The pitfalls, they soon realize, include a very different business environment from the West, as Chinas regulations can sometimes be vague or difficult for foreigners (or even Chinese) to decipher. Another immediate concern is the cost.

Long gone are the days when China offered nothing but cheap, skillful labor. These days, labor costs in China are rising nonstop. Thats a key concern for small- and medium-sized enterprises like Copton Technology Co., a Qingdao, Shandong province-based lubricant supplier with over 300 employees.

The fact is we couldnt find a good worker even offering 5,000 yuan [U.S. $750.50] a month. A decade ago, we could find enough workers paying just 1,000 yuan a month, Zhu Lei, the companys general manager, told LubesnGreases.

In the first half of 2017, monthly salaries in Qingdao, a coastal city in north China, averaged about 3,778 yuan, up 15.8 percent year-on-year, according to the local government. Across China, minimum wages in various regions are also climbing. The government in Shanghai set the minimum wage at 2,300 yuan per month after insurance and allowances-the highest in the country.

In April, Copton started operation of its new smart facility in Qingdao. Representing an investment totaling 700 million yuan, the blending and packaging facility is able to churn out 100,000 metric tons a year of lubricants for vehicles, industrial machinery and original equipment manufacturer customers. A major reason that we did this expensive facility is to avoid rising labor cost, Zhu said.

The facility is equipped with two highly automated filling lines from Italian packaging machinery maker Ocme, each costing about 30 million yuan, or 10 times its Chinese counterpart. Copton also has a blending system made by American company Emerson, as well as a large vertical warehouse controlled by a sophisticated inventory management system. It links the sales department with the manufacturing side, to ensure client demand is met in a timely manner while avoiding wasteful overstock. The plant can easily add more capacity, thanks to a flexible design.

Boasting that it is the most expensive and advanced lube facility in China, Zhu said the company is really investing in the future.

The one-time investment looks huge, but based on our calculation, the cost will eventually beat human labor thanks to the efficiency and accuracy, he said. Additives, for example, can be handled with great precision. With human workers, precision is not guaranteed, and re-do costs money and time. With [these] systems, we dont have such concerns, Zhu added.

But compared with labor costs, perhaps the bigger challenge is the homogeneous competition. Like many other industries in China, there are relatively few technical barriers to entry, and lubricant companies struggle to differentiate their products from the scrum.

Thats why there are so many cheap oils in the market labeled API SN, Zhu said, referring to the current highest API engine oil category. But did they go through all the costly tests? I bet no. To many consumers it matters little, he conceded, as long as the price is low.

This is why companies like us are pushed to invest heavily in quality, to compete for consumers who actually care about the quality. Our rivals are not Chinese companies, but multinationals, Zhu stated. Copton, he continued, aims to be Huawei in the lube industry, a nod to the well-recognized Chinese smartphone brand.

To ensure quality, Copton buys API Group II base oils from major refiners such as ExxonMobil and PetroChina and additives from major international suppliers, which means the price tag is above average. For example, its name-brand, full-synthetic SAE 5W-30 engine oil, licensed to API SN, is priced at 538 yuan ($81.00) for four liters-10 percent higher than its counterpart from Shell (488 yuan). Meanwhile, other Chinese manufacturers may make the same claims on their product labels yet charge no more than 250 yuan.

Copton was listed last year on the Shanghai Stock Exchange and reported 2016 revenues of 821 million yuan. But to be Huawei in the lube industry, a fancy smart facility is just part of the heavy investment Zhu mentioned. More money goes to research and development.

Over the years, Copton has gradually established a partnership with the Lanzhou Institute of Chemical Physics, a division of the Chinese Academy of Sciences, a major Chinese government think-tank. The two set up a research center in Qingdao to develop oils for high performance, energy efficient engines.

Copton also recently hired a research director with decades of experience in multinational and state-owned companies, to oversee the R&D department. Its critical that we have the right person to lead our research team for high quality products, Zhu said.

Chinas lubricant consumption was 5.4 million tons in 2016, down 3.5 percent compared to 5.6 million tons in 2015, lubricants consultant Zhang Chenhui noted in a presentation given at the China Lubricants Market Focus gathering in Beijing in April. Demand will float back up around 5.5 million tons in 2017, he added. Other analysts and industry sources agree that Chinas lubricant market shrank in 2016 but generally estimate demand is larger-in the range of 6 to 6.5 million tons per year.

