Which company will prevail?

Executives from Chinas two state-owned lubricant giants – Lubricant Co., Sinopec Corp. and PetroChina Lubricant Co. – outlined similar strategies at the 12th Annual Fuels & Lubes Asia Conference in Hong Kong in March. Speaking through an interpreter, the executives said that growing competition for Chinas domestic lubricant market has driven consolidation and reform over the past five years. Todays intensely competitive lubricant market is pushing them to streamline even more, as they go after each others traditional strongholds.

As Geeta Agashe, petroleum and energy director at consultancy Kline & Co., explains, Chinas lubricant market was centrally managed until 1992, when the market was first liberalized. By 2000, the government had drawn an imaginary line across the countrys middle, following the Great Wall, and designated the area north and west of the Wall for PetroChina, and the south and east for Sinopec.

Originally the government divided the market geographically, Agashe says, but now its an open market, PetroChina and Sinopec need to increase sales in each others territories. For example, in March 2005 PetroChina opened a blending plant in Huadong, in Chinas south.

PetroChinas biggest competitor is Sinopec, and vice versa, says Agashe. PetroChinas goal is to increase market share in southern China, and Sinopec is trying to do the same in the north.

KunLun: Past and Future

Since its formation in 2000, PetroChina Lubricant Co. has followed a plan emphasizing five unifications and one focus, Deputy General Manager Gong Weijun told the Hong Kong gathering. The unifications, or centralization programs, target allocation of resources, product standards, research and development activities, pricing, and the companys distribution network.

The one focus, said Gong, who is based at PetroChinas headquarters in Beijing, is to promote one strong brand. (This focus on a single brand, KunLun, marks a departure from two years ago, when a company official said it would consolidate its 10 brands into a portfolio of three brands, reserving KunLun for higher-quality motor oil.)

In 2001 the company began restructuring. By 2002 it began to consolidate its sales and distribution functions, and that year launched the KunLun brand. In 2004, PetroChina further rationalized its distribution network and developed a new logo. And by May of 2005, said Gong, all brands but KunLun were on their way to being eliminated.

Today, the company has 11 blending plants, two research and development centers and one research lab. Notably, 93 agencies have been consolidated into just six sales centers.

As part of its product standardization efforts, PetroChina has simplified base oil types and grades, from 137 to 77. It has centralized procurement of additives and packaging materials, saving 150 to 200 million Yuan RMB (U.S. $19 to $25 million) annually. The integrated R&D program, said Gong, has reduced R&D staff from 700 to 500 and has brought annual savings of 50 million RMB.

PetroChina will continue to close small-scale blending plants, will build four base oil production bases and adjust production layout greatly, Gong said. Since 2001, the companys goal has been to expand the sale of finished lubricants, moving away from the sale of base oils and low-end oils.

We have three hydrotreating units now, and all are running at full capacity, Gong said. Plans are not finalized for upgrading or building new units, but PetroChina will close the smallest refineries and expand larger and more modern ones … We have stopped selling low-quality base oil, and we dont want to sell any except under long-term contracts. But the market could change.

The Profit Picture

PetroChina Lubricant Co.s finished lubricant sales volumes are continually rising, Gong said, from a total of 1.21 million tons in 2001 to 1.83 million tons in 2005. At the same time, sales revenues and profits have also increased. In 2001, the company lost 1.24 billion RMB on sales of 2.63 billion RMB (a loss of U.S. $155 million on sales of $328 million).

By 2005, he noted, sales reached 8 billion RMB (U.S. $1 billion) and profits improved to 1 billion RMB (U.S. $125 million).

Looking ahead, Gong expects additive prices to increase in China. Price competition will put pressure on brand-name marketers, and on service. Except for China, there are about 1,300 to 1,400 blending plants and 1,000 brand names worldwide. In China … there are more than 4,000 blending plants and 4,000 brand names … With the intense competition, some blenders have been or will be closed down.

Gong acknowledged that the KunLun brand is in the early stages of development, while Sinopecs Great Wall brand is the first world-famous brand in the Chinese lubricants industry and holds the leading position of high-grade engine oil.

But PetroChina has powerful resources, technology and additives, and it will continue to consolidate and modernize, said Gong. It will aim at top markets and compete with the famous international brands. It will focus on developing very important customers. It will build KunLun auto maintenance centers and KunLun fast oil change centers.

PetroChina will cover the Chinese market, satisfy customer demands and use existing base oil resources to the extent possible, and lay the foundation for creating the number one brand in the Chinese lubricants industry, Gong concluded.

Great Walls Growth

Li Liangyao, vice manager of Lubricant Company, Sinopec Corp., Beijing, told the Hong Kong conference that there are many similarities between Sinopecs and PetroChinas strategies and goals. Like his competitor, Lis company has gone through a period of intense consolidation and restructuring, following five principles of unification.

Since 1992 when the domestic lubricant market was deregulated, said Li, it is now very competitive. Consolidation of the lubricants business was necessary to compete.

Sinopec has consolidated its planning and management, resource allocation, marketing, brand image and product development. In addition, two years after Sinopec Lubricants 2001 founding, it acquired Jinzhi Tianjin Grease and Shanghai Lubricant Blending Co.

At the end of 2003, Li said, the company decided to consolidate all its brands into one, Changcheng (Great Wall), in order to focus on one strong brand. It was very important to minimize costs, Li continued. There were five Sinopec refineries making base oil before our consolidation, and problems of supply. Now, there are no more base oil sales to the market; we are allocating base oils internally.

In May 2003, Sinopec reformed its management systems, reduced procurement costs and streamlined supply. Centralized additive procurement was very important, Li said, as was unified cash management. The company set up five sales centers, and marketing and distribution were also streamlined, helping to reduce costs.

Sinopec places great emphasis on upgrading the value of its Great Wall brand. The brand is advertised on television, and the company is ready to make the brand international. We have plans to become international, Li said. Last year exports grew 200 percent, but from a small start.

Staking Out the High End

Sinopecs sales volumes have expanded rapidly, rising from less than 900,000 tons in 2002 to 1.3 million tons in 2004, representing 8 billion RMB in sales (U.S. $1 billion). Sinopec is particularly proud of its partnership with Chinas space agency. It has provided lubricants and leak detection and other services for the Shenzhou spacecraft.

The companys goals for the future are to target the high-end market, speed up its quality upgrade program, develop the talent to enhance its core competences, focus on its brand, and build international competitiveness.

Sinopec is now actively seeking friendly cooperation, said Li. The company seeks technical cooperation. It wants to provide customers with more services on the automotive side, including the possibility of building a chain of service stations. It wants to cooperate with its base oil, additive and packaging suppliers to create mutual benefit. It wants to be clean and environmentally friendly, and wants industry to be of service to the countrys overall development.

But most of all, concluded Li, Sinopecs goal is to be the leading manufacturer and marketer of high-end lubricant products in China.