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Dexos 1, General Motors new proprietary engine oil specification, has the potential to be a real game changer in the automotive lubricants marketplace. Making money on dexos will require an open mind and some gutsy moves, but it could be a winner for some. Last month I highlighted some of the issues and concerns swirling around this new kid on the block; this month lets identify the gains some may see from dexos, and how it might impact others.

As youll recall, GM has two specifications under that trademark, which it insists on spelling with a lowercase d: dexos 1 for spark-ignited engines (part number GMW15827), and dexos 2 for light-duty diesel engines (GMW16095). The latter is about to launch in Europe and elsewhere; the former is the version for North America, starting with GMs 2011 model year vehicles.

Many oil marketers and especially quick-lube operators are fretting over the introduction of dexos because it represents an increase in the variety of engine oils they must manage. Yet, a look back to the mid-1960s shows that each of the U.S. automakers has had unique engine oil requirements. There was no unified system of API engine oil categories, no donut as we currently know it. Engine oils were designated by the essentially non-descriptive terminology of ML, MM and MS, and brand names were the only other guide.

Original equipment manufacturers and the oil industry alike were concerned about this scattered approach to engine oils, and its impact on logistics and quality. Still, when the current API Engine Oil Licensing and Certification System was first developed, there were some oil marketers who quickly declared that it would mark the end of competition, reduce margins and commoditize engine oils. In some respects, that prediction has been borne out; many consumers today seem content with any major brand of engine oil, as long as it has the API donut or starburst logo on it. (One size fits all, indeed.)

The idea that multiple and diverse oil specifications are a negative in the marketplace doesnt compute with the rest of the world. North America is the only major market where engine oil approvals are not related to a specific OEM. In Japan, the major OEMs all sell Genuine Oil which meets specific and unique requirements for their particular vehicles. In Europe a similar system is in place, with oils specified by ACEA standards plus OEM-specific requirements. In both markets, do it yourself (DIY) is a minor part of the oil market, and car dealers capture the bulk of oil-change business. OEM requirements also drive markets in developing economies, although API categories carry some weight.

Quick-lube operators say they oppose dexos 1 because it requires them to stock another product, and one that will cost a high premium. However, most quick lubes already carry a large number of products other than those in their bulk tanks. In fact, specialty oils such as semi-synthetic and full-synthetic products can bring a premium anywhere from $15 to $30 over a shops standard bulk-tank oil for an oil change, according to data from National Oil & Lube News.

Yes, it complicates things, but the addition of another premium oil like dexos 1 to a quick-lubes slate could be a real money maker, just as those other specialties are. It might mean dropping something else but thats to be expected and is the price of competition.

Follow the Leader

A bigger questions is, what will the other OEMs do if GM makes a go of dexos 1? Interestingly, both Ford and Chrysler already specify their own engine oils for factory fill. In Chryslers case, the MS-6395 engine oil specification requires a 100,000-mile Las Vegas taxicab field test on top of the standard ILSAC requirements. Ford has specifications that require additional testing, but reserve GF-4 (moving to GF-5) for North American passenger car use in the aftermarket.

It doesnt seem like too much of a stretch for these two automakers to go forward with their own requirements. The other global OEMs, whether Mercedes, Toyota, VW or others, also might relish the opportunity to layer on their own recommendations for the North American market. Representatives say they do not see dexos 1 as undercutting the current engine oil development process, and point out that all OEMs make recommendations in their owners manuals based on their own specification. GM too has said that it will continue to participate actively in ILSAC, the committee of North American and Japanese auto companies that works on the GF-series of engine oil specs.

My crystal ball is admittedly foggy, but the possibility looks strong that each of the OEMs will push its own product. Even if there ultimately were several OEM brands and licensing programs, it still seems that each of these could command higher margins than todays commoditized oils.

Some have raised the question of formulation costs, tossing around dire predictions of a 30 to 50 percent cost increase in additive components due to dexos projected use of molybdenum based friction modifiers. One additive supplier told me that although technically challenging, they do not believe that dexos 1 will require chemistries not currently used in North American, Japanese or European formulations.

