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Question Complexity


Given the lubricants industrys limited resources, its time to focus attention and resources where they add value – and not on needless complexity such as redundant engine tests, urges Trevor Russell of Infineum.

Complexity, said the additive company executive, can be both the friend and foe of the lubricants industry. It is the driver for many niche opportunities and is what enables product differentiation, he allowed. Yet some processes and procedures – especially those used to develop engine oil specifications and tests – have become more resource-sapping than they should be, and risk the industrys ability to innovate and grow.

On the one hand, complexity can bring endless opportunities for differentiation and niche developments, Russell told the ICIS World Base Oils & Lubricants Conference on Feb. 22. On the other, it can bring consumer confusion, duplication of effort and cost.

Russell, Infineums Abingdon, U.K.-based chief strategy officer and sales and marketing vice president, listed numerous areas where complexity is on the rise. There are more original equipment manufacturers to be satisfied, more farflung geographic markets to be reached, more engine hardware types that demand attention, and increasing variations in the base stocks – particularly API Group IIIs – that blenders want to use in their lubricants.

Perhaps life seemed simpler in the 1980s and 1990s, after the emergence of truly global OEMs, Russell noted. Those OEMs required suppliers with equally global capabilities, and that led to a landscape where a handful of major oil companies in each geographic area had significant market shares.

Today, he added, the picture is changing again, driven by the enormous demographic and economic changes that we see on a global scale. Now we are operating in an industry where the major markets in the West are mature and experiencing much lower growth, even shrinkage, while those of the developing economies in Asia, Eastern Europe, Russia and Latin America are growing rapidly.

Oil and additive companies are already investing in these high-growth regions, Russell stressed. The shift east of vehicle manufacturing has been followed by lubricant production, as seen with the announcement of many new blending plants in China and Southeast Asia. At the same time, we also see movement in the opposite direction, with rising [national oil companies] in emerging countries having clear global growth aspirations.

This mutual movement into new territory has the potential to create tension, as established global giants move east and south, while the growth-economy nationals move west and north, he said.

Of course, as it shifts east with demand, the lubricants industry cannot neglect the established markets of North America, Western Europe and Japan, Russell said, even if these are seeing flat or falling lubricants consumption. They are still the source of most new lubricant specifications, and organizations such as API and ACEA remain the bedrock of global specifications.

The level of complexity linked to specifications is clearly growing, as they continue to fragment, Russell said. Some OEMs are moving to globally licensable specifications, but overall, we not only see an increase in the complexity of our industry categories but also in OEM specifications. In the recent past, only a few OEMs were active, but now almost all OEMs want to play a part and have their own systems and specifications – which are often mutually exclusive.

This requires the oil and additives industry to be smarter about the proliferation of specifications, to satisfy both the OEMs need for faster delivery of new technologies and the lubricant blenders desire for differentiated, higher value products.

Another issue, he observed, is the wide variety of API Group III base oils available, complicating the grade slate that confronts formulators. Not long ago, the world had three merchants of Group III base oils: SK and S-Oil, both in South Korea, and Finlands Neste Oil. Today, the list of Group III producers includes Petronas, PetroCanada, Neste-Bapco, GS-Caltex and Chevron, SK-Pertamina and Shell, to name some of the largest. These companies use differing processes and feedstocks, and interchange is minimal, so intensive testing programs are required when blenders consider a change of suppliers.

Group IIIs rise has been accompanied by the demise of uncompetitive Group I plants, which results in the potential for a significant amount of reformulation work and/or brand repositioning, he said. Formulators also must work across a wide spectrum of viscosity grades, from monogrades to SAE 20-50 and now down to the new 0W-16 grades.

Costs are also climbing – sharply – for engine oil development programs, such as the API C categories that form the basis of most global heavy-duty diesel lubricants, Russell said. For example, API CF required a candidate oil to pass only two engine sequence tests; todays API CJ-4 oils must pass 19 tests, and the entire category cost nearly 20 times as much to complete.

