While the technical gurus wrestle with the engine tests detailed so well by David McFall (see PC-10, A Multimillion Dollar Bet, September), there is yet another high-stakes game being played in the world of heavy-duty motor oils, one that no one wants to talk about. That is, the marketing strategies oil companies will use to introduce PC-10. For the majors, this too is a multimillion dollar bet – with the potential to redefine who the leaders and laggards are in HDMO. One would think that when a new specification is approved the majors simply start to produce the juice and move it into the market. But as some painfully found when they rushed to be first to market with GF-4 passenger car motor oil, its not quite that simple.
For example, ExxonMobil and Citgo did very well as laggards rather than leaders with GF-4. Whether by accident or design, they were able to capture significant market share by holding on to GF-3 a little longer than the others, and selling it at a lower price while others carried the cost burden of upgrading to GF-4.
A similar situation could play out when the majors introduce PC-10 – except with PC-10 the challenges of a rollout strategy are exceedingly more complicated. First, although PC-10 is required to be backward compatible with older engines, its use in these engines will come at a cost. In terms of direct costs, some suggest fleets will pay 25 percent or more per gallon for the privilege of using the new HDMO. In return, instead of getting an oil that performs better in older engines, they may get a pricier oil that requires significantly shorter drain intervals. In addition, switching to PC-10 could press restart on any oil analysis histories they have kept for years on their fleets.
With benefits like these, convincing a fleet operator with older engines to use PC-10 could end up being a tough sell even for Joe Girard.
To further complicate things, majors must also take note that todays CI-4 Plus oils will not be forward compatible with EPA-compliant diesel engines coming in model year 2007. Due to their higher concentration of certain metallic additives, use of CI-4 Plus oils in the new engines will cause harm to such exhaust aftertreatment devices as diesel particulate filters and oxidation catalysts. This means that PC-10 will absolutely be required for the new EPA-compliant diesel engines starting in 2007.
The challenge for majors, however, is determining how many of the new EPA-compliant diesel units will actually be in the market in 2007. This will determine the size of the prize in terms of demand and growth for PC-10 HDMO.
In the past, predicting the rate at which new engines penetrated the market was relatively straightforward, based on scrappage rates and economic indicators. Its much more challenging this time around. One reason is some of the larger fleets are stocking up on 2005 and 2006 engines in an effort to avoid being guinea pigs for the new engine technologies. They remember all too well the injector and seal problems encountered when low sulfur fuel was first introduced. Because of this, some expect a new crop of problems to arise with the 2007 engines running ultra-low-sulfur diesel.
In addition, its believed that pre-2007 engines will afford lower service costs and better fuel economy. A potential counter to pre-buying, however, is legislation now winding its way through Washington, aimed at providing financial incentives for purchasing the newer engines. This could actually spur demand for 2007 engines – and also PC-10.
Each of these issues makes it unusually difficult to estimate market penetration for the 2007 diesel engines, and for the new oils.
When the costs and benefits of forward and backward compatibility are weighed, along with pre-buying and the fact that the 2007 EPA emissions requirements impact only on-road diesels, it becomes clear that CI-4 Plus oils will still be in demand in 2007. In fact, with roughly 42 percent of the total HDMO demand in the United States coming from the off-road class of trade, and the majority of on-road diesels being vehicles older than the current year, CI-4 Plus will likely be dominant in 2007 and for some time after.
So whats a major to do? Does it drag its feet on introducing PC-10, believing demand will initially be soft and grow slow? Does it race to be first to market with PC-10, hoping to capture what may be an attractive – and high-value – chunk of business? Or does it develop a unique universal HDMO that strikes an acceptable compromise between price and performance, and pitch it to mixed fleets operating both old and new equipment?
And what about those who bifurcate brands and run with CI-4 Plus and PC-10? How will they manage the marketing, inventory and distribution challenges created by doubling their brands?
These and others are strategic options no one wants to talk about – yet everyone who is anyone in the HDMO business has to be thinking hard about.