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Cashing In on Genuine Oils


Automakers have caught on to the profits to be found in aftermarket sales, and theyre using multiple angles to take increasingly larger slices of the passenger car motor oil pie. Data from an industry research firm suggests their tactics are working.

Diverse factors have driven greater adoption of OEM genuine engine oils in recent years, and consumption is projected to continue growing. These include factors on the business side, in terms of original equipment manufacturer programs that encourage car dealers to use such oils, and on the consumer side, where shifts in vehicle ownership forms and habits come into play.

Global consumption of OEM genuine engine oil is projected to grow at a compound annual rate of 4 percent through 2022, with strong growth in North America due to new ownership patterns and changes in consumer behavior.

From our findings, weve seen OEM genuine oil globally accounts for between 10 and 20 percent of overall PCMO consumption in 2017, David Tsui, a project manager in Klines energy practice, said during a webinar.

Klines first study of OEM genuine oil brands and programs classifies products in three categories: OEM genuine oil, co-branded oil and merchant-branded oil.

OEM genuine oil is manufactured for an OEM based on its specifications. The products blenders may change, and multiple blenders may supply the fluid, Tsui explained, but the fluid is packaged with only the OEM genuine oil brand on the front label. Sometimes the product may identify the blender on the bottles back label.

Traditional mass-market engine oil and oil co-branded with an OEM and lubricant company still dominate PCMO demand in all regions by a wide margin, Kline found. Those types together accounted for at least 70 percent of demand in every region. OEM genuine oil is most prevalent in Asia-Pacific, followed by North America, Europe and South America.

Although the Africa and Middle East region has very little OEM genuine oil, Shell and BMW have a notable agreement there, which was recently renewed through the end of 2022.

Tsui pointed out that genuine oil consumption patterns may vary significantly within regions. From country to country, cultural differences will affect genuine oil consumption, he said. We found a lot more variation in genuine oil consumption than we anticipated when we first started this study.

For automakers, genuine oil is a means to drive customer loyalty and reduce warranty claims by ensuring drivers use the correct type of engine oil. Every time a customer goes back into a dealership, its an extra touch point for the OEMs, Tsui said. Any warranty claims come out of their bottom line. Thats their goal for choosing a genuine oil specified to their liking. It gives the OEM much more control over the genuine oil, and they have more assurance the fluid put in their vehicle really is designed to protect their engine.

Automakers are also leaning more heavily on genuine oils because of the high profitability of the aftermarket sector. OEMs dont make very large profit margins on new vehicles. Its generally under 10 percent, typically closer to 7 to 8 percent, Tsui noted. They see a profitable aftermarket thats based on servicing their vehicles. Theyre trying to grab a larger piece of that pie.

Pulling In Consumers

Tom Glenn, president of consultancy Petroleum Trends International, told LubesnGreases that the trend toward OEM genuine oils has been driven by a mix of business-related issues and changes in how consumers value their leisure time.

Consumers saw the convenience of fast lube shops as they became increasingly prevalent and offered prices that almost negated the savings to be had from do-it-yourself oil changes. My sense is that as fast lubes became an industry, it pulled a lot of that business from gas stations, and a lot of people from under their cars doing it themselves, Glenn said.

As the complexity of modern vehicle design began to make a DIY oil change more difficult, it also increased the appeal for owners to bring their cars to the dealer for maintenance.

Glenn highlighted the advantage of having a captive audience already coming in for warranty work. Car dealers began offering low-cost or free oil changes to draw customers back in for both warranty work and post-warranty work. They slowly reformed consumer perceptions that an oil change at a dealer was both time-consuming and expensive. And, as with fast lubes, the oil change provided car dealers with an opportunity to sell other maintenance services.

OEMs also took note of growth in the do-it-for-me segment and the opportunities it presented.

Although some genuine oils such as Ford Motorcraft had been around for a long time, car dealers had balked at their price. In an effort to keep costs down, dealers were buying other brands in bulk and limiting use of genuine oil to customers who requested it. Pull turned to push, however, when OEMs developed programs giving incentives to dealers to optimize use of genuine parts and fluids. Genuine oils now represent the majority of product used by car dealers for oil changes.

Major lubricant suppliers tend to see engine oil supply to OEMs in two categories: factory fill for new vehicles and service fill for newer vehicles already sold to customers. Factory fill is notoriously low margin, but its also a very large volume, Tsui said. For suppliers, its a good way to keep plant capacity occupied. But generally speaking, it tends to be very demanding volume.

