“We Want to Lead the Consolidation”

Wu Xinghe, CEO of China Rerun Chemical Group in Heilongjiang province, has been very busy lately. Within one mid-summer week, he had business meetings with investors in London and Hong Kong, then flew back to China to meet potential partners. He then engaged in discussions with lubricant and grease marketer Huachen Petrochemical, in the nearby city of Shenyang, to explore areas of mutual interest such as financing, marketing and geographic expansion, possibly via a joint venture or merger.

Wu is clear about his next move after last Octobers listing of Rerun, a lube producer based in the northeastern city of Daqing, on the London Stock Exchange alternative investment market (AIM), which is for fast-growing small- and medium-size companies.

We want to lead the consolidation in Chinas lube industry, he said when LubenGreases visited the companys offices recently. China has over 4,000 lube suppliers and most of them are small, privately owned, competing in the low-end market. However, some are doing very well with their own advantages, be it sales network or research and development capacity, he explained. We want to find a way to work with them.

Wu added that his idea of acquisition is not necessarily buying an entire company; rather, he prefers cooperation based on a win-win strategy. In fact, Huachen is one of several companies he is in talks with, and he hopes to ink agreements with some by year end, should they fit Reruns strategic criteria.

Finding ideal candidates across this huge nation is not easy, but Rerun found itself a scouting partner in Shang Ji Yuan, a Shenzhen-based consulting and publishing firm which operates business-to-business websites and serves the lubricants industry.

Shang Ji Yuan has the [resources] and knows what we are looking for. It will help us to speed up our consolidation, Wu said.

Rerun, known as Runyuan in Chinese, recorded revenues of Yuan 226 million (U.S. $36.8 million) and after-tax profits of Yuan 20 million in fiscal 2012, according to the London shares offering. Now it is eager to expand outside its home province, where it already is a sizeable lube supplier with revenues growing at double-digit rates in recent years. Thats why it is particularly interested in companies in adjacent regions. Huachen is in the close-by Liaoning province, for example; other candidates are in cities such as Wuhan in Hubei province and Shenzhen in Guangdong province.

Wu also said companies producing specialties such as lubes for farm equipment like tractors are also of interest to him. In short, we basically choose our target who can complement us either geographically or with their products. If our M&A strategy works out well, we will probably think of using it on European companies, he said.

As for Chinas great number of low-end producers, Wu predicts the majority will go out of business eventually. He points to Daqing itself as an example: The city used to have more than 300 lube producers, and now only about 100 survive.

With a history dating back to its founding in 1993 as Daqing Runyuan Chemical Factory, Rerun today offers dozens of lubes under its parent brand Runyuan, including engine oils for gasoline and diesel cars and motorcycles, air compressor oils, gear oils and more. Rerun buys API Group II base stocks from China National Petroleums Daqing refinery, which uses PetroChinas own proprietary dewaxing technology. Rerun also buys imported synthetic base stocks to produce more refined lubes for high-end automobiles.

Next, Wu said he is going to develop and produce lubricant additives, which his company currently must buy from multinationals such as Lubrizol and Chevron Oronite. We will hire talents to develop packages primarily for our internal supply, he said, adding Rerun is making some components but the market demands additive packages.

A true believer in lean management, Wu has 58 staff in the head office, with two in charge of R&D. I dont need a lot of people, but each one of them has to be a top-level talent in his profession, he declared. Eventually we will expand our core R&D team to five people to develop lubes and packages.

To enhance Reruns R&D efforts, Wu already has partnered with local academic institutions like Daqing-based Northeast Petroleum University. Under the partnership, Rerun will provide financial support while the university will provide research capabilities.

He anticipates the R&D muscle will help him gain more industrial clients, such as steel companies and construction companies. Sales of industrial lubes currently account for about 10 percent of Reruns revenue, with the rest coming mostly from automotive products. In the future, Wu said he expects 20 percent of revenue could come from industrial oils.

Reruns factory is ISO 9001 accredited for environmental controls, and also holds 18001 accreditation for its health and safety systems. The Daqing facility has been expanded twice in recent years, adding storage tanks and blending lines in 2009, and then adding a third packaging line and even more storage capacity in 2011.

Reruns lube production capacity is currently 40 million liters per year, and even more if it adds work shifts. In first-half 2014, it produced 8.1 million liters of lubes, said Wu.

As a regional player, Reruns revenue relies heavily on its distributors nationwide. Wu sets high sales targets for these regional distributors, as well as setting suggested retail prices, and says he also helps them do marketing and provide customer services.

We support our distributors in various ways, and reward those who beat the target. Distributors are a vital part of our growth and we are going to develop more for our new business, he said.

He also spotlighted a new mobile oil-change service the company is test marketing in Daqing. With this service, local distributors operate cargo vans – provided by Rerun, stocked with its lubricants and decorated with its logo – that offer on-call oil changes, filter replacements, tire pressure checks, and more.

Usually, once consumers are happy with one type of lube, they will stick to it. We want this service to help us reach more consumers, especially in smaller cities, Wu said.

He went on to say that the service has been running great in Daqing and may be copied in other pilot cities like Shenzhen and Guangzhou to the south, and then rolled out even farther. However, Wu made it clear, this business model is not only about oil changes. The refilling service is just a start. Eventually it will be something bigger and bolder and will certainly bring us more profits – but right now, I cant reveal more, he demurred.

Rerun has one major brand – Runyuan – and five sub-brands: Panther, Tiger, Horse, Deer and the newly launched Black E. In the future, it will have about 20 sub-brands, Wu said. Under his branding strategy, each one will serve a specific market. For example, Black E is only available in Chinas north, because in the south, Black E also means beggar in Cantonese. So we sell Runyuan in the south, Wu explained.

Another example is Panther premium engine oil. Meeting API SL and available in SAE grades 5W-30, 15W-40 and 20W-50, Panther is suggested for use in foreign-brand cars such as Audi, Buick and Toyota. The Deer brand (API SF, 10W-30, 15W-40 and 20W-50) is targeted to owners of low-end, domestic-badge cars.

Consumers in different regions have different demand for lubes and we hope our products will serve them all, Wu said.

To make these plans happen, he says he is ready to invest several million dollars. Rerun is the only publicly listed company among the 4,000 small and medium lube producers, but being a lube producer is far from enough. In five years, Wu envisioned, I want to turn Rerun into an R&D and service-oriented company, with production partners all over the country.