Europes New Paradigm

Europes finished lubricants market is one of largest and most complex, but the disruptive combination of advances in engine technology and increasingly stringent emission control regulations are upending market dynamics across the continent. If that is not enough, original equipment manufacturers are, in varying degrees, battling the backlash from Volkswagens diesel emissions scandal that the auto giant continues to contend with, recently setting aside 22 billion to cover fines and compensation.

Away from Wolfsburg, less powerful, but still significant, forces have prompted a rethink of business strategies in many boardrooms. Since 1995, the European lubricant market has fallen by 25 percent, according to data from the Union of the European Lubricants Industry (UEIL), a Brussels-based trade body that represents companies in Europes lubricants industry. It collects statistics from six core countries, supplemented by estimates from a further 12 countries. The combined data provides an insight into the European lubricants market and accounts for more than 90 percent of European market volumes.

UEIL, which claims to represent 400 companies in 20 European countries, says the market has declined despite increased population and GDP (Gross Domestic Product). Per capita lubricant consumption is also declining and has already fallen 32 percent.

In many respects, the finished lubricant market is a victim of its own success. That is because drain intervals have increased significantly in the last 20 years, and there have been major strides in lubricant efficiency particularly in the industrial sector, UEIL said.

The European market is homogeneous, particularly from a regulatory perspective. The finished lubricant market in Europe is predominately automotive, accounting for a 64 percent share in 2015. But the industrial market, which includes process oils, is growing, accounting for 36 percent of the market in 2015. The decline in the overall market is most evident in the automotive sector, even though the vehicle parc continues to grow.

Although Europe is a large region, just five countries account for almost 75 percent of the total market, according to UEILs President Dr. Valentina Serra-Holm. Germany accounts for 25 percent, followed by the U.K. and France (13 percent), Spain (11 percent) and Italy (9 percent). Although Europe has recovered from the 2008 financial crisis, its lubricant market remains far below precrisis peaks of around 5.5 million tons.

The quality shift from monogrades to mutlitgrades in the automotive has been driven by a sea change in consumer mentality that covets high-quality lubricants, said Serra-Holm in a presentation at the Base Oils and Lubes Middle East 2017 Conference in Dubai. She added that the performance of Germanys economy has been instrumental in the growth of industrial lubricants, given the tendency of German producers to focus on quality, particularly in niche, high value added applications.

Nevertheless, Europe has its share of challenges. Widespread deindustrialization is underway, resulting in a shift of production from Europe to Asia that has impacted lubricant demand. For example, transformer manufacturers in Europe are being challenged by their Asian counterparts, which has affected demand for process oils, Serra-Holm told delegates.

The trend toward energy efficiency is also slowing lubricant demand, most obviously by a shift to e-mobility. Last year, electric passenger car sales grew 10 percent, according to Serra-Holm, a trend that she says will continue.

With all the rationalization of API Group I capacity, Serra-Holm thinks the availability of raw materials to some sectors might come under strain. In 2016, Western Europe lost 25 percent of its Group I capacity, and its not over yet. Allied industries, including the chemical industry, are undergoing consolidation that may result in fewer suppliers. Also, regulatory pressures imposed by REACH (Registration, Evaluation, Authorization and Restriction of Chemicals) could force smaller firms to exit the European market.

All of these challenges coalesce at a time of increasing complexity in Europe: OEMs demanding dedicated blending lines was an example Serra-Holm described to delegates. Amid falling demand and consolidation, UEIL predicts opportunities can still be found in niche, high-value markets, given the overall swing toward quality. She argued that there is still space in the market for dedicated, flexible suppliers. With Europes track record of innovation, that may indeed complement the strategy of some lubricant companies in the Eurozone.

Fast Growth in India

Ranked as one of the fastest growing economies, India is also the worlds third largest lubricant consuming market and the largest manufacturer of 2 and 3 wheelers. With such compelling statistics, it is no surprise the most prominent lubricant manufacturers, and many others too, have beaten a path to Indias door, seeking a share of a lubricant market that has strong growth prospects. At a time when many other lubricant markets are static or in decline, it is easy to understand the excitement of lubricant marketers over opportunities in the worlds second most populous country.

