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August 9, 2016

Volume 7 Issue 9

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Consolidation Looms for Japanese Market

Japan’s top four lubricant companies are expected to merge into two entities by 2017, events that could significantly reduce competition. Foreign brands are unlikely to take up much slack, observers say, due to difficulty entering the market.

The merging of JX Nippon Oil & Energy with TonenGeneral and Idemitsu Kosan with Showa Shell Sekiyu will leave the two surviving companies a combined 89 percent of the Japanese lube market, Adachi Yukihiko, managing director of Kline & Co.’s Tokyo office, said at the ICIS Asian Base Oils & Lubricants Conference in Singapore in May. JX Nippon Oil & Energy currently holds 37 percent of the market, compared to shares of 30 percent, 12 percent and 10 percent, respectively, for Idemitsu Kosan, Tonen General and Showa Shell Sekiyu.

The mergers would either require Japan’s automakers to rely on single suppliers for factory fill lubricants instead of their strategic preference of maintaining two sources, or it will force different original equipment manufacturers to use the same combination of suppliers. According to Adachi, JX Nippon Oil & Energy is the top supplier for major automobile OEMs in Japan, supplying lubricants to Toyota, Nissan, Honda, Subaru, Mazda and Suzuki. Idemitsu Kosan supplies to Nissan, Honda, Subaru, Mazda and Daihatsu, TonenGeneral to Toyota and Showa Shell Sekiyu to Suzuki.

However, experts say a reduction in competition will not lead to foreign lubricant players entering Japan, as the lubricant production know-how needed to meet automotive engines technology or Japanese domestic specifications is still lacking.

“The main grades available in the market in Thailand and Malaysia and other countries are different from those sold in the Japanese market, so I do not think there will be any increase in the volume of direct imports from these countries. However, there is a possibility of an increase in imports for high quality base oils,” a Japanese industry insider told Lube Report Asia, noting that demand exceeds local supply.

Photos: Autumn Snake, Shell and Province of British Columbia/ Flickr, Wikimedia Commons

The four companies represented by these brands could become two in Japan if JX Nippon Oil & Energy and Idemitsu Kosan succeed in their respective acquisitions of Cosmo Oil and Showa Shell Seikyu. Eneos is JX Nippon Oil’s brand.

The merger of Idemitsu Kosan and Showa Shell Sekiyu will mean a drop in the number of players, reducing excess competition, and this is something positive for the industry as “we can expect the mergers to consolidate their synergies and develop new growth strategies,” said Matsumoto Seiichiro, an analyst in the industry research department of Mizuho Bank in an industry report.

For example, Matsumoto said, in terms of marketing networks, Idemitsu Kosan is strong in northern and central Japan (on Hokkaido island and in the regions of Tohoku and Chugoku) while Show Shell Sekiyu’s strength is in the eastern and central parts (Kanto and Chubu regions).

Combining their networks, “can lead to increase efficiency of service stations and expansion of the companies’ brand presence in the three major metropolitan areas of Kanto, Tokai and Kansai,” he explained.

Also, merging the companies may enhance their competitiveness when biding for business and expanding overseas market share. This is especially so when “in general, factory fill lubricants are procured based on competitive bid for all OEMs while overseas OEM plants source from multiple sources including local suppliers,” Adachi explained.

“The lubricant business focuses on brand based on product differentiation and long term relationships with network expansion as the main strategy for overseas market development,” added Matsumoto.

A shareholders meeting will be held for JX Nippon and TonenGeneral to approve the business integration at the end of this year and the new corporate group is expected to launch in April 2017. Idemitsu Kosan and Showa Shell Sekiyu are expected to have a shareholdings meeting to approve the merger by the end of this year.