Macroeconomics

India is the fastest growing of the worlds major economies. The International Monetary Fund projects the countrys gross domestic product to grow by 7.5 percent in both 2016 and 2017. This compares favorably with China at 6.3 percent, the United States at 2.6 percent and the European Union at 1.7 percent. Average GDP growth for the world is estimated at 3.4 percent in 2016 and 3.6 percent in 2017.

To stimulate sustainable growth, Indias government initiated the Make in India program in an effort to turn the country into a global manufacturing hub. The program aims to promote the manufacturing of low cost, eco-friendly and zero defect products. Other goals are to foster innovation, enhance skill development, protect intellectual property and build a best-in-class manufacturing infrastructure.

In support of this initiative, the government launched a new trade policy, introduced new labor laws, simplified regulatory compliance and improved resource management. The program also plans to train 500 million young people by 2020 to improve employability. The ultimate goal is to increase the manufacturing share of GDP from 15 percent to 22 percent by 2022. As a result of this initiative, India has seen a 221 percent increase in foreign direct investment in manufacturing since 2014, creating 145,000 jobs in the sector.

The government also embarked on an ambitious U.S. $17.7 billion Digital India program to transform the country into a digitally empowered society and knowledge economy. By 2019, it aims to provide Internet access to all citizens, adopt IT products and services, empower citizens with digital inclusion and provide job opportunities (17 million direct and 85 million indirect).

A 2015 Ernst & Young survey rated India as the most attractive market for investments in the next three years. There are a number of reasons for this optimism. For example, India ranks first among the worlds fastest growing economies and among the worlds top destinations for foreign direct investment.

Lubricant Industry

Indias three national oil companies – Indian Oil Corp. Ltd., Hindustan Petroleum Corp. Ltd. and Bharat Petroleum Corp. Ltd. – control 48 percent of the market. Several private companies share the rest of the market, including Castrol, Shell, Valvoline, Gulf Oil, Tide Water and Total. Many other smaller companies, among 40 brands, also operate in the country.

Indias domestic base oil production capacity is 1.2 million metric tons, and actual production in 2015 was around 1 million tons. Total lubricant base oil demand is 2 million tons, including white oils and transformer oils. The difference in production and demand is met by imports. In 2015, the market was dominated by Group II base oils, which accounted for about 60 percent of sales.

Globally, India ranks as the third largest lubricant market. The auto industry comprises 22 percent of the countrys manufacturing GDP, and the vehicle parc totals 150 million vehicles, with two-wheelers comprising 77 percent of the vehicle parc. India represents the second largest market for two-wheelers and the sixth largest market for passenger vehicles. It is the second largest market for buses and eighth for commercial vehicles.

Domestic commercial vehicle sales slowed in 2014 and 2015, although exports are growing. Medium- and heavy-duty vehicle sales responded faster to changes in the economy than light commercial vehicle sales. The medium and heavy vehicle markets are dominated by Tata Motors (52 percent) and Ashok Leyland (28 percent), although Daimler India Commercial Vehicles Pvt. Ltd. has gained significant market share in the last four years. Global players are expected to take a larger portion of the market by 2020, as Euro VI kicks-in.

Ashok (43 percent) and Tata (35 percent) also dominate Indias bus market. Daimler, Scania, MAN and Volvo are also active in this market. The luxury segment is expected to grow faster in line with the rising economy.

All major multinational passenger car OEMs compete for market share in in India, with Maruti Suzuki (47 percent) and Hundai (18 percent) occupying the top two positions. Tata has lost significant market share in the last five years, and Honda dominates the midsize segment. Almost all OEMs are introducing small cars to the market, and India is becoming a manufacturing hub for small to midsize cars.

Indias two-wheel vehicle market is growing at a compound annual growth rate of 6.8 percent. The market share of scooters has increased rapidly, having recorded more than 5 times the CAGR compared to motorcycles. Hero MotoCorp, with 39 percent of the market, continues to be the leader in two-wheeler sales, although it has lost market share to Honda (26 percent), TVS Motor Corp. (13 percent) and Bajaj (12 percent).