Blending capacity in the country sits above 20 million tons. Zhang estimated that there were 1,350 blending plants operating in China in 2015, including 300 specialty oil facilities. The output of Chinas two state-owned companies-Sinopec and PetroChina-and international companies accounted for 59 percent, with the remainder made by small- and medium-size blenders.

China has a high degree of brand concentration in the industrial lubes market, due to centralized purchasing, collective bidding and supplier management of large and super-large industrial companies, which account for 80 percent of industrial lubricant demand. These enterprises value brand, reliability and technical service, Zhang told attendees. Lubricant SMEs, on the other hand, can only sell products to similarly sized industry users, he said.

In the automotive segment, 600 SMEs compete in the market. Chinas automotive lubricants have a low degree of brand concentration stemming from decentralization of the auto aftermarket, Zhang reported.

Under the Chinese governments Made in China 2025 strategy, which aims to largely shift the entire manufacturing sector from low-end to value-added, with as little impact on the environment as possible, Coptons Zhu sees fresh opportunities in industrial lubricants; he reckons that Chinese companies will have to buy more advanced, automated machinery for manufacturing.

Its true that clients prefer using oils from multinationals on their expensive imported machines, but not every Chinese manufacturer will pay so much money for foreign machinery, and these companies will be our target, he said.

Hu Qingguang also sees Made in China 2025 as an alternative to the homogeneous competition. Hu is general manager of Makhop Technology Co., a lube producer based in Zhuhai, in south Chinas Guangdong province. Founded 10 years ago and now listed on Beijings over-the-counter exchange for SMEs, Makhop has capacity to make 150,000 t/y of lubricants, including industrial lubes (most of which are process oils for air conditioner manufacturers) and engine oils, as well as business from OEMs. In 2016, Makhop reported revenues of 214.3 million yuan.

The company is developing a new processing oil for a client that is eager to cut emissions and improve efficiency at its plant. I see there will be growing demand for such oils under Chinas new strategy, Hu said.

Its no doubt that Chinas environmental laws will be increasingly strict, and our clients will need us to help them comply with the laws with energy-efficient, eco-friendly oils, he continued.

Unlike Copton, with its strategy of improving quality and efficiency to woo customers, Makhop is placing its bets on service. Quality alone is not enough to make Makhop stand out among rivals because oil quality is getting very similar, Hu said. However, providing satisfying, timely services could make us different.

If compliance is the key to keep industrial clients happy, it requires a very different approach to win over car owners.

In October 2016, Makhop set up a local subsidiary targeting Chinas fast-growing installer aftermarket. As a pilot program, Makhop moved with caution-so far, it has only opened two local car-care stores named Jin Mei He. These provide various services including engine maintenance and oil changes, air conditioner maintenance and car cleaning, all using Makhop products.

Our stores are located in car-dense communities in Zhuhai. We aim to serve car owners with our products at more competitive prices than the 4S stores, Hu said.

These 4S stores-standing for sales, spare parts, service and survey-have long dominated Chinas aftercare market. Upon buying a car, a customer typically will be directed to a 4S store authorized by the automaker for all maintenance, as well as repair services associated with car insurance companies. Because of their dominant position, 4S stores often charge high prices.

Although industrial oils are its major business and most of its sales currently come from south China, Makhop aims to sell more motor oils in the next few years. To achieve this, Hu said the company will have to invest in a distributor network.

China is big, and regional markets could be very different from each other. So I have to rely on local distributors and learn about the local market, he remarked. The importance of local distributors is a major reason that Makhop is reluctant to open a store online, the strategy adopted by some of its rivals, such as Nanjing-based Lopal.

Makhop competes on services, so selling online isnt exactly the right model for us, Hu said, while acknowledging that opening an online store is probably good for branding.

Makhops Hu and Coptons Zhu both agree that the Chinese market, despite its challenges, deserves their devotion. They see far fewer benefits in Chinas One Belt, One Road initiative, which aims to forge business ties with Central Asian, Southeastern and African countries.

The countries along the initiative are mostly developing countries demanding large quantities of okay-quality lubes, which obviously are not what Copton produces, Zhu said.

Makhops Hu said hes open to export, but his concern is the tax policy. China now allows lube export, but I dont see any supporting policies. If VAT tax cannot be refunded, our prices will not be competitive at all in markets overseas, he said.