Product technology is not the greatest challenge from a commercial standpoint, but instead non-product related issues will threaten to derail lube brands. Cyberattacks hit thousands of organizations worldwide earlier this year, including some of the automotive OEMs such as Honda in Japan and Renault in Europe, providing a wake-up call to everyone to get the stay-in-business basics right.

But after the basics, what are the key strategic issues? No prizes for guessing: Start with the consumers. Its their choices that will determine the strategic to-do list in the longer term. Yes, increasingly, its those pretty uninterested end-users who will drive the business.

Position for the Long Term

Drivers are set to move to electric vehicles in large numbers over the long term, although the hybrid option is the logical choice to suit many motorists needs. Hybrids of course require far less engine oil than conventional engines, but it will be a premium quality to meet driving needs.

Global salesof pure electric vehicles and plug-in hybrids totaledover 750,000 units in 2016, up36 percent from 550,000 units sold in 2015, according to the International Energy Agencys Global EV Outlook. Electric vehicle sales remain less than 1 percent of the worlds total, but far more in some markets.

In many countries, like Norway, electric vehicles are benefiting from high-profile encouragement from governments, as well as progress in battery technology. The price of battery packs has fallen toaround $150 per kilowatt hour, a level which makes electric vehiclescompetitivewith prices of conventional vehicles. It is now possible to produce affordable electric vehicleswith ranges greater than 300 kilometers (185 miles).

Germany began the push to ban diesel- and gasoline-powered engines last October, when the countrys federal council passed a resolution to eliminate combustion vehicles by 2030 in favor of electric cars or hybrids. The resolution, which has yet to be approved, urges the European Commission to implement the measure across the European Union.

Similar government bans on vehicles with combustion engines were approved in July, with France aiming to end sales of these cars by 2040 as part of emissions reduction targets set in the recently signed Paris climate accord. The United Kingdom followed suit a few weeks later, setting the same deadline to ban diesel and gasoline vehicle sales with the goal of improving air quality.

In July, Volvo announced that all new cars manufactured from 2019 onwards will be partially or completely battery powered, becoming the first major OEM to move away from pure combustion engines. Other European automakers such as Renault, BMW and Volkswagen have made inroads in electric vehicle technology thanks to government-sponsored grant programs.

A lubes company would be foolish if it didnt seek to link its brands with those OEMs and digital pioneers that are pushing hardest to exploit electric vehicle technology. Its shareholders would certainly expect nothing less-Tesla, with its niche sales, in April boasted a higher market capitalization than General Motors.

Brace for the Short Term

Coming back to this years realities, the more immediate worry is: Will recent record vehicle sales levels continue to support lubes own buoyant performance? There are already trends in some segments towards lower car ownership-consumers are moving, albeit gently, away from owning vehicles as urbanization, debt, car-sharing and Uber-style options proliferate. More worryingly, there are clear signs that car sales could be badly undermined by relatively minor economic changes.

Those pretty uninterested motorists (and even enthusiasts) are overwhelmingly buying their cars on credit. Eighty-six percent of new car sales in the United States are financed, according to the Federal Reserve Bank of New York. Outstanding loans to buy these automobiles amount to over $1 trillion, excluding leasing.

In the U.K., financing known as a Personal Contract Plan (PCP) has fueled record car sales and is used by some 80 percent of buyers, says the U.K.s Society of Motor Manufacturers and Traders. These financing arrangements on both sides of the Atlantic, with their current very-low interest rates, allow motorists to drive more upmarket cars than they could otherwise afford by effectively paying a depreciation charge and, if all goes well and their car holds its value as expected, using the equity as a deposit on their next car.

All will be well, provided interest rates dont rise too much and the vehicles residual value holds up.

However, interest rates-which have been low for a prolonged period-are set to rise. If recent U.S. campaign promises actually result in $1 trillion or more in infrastructure spending, as well as significant reductions in taxation, we can expect the increase to be significant.

Between the Old and the New

On the other hand, the success of PCPs and other schemes in ramping up new vehicle sales has resulted in similar growth in used car sales. In the U.S., cars are coming off-lease at about twice the long-term average. Eventually, this overhang will depress the residual value of cars bought on financing deals.

The National Automobile Dealers Associations Used Car Guide showed U.S. used car prices fell each month in the eight months leading up to February this year. Furthermore, Morgan Stanley notes that up to 12 million relatively low-mileage vehicles are likely to hit the U.S. market over the next three years, depressing used car prices further and cannibalizing new car sales.

Higher loan repayments and a shortfall in residual values would reduce new car sales-a trend that is already visible. They are also likely to adversely impact those upmarket models which consumers could afford, because their high residual value was more important to their monthly payments than their larger upfront price tag.

Governments are waking up to the sharp rise in car loan debt reminiscent of the mortgage-based financial crisis of 2009. Observers point to sharp sales practices impacting consumers who become unable to pay off their loans, while the subprime auto loans themselves are bundled into deceptively attractive securities. Its not surprising that fund managers are starting to short subprime lenders.

Heres the rub for lubricants: Car financing deals already distance consumers from maintaining their cars-its often wrapped up in the contract. But also, the technical benefits of high quality lubes that can enhance engine life will be swamped by floundering residual values. And when the finance contract expires, cars are serviced and maintained through a business-to-business deal. Plenty of reason, then, for consumers to remain uninterested.

Governments may also find themselves adding to the sales overhang. A few years ago, they led motorists in many countries to opt for diesel in order to reduce carbon dioxide emissions and save the planet from the worst of global warming.

Now that the full dangers of particulate emissions are better understood there are numerous initiatives, particularly across Europe where diesel penetration was highest, to penalize those same motorists. There are calls for government-sponsored scrappage schemes to drive diesel cars out of towns and cities, but with a resulting overhang of diesel cars that would further depress used car prices.

Branding and Loyalty

If lubricant customers are changing, how must we respond?

Many of these trends show that the key lubes-buying decisions are moving from the consumer to businesses in one form or another. Even in relatively immature markets, where brands often enjoy a high degree of consumer interest and enthusiasm, the need for big, above-the-line marketing budgets may have peaked. In all markets, the best lube brands will increasingly be defined by their ability to dovetail with their business customers and support their own development.

Looking to the future, OEMs face a sea of troubles. Their sales of new vehicles may well significantly fall in the near-to-medium term, damaging their revenues just as they confront environmental challenges and a technological arms race towards electric vehicles. Our own in-house analysis has shown that OEMs lucrative aftermarket business can be severely hit by sales fluctuations. This, in turn, can strongly impact premium lubes sales.

The industrys response to both of these challenges can be powerful. Some lubricant companies are well-placed to support OEMs in such times. With their own lube brands, automakers have fantastic scope to project a broader personality toward business customers, going beyond factory fill, beyond technology links and into logistical and transactional relationships. At the same time, a strong lubes brand need not lose sight of its exciting, emotional appeal that can support its business customers own marketing programs.

Principal Consultant John Sargeant has direct experience with the lubricants industry in the Americas, Asia and Europe.He was with BP and Castrol for nearly 30 years and now supports Senka Solutions.Stuart Speding is Director of Senka Solutions, established to advise lubricants clients across the value chain, including refining, branding, M&A, sales channels and market entry strategies.Speding has over 20 years experience with Mobil, BP and Castrol.For information, email stuart@senka.co.uk