With electric vehicles and autonomous cars looming large, the new battleground for lubricant additive companies is set to be Asia-Pacific. The region is almost the only place where vehicle production capacity is growing, says PwC Autofacts, with 14 new plants planned by 2022-more than double either North America or the European Union.
China, already the worlds largest auto market with 28 million vehicles produced in 2016, is set to grow to 40 million vehicles by 2025, a June 2017 Forbes article pointed out. This is no fanciful projection. The United States has a car ownership ratio of one vehicle for every person in its population; in China, the ratio is just one for every six people, and its population is four times greater than the U.S.
Volkswagen predicts sales of 1.5 million new energy vehicles in China by 2025, but this also embraces gasoline-electric hybrids. However quickly electric vehicles take hold in China, the sheer scale of overall market growth means that conventional internal combustion engine technology will be a key part of the landscape for many years to come.
Additives manufacturing hubs are developing quickly to serve demand in this region. To mount an effective challenge to the big four Western companies in addition to a slew of emerging Chinese domestic manufacturers, European players are establishing manufacturing bases in Singapore and China.
Lars van Dijk, sales leader Asia Pacific for BRB International in the Netherlands, captured the mood: Everyone in the market is moving to Asia-Pacific. A lot of new factories are being built with new base oil capacity added. We see a lot of action taking place there.
London-based consultancy The Strategy Works attended the China International Lubricants and Technology Exhibition (Inter Lubric China) in Beijing in September and talked to some of the companies expanding operations in the region.
R&D, Legislation Drive the Market
Asia-Pacific is no longer a low-tier lubricants market, and price alone is not a differentiator for new entrants. Players recognize that investment in research and development is paramount.
Products now need to be registered in China via the Inventory of Existing Chemical Substances Produced or Imported in China, a system that is sometimes called China REACH because it adopts many traits from the EUs substance inventory program. Once a product has been registered, it is available for any company with the technical resources to use in its formulations.
China has also been quick to recognize its role in reducing global emissions by implementing the China Stage 6 standard starting July 2020, limiting emissions of greenhouse gases and pollutants in line with global trends.
Tighter regulations on emissions are driving lubricant manufacturers to improve the quality of products. This, coupled with the demands of auto manufacturers as they move toward more specific performance parameters for engine oils, raises the bar for additive companies.
The heightened focus on quality is one factor behind Jinzhou Kangtai Lubricant Additive Co.s decision to undertake an initial public offering process on Chinas National Equities Exchange and Quotations Co. (the New Third Board). The Jinzhou, Liaoning province-based companys president, Peigen Yu, explained that the company has been preparing for its IPO for three years, including an application submitted to the China Securities Regulatory Commission. The application process takes about 10 months, and the company expects to complete it by May.
Jinzhou Kangtais portfolio contains more than 100 additives, both components, like sulfonate based detergents, ZDDP and ashless dispersants made from highly reactive polyisobutylene, and additive packages targeted to blenders of automotive and industrial engine oils, gear oils, hydraulic fluids and more.
One of Jinzhou Kangtais first investment priorities is building a new R&D center, followed by a capacity increase from 60 million metric tons per year to 90 million t/y. Investment in R&D will enhance products and increase profitability, Yu explained. Conventional component additives have profit margins of only about 10 percent to 20 percent. Therefore, R&D becomes our priority.
Yu is pragmatic about market requirements. We are preparing for Chinas own new engine and lubricant standards in the future, in addition to U.S. [American Petroleum Institute standards]. With these approvals, we can increase our market share and achieve much higher added value.
Singapore or China?
Singapore is an attractive base to BRB, despite its higher labor costs. Its infrastructure, the intellectual property protection, the support that they have from the government-there are droves of incentives and subsidies to support new producers that can add value on a technical level with cutting edge technology in Singapore, as they want to develop a knowledge-based economy, van Dijk explained. Logistically, it helps being close to our suppliers.