More Cost Factors

While the total cost of dexos 1 will be higher than conventional oils, it will not be due to additive componentry alone. The need for API Group II+, III and even IV base stocks also will have a significant impact on the finished oils cost. A look at posted base oil prices on, for example, shows that Group III currently costs about 80 cents per gallon more than Group II, for the 4 cSt grade. Group IV (PAO) has an even bigger delta over Group II.

One additive company source observed that the strategies of lubricant marketers will largely dictate the number of players in the dexos 1 market, and the corresponding number of product approvals required. Until those factors are known, the magnitude of any added cost is unknowable. In general, products with additional specifications and testing requirements will incur additional development costs.

An interesting point, this source added, is that dexos 1 is intended to be a global GM specification. In emerging markets where GM has a presence, such as India and China, the introduction of dexos 1 represents a higher performance level than is typical. This may drive those markets toward higher performance levels in general and impact the overall additive technology and products developed for those markets.

The American Chemistry Councils (ACC) Product Approval Protocol Task Group (PAPTG) reviewed the dexos 1 situation at its September meeting, but declined to comment on dexos 1 for LubesnGreases at this time.

The ultimate price for a dexos 1 product will be determined by the market. Yes, dexos 1 will be more expensive to make than current products, but I believe the extra costs can be more than recovered in the marketplace.

Barriers to Entry

Some believe (or hope) that dexos will run afoul of the Magnuson-Moss Warranty Act, which says that manufacturers cannot require that only branded parts be used to service their products. If an automaker ties its consumer warranty to the use of a specific brand of aftermarket product, the manufacturer must provide it for free. GM spokesman Tom Read says his company is comfortable with its engine oil specification and licensing program. That suggests that GM is confident it has that base covered.

Jeff Leiter, legal counsel in Washington, D.C., for the Independent Lubricant Manufacturers Association, opines that so long as there is no tie relating its warranty to the use of dexos, GM is probably safe. In the past others have used language stating that warranty claims may not be allowed if the proper lubricant is not used. However, no actual claims have been denied. One example is Volkswagens requirement to use its specified oil for diesel-powered VW vehicles. This was challenged by the Automotive Oil Change Association, and the decision was reached that VW could not block the use of other oils.

Leiter pointed out that federal requirements for engine fuel-economy certification could set a precedent here. That is, oils which the OEMs use to certify their engines for Corporate Average Fuel Economy requirements must be readily available in the market. If GM imposes high dexos licensing fees and royalties, that may constitute a serious barrier to entry for many oil marketers, and put dexos outside the federal guidelines. GM plans to discuss the matter in more detail with ILMA leadership, Leiter said.

GM previously has said that it will approve multiple suppliers for dexos 1, to eliminate any concerns about wide availability.

For many oil marketers, though, the perception of dexos is that the royalty/license fees ($1,000 per year plus $0.36 per gallon) are excessive versus the API systems ($1,050 per year plus $0.0015 per gallon) – again leading to a reduction in competition. This expense, they argue, could force quick-lube operators and dealers to buy their dexos volumes from GMs own aftermarket arm, Mr. Goodwrench, which would amount to a shadow warranty.

Better Gallons, but Fewer

Last but not least, dexos 1 will enable significantly longer drain intervals, based on expected recalibration of GMs on-board Oil Life Monitors. Drivers would have to pay a premium price for this oil, such as they now pay for synthetic or high-mileage engine oils, but they should appreciate the ability to go much further between changes. Over time, the impact on oil volume obviously would be negative, but per-gallon profits could be strongly positive.

Time is on the side of those marketers who want to move gingerly and deliberately ahead on dexos. Initially, the volume will be small. Only 5 percent of the U.S. fleet of light-duty vehicles will be 2011 models and of these, perhaps 30 percent will be GM products. By the end of next year, maybe 1.5 percent of the vehicles on the road – just 1.8 million cars – will require dexos 1.

Generously assuming two oil changes per vehicle per year, dexos 1s first-year volume will amount to 3.5 million gallons, after initial fill. Thats just about 0.5 percent of the total U.S. passenger car engine oil market – hardly enough to warrant the concerns over how to manage another product in the mix. A gradual roll-out of dexos should be manageable, prior to ramping up to larger volumes in subsequent years.

When it is all said and done, the industry will adjust to dexos 1 and whatever comes after it. People will grumble because it means change, but eventually theyll see the possibilities. The first ones to adapt and promote the new products will have a head start, but the entire market will evolve.

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