Whoever gets the factory fill business tends to get the service fill, he continued. With service fill, you tend to see margins higher than factory fill. The suppliers will have the opportunity to supply ancillary products and some other products, such as higher-tier full synthetic.

Distributors view working with genuine oils as a good way to occupy their warehouses and stay busy, Tsui said. It is a significant volume. They tend not to try to rely overly on any one particular OEM. They prefer to diversify in case contracts change with the OEM, so that they dont suddenly lose a big piece of business.

In interviews, Kline has found distributors models and roles shifting more toward logistics. Instead of handling the billing, sales and everything else involved, they tend to be paid for delivery service. But even when paid for delivery service, they still have the opportunity to sell non-competing products into the dealership.

Continuing the Upward Trend

External market drivers and trends that could impact OEM genuine oil consumption include vehicle subscription services, the penetration of ride-sharing options and increasing vehicle prices.

From our interviews, we believe genuine oil is going to grow at a much faster pace than the overall PCMO market, which is going to be kind of flat, Tsui said. This could change as disruptors come in. Should subscription and other things really take off, youre likely to see this increase a lot more.

He noted that many automakers and some mega-dealer networks have jumped into the subscription service arena, which could be another growth opportunity for OEM genuine oils. A vehicle subscription aims to take all the maintenance and insurance concerns out of vehicle ownership.

Its like buying a membership to have a vehicle, he said. The reason this is a market driver for genuine oil is that all of this is facilitated by OEMs. When OEMs are responsible for your maintenance, that volume is taken away from the DIFM channel and goes towards the new-car dealership channel.

According to Tsui, Toyota and a number of carmakers have purchased stakes in ride-sharing services, and this too could boost consumption of genuine oils. I believe the ultimate goal is, one, to populate them with self-driving vehicles and two, with those OEMs vehicles, he said. Once vehicles start being owned by an OEM versus by a contractor, then these same vehicles see service through dealership networks.

The increased average price for purchased vehicles may also lead to greater demand for genuine oils, he said, with well equipped vehicles often in the $40,000 range. If you plan on keeping that vehicle a lot longer, you might be inclined to take better care of it at that price, he added.

Staying on Spec

Products marketed as genuine oils tend to have an OEM specification, and some follow API specifications. Some also have a separate specification of their own.

As oils preferred by Japanese OEMs are trending thinner, OEMs in America and Europe are shifting back up to SAE 5W-30 viscosity oils because of more use of turbocharged gasoline direct-injection engines that run hotter and have more power output.

Theyre finding that 5W-30 tends to be the preferred grade for the turbo engines, and they also tend to have slightly different needs, Tsui said. Because the Japanese engines tend to be running at lower operating temperatures, are smaller displacement and generally speaking naturally aspirated, they dont tend to be as oxidatively demanding as the European and American engines.

He said this difference in requirements in different regions and countries means its become harder to make a typically universal oil that would fit in just about any vehicle. Thats another reason why genuine oil will become more of a staple, he added. For example, 0W-16 in a lot of regions isnt available in your typical retail shop or Jiffy Lube-type store. If you wanted 0W-16, you would have to go back to Honda or Toyota to get that grade.

Kline estimated that Toyota accounted for more than 20 percent of around 1 million tons of global genuine oil consumption volume in 2017. It was followed by Renault-Nissan-Mitsubishi (Renault is a partner but doesnt offer an OEM genuine oil), General Motors, Honda, Fiat Chrysler and BMW, then smaller players.

Toyota is at the top mainly because it sells a lot of vehicles globally, Tsui said. The drain intervals they tend to use are pretty short by modern standards. They typically are around 5,000 miles or 8,000 kilometers.

Indias largest car manufacturer, Maruti Suzuki, launched the Ecstar brand of lubricants in the country in 2017, while Tata Motors has also bet big on genuine oil by launching products for its entire range of commercial vehicles in 2018.

Some OEMs mandate the use of genuine oil at their dealerships, and most prefer to reward dealerships for using genuine oil, he noted. Examples include Daimler, BMW, Mahindra & Mahindra and Honda. In select countries, these only allow genuine oil use.

In markets such as the United States, where the Magnuson-Moss Warranty Act prohibits OEMs from requiring owners to use genuine oils to maintain their vehicle warranties unless the item is provided free of charge, dealership loyalty rates will be lower. In other countries such as India and Indonesia, OEMs require owners return to dealer workshops for maintenance and service on new vehicles.

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