However, despite the frenzied anticipation, only a few are making headway in a notoriously complicated market. According to an industry expert, a number of key factors determine success. Speaking in Dubai, Geeta Agashe of Geeta Agashe & Associates said several characteristics define successful marketers – the overarching factor being a recognition that India is not a homogeneous market.

Entering the Indian market is as much about definition as anything else, and Agashe said research has established that successful marketers use a marketing-led STP (segmentation, targeting, positioning) process. Segmentation identifies groups of customers; targeting establishes the segments to serve; positioning builds and improves brand equity in a chosen market.

Positioning evaluates product, price and promotion and is akin to the established 4Ps marketing mix assessment of consumer goods companies. A fifth P – people – is also vital, said Agashe, and refers to building up and retaining the right people or teams.

At a tactical level, successful lubricant companies in India sell a higher share of motorcycle oils because they are the most profitable, followed by high-quality passenger car oils and then high-quality heavy duty oils. Typically, they make lower profits on nonengine lubricants such as gear oils, greases and automatic transmission fluids.

Successful companies are also selling more premium products such as synthetics and synthetic blends, compared to conventional products. In addition, Agashe found that they are selling lighter viscosity oils rather than heavier grade oils, smaller package sizes as opposed to bulk quantities and more branded than nonbranded oils.

Successful companies also display a higher frequency of new product introductions and a degree of customization that does not sacrifice product quality and integrity. Recognizing the lack of homogeneity in India, successful lubricant marketers have devised different strategies for different states and regions. Rural and suburban India offer the most promising potential, and the bazaar trade or independent workshops, spare part shops and lube shops are key microdistribution channels.

Indias vast geographic area also necessitates segmentation, and Agashe noted that successful lubricant companies sell in Western followed by Southern, Northern and Eastern India in that order. In addition, pricing must be aligned with product positioning.

Crucially, getting and keeping distributors motivated is key to success in Indias competitive lubricants market, Agashe said. She emphasized that a good microdistribution model and a tight credit control policy are important pillars of a winning strategy.

Treating lubricant brands as fast moving consumer goods is a strategy adopted by successful lubricant marketers in India. Typically, they spend 5 to 6 percent of sales on advertising and promotion. Above-the-line promotion usually takes the form of advertising; below-the-line spending often consists of sales promotion activities.

Successful companies understand that for a lubricant brand to be successful in India there needs to be both a push and pull strategy, said Agashe. As an example, the number of lubricant brands associated with sporting events is striking, including not only Indias national sport of cricket but also such events as motocross and car rallies. There are even celebrity endorsement and association with Bollywood.

Establishing a relationship with an OEM similar to Valvolines association with Cummins may be a low-margin part of the business, but it creates a halo effect that leads to quick market penetration and access to OEM distribution. Companies like Castrol, Gulf Oil, IOCL-Servo and BPCL-Mak have emulated Valvolines initiative in forging strong links with OEMs.

It is also about people and empowering a local management team rather than remote management outside India. Agashe said international companies should leverage Indias intrinsic cost advantage by investing
in IT, production for export and R&D.

India clearly is not for the faint hearted and will likely be a long haul with numerous challenges. Yet, the fact some have succeeded provides a template for potential new entrants.

Its About Strategy

Not all lubricant companies have the scale to operate in two such diametrically opposed markets. The choice of a mature market like Europe or a fast growing economy such as India is as much about a companys vision and core capabilities than anything else. Europe represents homogeneity, but also a bearish outlook for lubricant demand. It is also heavily regulated.

India requires a dedicated business model and a microstrategy that may not offer the critical mass required by some companies. General Motors decision in May to cease selling Chevrolet brand cars in India by the end of 2017 is a vivid reminder of the challenging environment international companies face.

Despite the fact that India is forecast to become the third largest auto market in the next decade, GM was unable to expand market share. GMs forced exit will almost certainly become a case study of the potential pitfalls that can enmesh even the largest multinationals operating in India.