensive over time, largely because of fuel costs. New, longer and more expensive tests are introduced in each performance category. A greater number of pass/ fail criteria are introduced, leading to tighter formulation windows requiring more extensive R&D to identify. Other factors, he said, include a fragmentation of specifications and blender demands that product approvals allow more interchange of base oils and viscosity modifiers.

Pilley contended that additive companies cannot simply absorb those cost increases – that additive prices need to reflect those increases, along with expenses for other aspects of the business such as manpower and infrastructure. Officials from several companies agreed that the industry has generally allowed this.

Based on the published financial results, we can see that both the additive and lubricant companies are in a better place than five to 10 years ago, Pilley said. Clearly there has been a willingness to accept the need to pay higher amounts for higher-performing technology. This trend has been evident throughout the value chain….

There may be some exceptions in certain markets or regions. Pilley did say that lubricant marketers in the Middle East could face difficulty achieving real value for the most modern engine oils. On one hand, these oils are prescribed for new vehicles, of which there are a growing number in the region. They also have some advantages that are very germane in the Middle East, such as improved high-temperature performance.

However, Lubrizol said motorists in the region have shown a reluctance to recognize the value provided by such products. To some extent this is understandable, Pilley suggested. The dry, sandy conditions that prevail over much of the area cause significant levels of dust to enter engine sumps. The only way to keep this dust from harming engines is to change oil frequently, a practice that renders moot some of the advantages of the latest oils, such as greater oxidation and temperature stability that allows oils to last longer.

But Pilley said that some of the lack of interest in new oils is due to old notions. For example, many car owners in the Middle East cling to the idea that the regions high ambient temperatures demand heavy engine oils – at least SAE 15W multigrades. This goes against the recommendations of car manufacturers, which now recommend 5W or 0W oils.

Those contacted for this article agreed that globally there is nothing to suggest that R&D costs for lubricant formulation will stop going up. Quite the contrary, Pilley said. The rates of change and upgrades continue to increase, and the key driving forces [affecting engine oils] will lead to higher performing, more expensive finished lubricants.

Locke suggested additive companies need to try to minimize these increases.

We all need to recognize the challenge of meeting these ever-increasing technical needs and complexity in a long-term sustainable fashion, he said. There will be obvious challenges to having cost increases of 5 percent or more per annum in a market that is generally accepted to be growing in volume at 1 to 2 percent per year. He said the industry should do what it can to contain R&D costs, for example by avoiding test duplication, only adopting tests that are necessary and scientifically robust, and by cooperating with other stakeholder groups.

Still, he and others indicated they are not about to cut back on R&D just to save money.

Its a balancing act, said Bill Kleiser, manager of global services at Chevron Oronite, of San Ramon, California, U.S. We certainly work hard to control our costs and invest our technology spend wisely, but its critical that we are investing the amount needed to support our customers needs and stay ahead of the new regulations and OEM requirements.