Heavy-duty engine oil is the largest commercial vehicle lubricant category with 60 percent of the market, followed by gear oil (18 percent), tractor hydraulic/transmission fluid (18 percent) and grease (4 percent). The market is shifting to higher quality oils, with API CH-4 accounting for 26 percent of sales and CI-4 and above totaling 23 percent. SAE 15W-40 is the largest selling grade, comprising 47 percent of the heavy-duty market, followed by 20W-40 at 39 percent.

In the consumer market, motorcycle oil is the largest category at 59 percent, followed by passenger car motor oil (30 percent). Forty-five percent of the market is API SJ and above, and SAE 20W-XX and 15W-XX comprise 75 percent of sales, although the share of 5W-XX is increasing rapidly.

By 2019, Indias passenger car and motorcycle oils are expected to see a significant shift to lighter grades because of fuel economy regulations, boosting the demand for API Group II and III base oils. The shift will not be so dramatic for heavy-duty engine oils, with 15W-40 and 20W-40 continuing to dominate the market. There will be a continuing shift from monogrades to multigrades.

A Kline & Co. study projects consumer engine oils to enjoy the largest growth rates, followed by commercial vehicle oils. Overall, India is forecast as the largest lubricant growth market.

At present, synthetic and semisynthetic lubricants account for under 10 percent of the market. Motorcycle oils constitute the highest use of synthetics, followed by passenger car oil due to the presence of global OEMs in the market. Consumers are showing increasing awareness about the benefits of using Group II and III base oils.

Market Drivers

As in other parts of the world, the major market drivers for lubricants are emission regulations, fuel economy requirements, engine aftertreatment technologies and increased drain intervals. All represent challenges and opportunities for lubricant marketers.

For the most part, India follows European emissions norms, but lagging by a few years. India implemented what it calls Bharat or BS IV emission norms in 2010, which equate to Euro 4 norms. As in the past, dual norms were followed: BS IV was implemented in 13 cities, and BS III (equivalent to Euro 3) in the rest of the country.

In May 2014, the committee constituted by the Government of India submitted a report, Auto Fuel Vision policy 2025, recommending the extension of BS IV throughout the country, to be phased in by April 2017. In addition, it also recommended BS V in all of India by 2022 and BS VI after 2024. However, the government decided to leapfrog from BS IV to BS VI (Euro VI) from 1 April 2020 in the entire country and issued a press notification. BS VI is expected to reduce particulate matter emissions from heavy-duty vehicles by 67 percent and NOx emissions by 88 percent compared to BS IV.

Effective April 2016, all new passenger vehicles weighing less than 3.5 tons must display a label indicating its fuel efficiency, with one star denoting least efficient and 5 stars denoted most efficient. Effective April 2017, noncompliant companies will be subject to a penalty of around U.S. $15,000 initially and $150 per day until they are compliant, which is based on a formula. The expected effect of these fuel economy norms is around 8.4 percent improvement in 2016-2017 and 24.7 percent improvement in 2021-2022, compared to 2008-2009.

India is also developing fuel economy norms for heavy duty vehicles weighing more than 3,500 kilograms. In this effort, the government is working with the Petroleum Conservation Research Association, Bureau of Energy Efficiency and other industry stakeholders.

To meet these requirements, commercial vehicles will have to be equipped with various types of exhaust aftertreatment technologies. To comply with BS IV, most OEMs initially preferred to use selective catalytic reduction for heavy commercial vehicles (greater than 12 tons) and exhaust gas recirculation with an open type particulate filter for medium (7.5 to 12 tons) and light (3.5 to 7.5 tons) commercial vehicles. As BS IV is extended throughout the country by Apr 2017, OEMs are getting ready to offer EGR + DOC & POC option
for heavy vehicles also due to initial cost advantages. BS VI compliant vehicles are expected to use a combination of EGR, SCR and diesel particulate filters.

In the last 10 years, drain intervals for heavy-duty motor oils have increased from 15,000 to 80,000 kilometers due to improvements in engine/oil technologies and fuel quality. Some OEMs have started recommending ACEA E4 and E9 quality oils to provide longer drain intervals and improved engine life.