As of Jan. 1, only eight U.S. companies – two majors and six independents – held Dexos1 licenses. Two majors, ExxonMobil and Shell, signed up, while competitors such as Castrol, Conoco- Phillips and Valvoline declined, saying they will field products that meet the spec but will not pay to use GMs Dexos trademark. Licensees must pay GM a royalty based on their volume sales of Dexos and its overall market share, an amount that industry sources estimate at roughly 36 cents per gallon.

Recently, executives from three independent blenders offered their thoughts about what it takes to be a Dexos licensee – besides an ability to pay the royalties – in a panel discussion at the ICIS Pan American Base Oils & Lubricants Conference in Jersey City, N.J. Gerry Jackson of Renkert Oil and Ernie Henderson of Citgo moderated the panel, which also included Kevin Ferrick of the American Petroleum Institute.

ITS A SNAP

For some, the Dexos decision is a snap, the conference heard. Four or five years ago, we successfully licensed Dexron-VI automatic transmission fluid from GM, said Jim Kudis, vice president and co-founder of Allegheny Petroleum Products in Wilmerding, Pa. For Dexos engine oils, we looked at the cost to get involved, and the cost was not prohibitive so we decided to do it. A lot of our work is spec-driven already, so Dexos is a good fit.

Blending Dexos1 oils was almost business-as-usual for Allegheny Petroleums Pittsburgh-area operations, he described. We already were heavily into making synthetic motor oils, and had the right base oils already in stock. The additive system we use is one that works for both Dexos and these synthetics. Our motor oil all is made at Ambridge, Pa., so all the components are stocked there. With the pieces in place, Allegheny made its first Dexos shipment in early October.

Harji Gill, executive vice president at Indianapolis-based Pinnacle Oil, said his company also was well-situated to make Dexos oils, as it already made both factory- and service-fill products for OEMs. Dexos has a little bit different licensing requirements, he observed, but did it add complexity to our operation? Not really. We were producing GM-spec products before, so there was no additional operational issues for us.

In fact, each of Pinnacles blending facilities, in Indiana and Texas, has some factory-fill business so it makes Dexos at both, he explained.

Others found the path to Dexos a bit rougher. Dexos1 has added cost to our operation, such as building new tanks, commented Garry Rooney, senior vice president of Cam2 International, headquartered in Evergreen, Colo. It requires a different additive, viscosity index improver and storage facilities than we had before. We had to invest in all three, to handle the volumes of additives.

The Cam2 brand was founded in the 1970s as a joint venture between Penske and General Motors. Spun off in the 1980s as an independent, it now sells in 40 U.S. states and 40 countries, said Rooney, who is based in Holly Springs, N.C. Our primary focus is on the passenger car motor oil side, so this involves a lot of products, places and containers. Many of these are location-specific. We decided to support our customers, and to do that we had to license Dexos, he said, but only one of our facilities, at least initially, is making Dexos. We supply it in quarts and drums, and will adjust that as we go along.

PAYING THE PIPER

The royalty that GM collects on quarts of Dexos may be the deciding factor in its licensing, Rooney feels. The fee is based on the magnitude of volume sold. Now the gallons we anticipate selling wont be large. But Valvoline, Castrol, ConocoPhillips – their volumes are huge. They have the muscle as well to fight and stand behind their oil warranties.

That leaves a clear field for smaller, independent companies to license Dexos, the ones you see here today, Rooney said. Once set up to produce it, theyll go on to offer it to private-labelers, too. Its not an easy investment, and the capital requirements can be significant. Id say the top 10 percent of ILMA members will be involved, he said. (ILMA is the Independent Lubricant Manufacturers Association.)

Kudis nodded in agreement. Our plan is to make it easy for those who wont want to make Dexos themselves, and we already have seven or eight customers who are rebranders, he pointed out.

Kevin Ferrick, who manages engine oil licensing and standardization efforts at API in Washington, D.C., reminded the ICIS attendees that long before GM broke away to pursue Dexos, the auto and oil industries had united to support the API Donut and Starburst trademarks for engine oils. These remain important for consumers worldwide, he emphasized.

API and the ILSAC/Oil Committee set the goal to develop a performance standard for GF-5, which involved a lot of work, he said of the latest engine oil category, which also launched Oct. 1. It brought fuel economy and fuel economy retention, robustness, better sludge control, turbocharger protection and emissions controls though phosphorus retention and a phosphorus maximum limit. This is a consensus-based industry standard, developed through a process that benefits OEMs, oil companies and consumers. Through this one coordinated program, industry has developed tests, oil and additive companies proved the quality of their products, and theres been an evolution of new performance standards. Lubricant manufacturers commit to correctly make these products, and we have the After Market Audit Program to monitor them.

This is all done with a common goal – peace of mind for all who license API oils, he stated.

NEXT IN LINE?

That peace of mind will fray if others follow GMs lead, Ferrick worried. If five or 10 OEMs come out with their own licensing programs and unique requirements for engine oils, it would add great complexity, he said. OEM specs are not new, and they often have had certain requirements in the past. Traditionally, theyll take the API or ILSAC spec and add something on top. But if this continues, we could have multiple standards, and great confusion. Consumers might not know what oil to select.

Thats certainly a risk, said Pinnacles Gill, who was actively involved in developing the ILSAC GF-4 and GF-5 specifications. We have serious concerns going forward, he said. The costs going forward will be very high indeed, if every auto company starts agitating to have its own licensing system. Another thing is that demographics have changed, so a lot of drivers dont check their oil or change it or know whats going into their cars. Going forward, the proliferation of specifications could mean theres more chance for misapplication.

Theres a huge need for consumer education on motor oils, said Rooney, but no one is stepping up to do it. Theres an easy way to do it, and an expensive way, too, however no one is going to run 30-second commercials every day, he said wryly. The person with the best opportunity to teach consumers is the person who is selling the car. They need to spend two minutes sitting down and explaining it whenever someone buys a new car.

Meanwhile, he continued, Ive heard nothing from GM on how to educate the public about Dexos. They need to walk the dog. Maybe there can be some incentive to get their dealers on board?

BIG FUTURE – MAYBE

As the panel drew to a close, the participants expressed ambivalence about the future of Dexos, and its licensing fees. It was noted that API licensees pay a royalty, too – a flat $1,250 per year per member company or $1,500 for non-members, plus $0.002 per gallon after the first million gallons sold. But the much-higher Dexos fee will be a revenue stream for General Motors and a model for others.

A concern I have with Dexos is the big impact on consumers of the royalty fee, Rooney said. This cost goes on to the consumer. If it makes revenue for one OEM, it may inspire others such as Ford, Chrysler, Honda and Nissan, to do the same. The additive companies are very good at what they do, so perhaps wed have a Dex-Fo product, he mused, where a single additive package could satisfy multiple OEMs, as seen in transmission fluids. But thats still $3 to $4 per gallon in costs if every one of the OEMs gets a royalty fee from some products.

GM needed these products to be made around the country, said Kudis of Allegheny Petroleum. Now that its being done, the onus is on them – GM – to sell Dexos and to prove they can do it. All GM dealerships are hollering for Dexos right now, but what has GM said it will do to support the product? GM has to support Dexos or it will collapse.

And if they do, and theyre successful, concluded Rooney, you can expect prices to go up quickly in the future.”