All this added complexity has the potential to add significant cost to lubricant marketing and supply chain budgets, in addition to more expensive development programs, Russell said, rendering some programs of borderline commercial justification.

Russell foresees real cost challenges ahead for the industry, as it struggles to simultaneously create the next generation of passenger car and heavy-duty engine oil upgrades. Meanwhile, additive company research budgets reportedly are rising more than 7 percent a year, he said, and huge capital expenditures are needed to support emerging markets. Indeed, its a matter of public record that all four major additive companies are expanding capacity in Asia.

Russell continued, To be clear, this is definitely not about lowering technical hurdles but is about reducing the amount of duplication, redundancy and wasted effort.

Looking at the current oil development structures and processes, he said the industry should ask: Are these meeting our needs, moving quickly enough, and are they indeed sustainable? Are they creating value, versus adding unnecessary complexity? My fear is that the balance could tip towards complexity that doesnt create value.

Drawing to a close, Russell suggested that the processes for developing new specifications are ripe for reform. Those processes typically establish standards via consensus, and are led by trade associations. Infineum is both committed to and supports such bodies, he insisted. However, such processes now entail large numbers of people, sometimes with unclear voting rights and decision-making authority. Participants must continually find consensus and also grapple with very tight timelines.

In North America, with the slippage of the GF-6 timelines and serious challenges around meeting PC-11, Russell cautioned, we already see leading indicators that the system needs review – and thats before we start to consider the European challenge of ACEA 2014.

Whats the alternative? We believe a smaller, more streamlined system focused on delivering a baseline per-formance specification from which individual OEM specs can be built is worthy of detailed consideration, he said. Removing duplication – for example where the same basic performance criteria are assessed in multiple tests – would be a good start.

Finally, he concluded, we must ensure the interchange guidelines for viscosity modifiers, base oils and components are robust, current and fit for purpose. Addressing these issues will allow a release of resources to support and promote rapid innovation, which in turn will benefit all industry stakeholders and consumers.

Afterward, Russell sat down with LubesnGreases for an exclusive interview and to expand on the topic of complexity. He said that shifting resources to growth markets does not mean Infineum plans to trim its operations elsewhere. The way Im looking at it, moving resources to the East in fact is already under way. The growth is in the East, but our existing markets in North America and northwest Europe still need to be served. Our additives resources are in place there, and we dont mean to take those away. But we have to meet geographic growth, and we face technical challenges.

What were seeking is to do things more efficiently. Were seeing resources getting tied up in stuff that doesnt add value. One possible example, he said, could be base oil interchange and viscosity grade read-across guidelines, which determine the testing regimes for many candidate engine oils. Are these guidelines robust? Do they lead to too much testing? he pondered.

As the London audience heard, Russell sees the process for introducing new engine oil categories as another resource-sapping effort that needs fresh thought. We have seen some of the industry committees grow to where they are too large, unwieldy, and dont let the technical work progress.

The standards-setting organizations, within each committee and specification body, should have a mandate to think about complexity, he suggested. They need to be open to having a dialogue, to asking is the fluid were creating relevant, to asking if another test is really needed. For example, do we really need to run six engine tests to establish base oil interchange, or could three tests be sufficient?

Within Infineum itself, simplification is an ongoing goal, Russell said. Were always looking to at our business processes, our interactions, our hardware, where we can use nimble and lean manufacturing. Im proud that our customers say were number one in terms of supply reliability, and were extremely conscious of what goes into that. It takes constant questions: Should we expand a plant? reduce units? how to get the right capacity in the right places?

Some listeners at the ICIS meeting felt that Russells real goal in speaking was to justify the firm prices and margins now seen for additives. For a number of years we were not getting the returns needed for reinvestment in our business, Russell responded. We are now able to reinvest in leading edge technologies and manufacturing facilities. I just hate spending resources on low value, duplicative or wasteful activities.

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