Resiliency, Specification Upgrades and Sustainable Sustainability in the Lubricant Additives Industry
The lubricant additives industry, like many others, has faced a series of unprecedented challenges in recent years. From plant catastrophes and raw material shortages to port lockdowns and strikes, the industry has had its fair share of encounters with Murphy’s Law. These disruptions have forced companies to rethink their supply chain strategies, focus on building resilience and navigate the evolving landscape of sustainability and differentiation.
A Greater Shift Toward Supply Resiliency
The traditional model of relying on single, large-scale plants to achieve lower production costs is being reconsidered. While these large plants offer economies of scale, they also present a significant risk. If a major plant experiences a disruption, the impact on the supply chain can be catastrophic. As a result, there is a renewed interest in medium and smaller plants strategically located to provide backup in case of issues at larger facilities.
This shift toward a more distributed production model does come with its challenges. Increased production costs and more complex logistics are the trade-offs for enhanced supply chain resiliency. However, the alternative—losing market share due to an inability to fulfill customer demand—is far less appealing.
On the customer side, there has been a noticeable shift toward diversifying suppliers. In the automotive industry, for example, original equipment manufacturers (OEMs) traditionally favored a single lubricant marketer to optimize volumes and costs. However, recent disruptions have led OEMs to adopt a more diversified approach, opting for a major supplier and a minor supplier, with splits typically in the 80/20 or 70/30 range. Some OEMs are even going further, engaging more than two suppliers.
This diversification is facilitated using OEM genuine oils, where suppliers are not identified, allowing OEMs to seamlessly switch suppliers without impacting their customers. This strategy not only mitigates risk but also enhances the OEMs’ ability to respond to supply chain disruptions.
Specification Upgrades and Product Differentiation
Historically, the introduction of new specifications has allowed industry leaders to highlight their technological advancements. For instance, the transition from GF-5 to GF-6 specifications brought about significant improvements in fuel economy, wear protection, deposit control and protection for GDI engines. This requires a depth of formulation knowledge to reformulate and allows the Big Four additive companies to spring ahead.
However, when specification upgrades are not as challenging—sometimes as simple as a replacement test—then the gap between leaders and followers is smaller. As we look ahead to the impending GF-7 and PC-12 specifications, the industry faces a critical juncture. The question then is, will these new standards offer sufficient opportunities for differentiation, or will they level the playing field to the extent that Tier-2 and Tier-3 suppliers can catch up?
Tier-2 and Tier-3 suppliers have already been gaining market share in the additive package business. In regions affected by sanctions, such as Russia, new additive companies are emerging to fill the void left by the major players. Additionally, blenders are increasingly opting for suppliers outside of the Big Four for backup additive packages or cost advantages. This was driven by some of the supply shortages during which customers found themselves scrambling to find additives to blend with.
This shift created opportunities for smaller companies to gain a foothold in the market. By offering competitive pricing and reliable supply, these companies are becoming viable alternatives to the established giants.
The Evolution of Green Initiatives
In recent years, the terms “green” or “sustainable” have been synonymous with a flood of investment and government funding. Much like the dot.com boom of the late 1990s, the green movement attracted a wave of enthusiasm and capital. However, as with any trend, the initial fervor has begun to wane, which begs the question, has the green bubble burst?
The change in the U.S. administration, along with similar shifts in other nations, has led to a pullback in spending on major green initiatives. This has created the impression that the era of abundant green funding is over. Investment firms and governments that once eagerly supported green projects are now more cautious, and key performance indicators (KPIs) for sustainability goals are being pushed further down the road as ICE bans get pushed beyond 2035.
Despite these setbacks, the story of green and sustainable initiatives is far from over. In fact, the current environment may be a necessary phase in the evolution of sustainability, separating the truly viable projects from those that were riding the wave of hype.
The Enduring Value of Sustainable Practices
From Kline’s perspective, green and sustainable initiatives that are deeply ingrained in a company’s mission and are genuinely profitable or self-sustaining will continue to thrive. These initiatives are not dependent on external funding but are driven by a fundamental commitment to sustainability and a recognition of its long-term value. The world continues to face pressing environmental challenges, and there are regions where sustainable practices and products are not just desirable but essential. Companies that have integrated sustainability into their core operations are better positioned to navigate these challenges and capitalize on the opportunities they present.
The current pullback in green investment can be seen as part of a broader economic cycle. In the short term, both individuals and companies are focused on cutting expenses and staying afloat amid economic uncertainty. However, as global economies stabilize and recover, the focus on sustainability is likely to regain momentum. In the long term, sustainable practices are not just a trend but a necessity. As resources become scarcer and environmental regulations tighten, companies that have already embraced sustainability will have a competitive advantage. This is the essence of “sustainable sustainability” initiatives that are not only environmentally responsible but also economically viable in the long run.
The lubricant industry is undergoing a significant transformation as companies adapt to the challenges of recent years. The focus on supply chain resiliency is driving changes in production models, supplier diversification and the rise of smaller companies in the additive package market. While these changes come with their challenges, they also present opportunities for innovation and growth.
The initial wave of green investment may have subsided, but the underlying need for sustainable practices remains as urgent as ever. The current pullback in funding and the shifting focus of governments and investors are part of a natural cycle that will ultimately lead to a more mature and resilient green economy.
Sustainable initiatives that are deeply ingrained in a company’s mission and are economically viable will continue to thrive. These initiatives represent the future of sustainability, one that is not dependent on external funding but is driven by a genuine commitment to environmental responsibility and long-term value—much as the dot.com bubble companies that survived have blossomed into billion-dollar companies.
As global economies recover and stabilize, the focus on sustainability is likely to regain momentum. Companies that have embraced sustainable practices will have a competitive advantage, and the demand for green products and solutions will continue to grow.
In essence, the concept of “sustainable sustainability” is about creating initiatives that are not only environmentally responsible but also economically viable in the long run. This approach will ensure that sustainability remains a central focus for companies and investors, driving innovation and creating a more resilient and sustainable future.
David Tsui is project manager, energy with Kline & Co. His focus is on automotive and industrial lubricants as well as lubricant additives.