BRB has set up a joint venture facility in Singapore with domestic company Ban Guan Chemical, which provides the manufacturing equipment to compliment BRBs product technology. This is in line with the European companys philosophy to grow through local partnerships.
The plant manufactures liquid viscosity modifiers, which are marketed under the Viscotech brand. BRB serves its main markets in Singapore and Malaysia from this location, offering tailored technical service to customers. To increase its presence in the region, the company also has a distribution partnership with Tiarco Chemical Co. in China.
Jinzhou Kangtais Yu pointed out that Singapores advantages are aligned to its free port status and maritime access.
Italian manufacturer Italmatch (recently merged with Detrex Corp., the U.S.-based parent of Elco Corp.) has traditionally focused on the Asia-Pacific region from its base in China, with a long history of investing in Nantong, Jiangsu province. From here we develop P2S5 [phosphorus pentasulfide] specialized products for engine oil lubricant additives, says Italmatch sales manager Ge Ding. The rapid development of China is obvious, so we choose China as the core market to cover the Asia-Pacific area.
Cologne, Germany-based Lanxess has also been present in China for over 10 years with multiple sites, recently strengthened by its acquisition of U.S.-based Chemtura Corp.
Jinzhou Kangtai recognizes the catch-22 conundrum linked to production capacity: To be taken seriously by large lubricant companies, additive suppliers need to first demonstrate they have the production capacity to meet the lube companies demand.
But without demand, how can the additive makers raise the capital to invest in capacity? Even small market shares make the business model viable, as Yu noted. Kangtai can obtain just 1 percent of the global market and double its sales.
Another leading domestic manufacturer at Inter Lubric was Wuxi South Petroleum Additives, which has invested in development of its range of components and additive packages. Indeed, Ban Guan lists Wuxi as one of its principals on its website, but BRB confirmed this is a separate entity and not connected to their own j.v. with Ban Guan. Wuxis website also highlights its cooperation with Chemtura.
Components vs. Packages
Selling components in addition to packages gives Asia-Pacifics challenger brands more flexibility, as they can sell to competitors in addition to upstream lubricant companies. Yu of Jinzhou Kangtai, however, believes it is difficult for Western companies to produce components without cooperating with local companies.
For BRB, packages are the preferred option. BRB is very strong in driveline additives-and viscosity modifiers, which is also our focus, said van Dijk. In terms of market development, of course you have many players in Asia-Pacific that either supply packages or components, but for us its the additive packages-thats the differentiator.
Ding of Italmatch said the company is focusing on component additives derived from phosphorus pentasulfide-a key raw material in the production of lubricant additives. Phosphorus is abundant in China, hence its attractiveness as a production location for Italmatch.
However, Ding also recognized the importance of reducing the use of such material in finished products in order to meet international lubricant specifications. It must match American or European standards. Reducing phosphorus and sulfur is a fundamental step to maintaining our advantage in making high-performance products.
The Future
Its not surprising that China, and to some extent Singapore, are becoming the Asia-Pacific hubs of choice for additive manufacturers. With its young and rapidly growing car parc, Chinas unique market conditions are driving quality standards in an ever-upward spiral. Hybrid vehicles with internal combustion engines just raise the stakes further.
Pure electric vehicles may be the elephant in the room, but there will be multiple opportunities in the years to come for additive companies willing to invest in R&D in order to grab market share. Existing vehicle technologies will have to conform to the latest emission standards, and this will need to be supported by improvements in both fuels and lubricants.
It holds true for all additive manufacturers that having an Asian hub, either independently or in a partnership, puts them as close to the regions legislators as they can possibly be. This means they are in the best position to respond to rapidly changing market conditions in the worlds largest regional automotive market.
Michael Herson is managing director of London-based The Strategy Works, a consultancy specializing in original business-to-business insight on a global basis within the lubricants industry and other sectors. Contact him at (+44) 208 868 0212 or mherson@thestrategyworks.com.