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December 6, 2016

Volume 7 Issue 4

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Tongyi Treads New Ground without Shell

BEIJING – Tongyi Lubricants CEO Li Jia had a fruitful journey to the United States in late October. The trip saw Tongyi gain brand management rights for America's Peak products, an endeavor that serves as an example of some of the strategies the Chinese blender has employed in the year since it was divested from its former majority shareholder, Shell.

During the weeklong trip, Tongyi signed an agreement giving it the rights to sell Old World Industries’ Peak-branded motor oils and auto care products throughout Greater China.

“Peak has an attractive product line, which we intend to introduce to Chinese consumers,” Li told Lube Report Asia in an interview at Tongyi’s headquarters in suburban Beijing. “Initially we plan to bring China its diesel exhaust fluid and antifreeze, which are popular in the U.S.”

A major reason Tongyi will first import the two auto care products rather than Peak’s motor oils, Li said, is to meet intensified demand from its heavy-duty diesel engine truck operators, which must comply with China’s increasingly strict environmental policies. To meet emissions standards already widespread in the West, modern trucks in China are increasingly coming equipped with selective catalytic reduction systems, which require the use of DEFs formulated with 2.5 percent urea and 67.5 percent demineralized water.

Photo: Tongyi Lubricants

Tongyi Lubricants CEO Li Jia signed an agreement with Peak CEO Kal Mahmood in Chicago, United States, in October.

Tongyi will first distribute the products from its hubs in Guangzhou, Wuxi, Xiangyang and Beijing, then break into other first-tier cities such as Shanghai, where preference for foreign brands is highest. Li added that it’s convenient for Tongyi to sell DEF through its already-established sales network.

“It is true that Tongyi makes lubes, but Tongyi is not just a lube seller,” Li said. “Now with Peak’s urea-based diesel engine exhaust fluid, we are able to provide a solution to our truck clients.”

A solution provider is indeed what Tongyi has been positioning itself as. The strategy helped it win over difficult industrial clients in China’s downsizing and increasingly competitive steel industry, including Wuhan Iron and Steel Corp. in Hubei province and Rizhao Iron and Steel Co. in Shandong province.

Tongyi helped a steelmaker reduce the varieties of lubricant products it required at its plant from over 100 to merely dozens. Because the client also owns a vessel fleet, Tongyi offered to provide it marine oils and even set up an automotive engine oil change station inside the plant to serve its workforce.

“When a client is struggling, all you should do is provide a cost-effective solution rather than cut prices. There will always be someone who can offer cheaper price than you,” Li suggested.

Even though many heavy industries, including steel, are cutting capacity, Tongyi forecasts that its industrial lube sales will increase about 18 percent from last year.

Tongyi’s wide range of products – including engine oils for passenger cars, trucks and even tractors – plays an important role in making Tongyi a one-stop-shop for lubricants. But Li is eager to expand Tongyi’s portfolio to specialty products such as food-grade lubricants and metalworking fluids through partnerships with international suppliers.

“We are in talks with companies in Japan and Germany,” he continued. “Either we can work with them or buy them. Our options vary.”

Tongyi’s newfound access to global resources, as exemplified in its deal with Peak, is one of the major benefits brought to it by Carlyle Capital, the U.S.-based venture capital firm that became Tongyi’s largest shareholder, followed by Huo’s Group, when Shell sold its 75 percent of the company.

“Carlyle’s rich resources in the global market, as well as its experiences in negotiations and acquisitions, will tremendously benefit Tongyi’s future development,” Li said, adding that Carlyle also gives Tongyi full authority to run the company, which he said is a noteworthy difference from the days when Tongyi was controlled by Shell.

Even though the joint venture with Shell did not last, Li said that Tongyi benefited a lot from its former partner, which provided a good model for how to structure and manage a company in an efficient, organized way.

Take risk management, for example, he said. Most local Chinese companies know about the concept, but very few of them actually invest in it. That used to be the case for Tongyi but is not anymore. “Part of our annual plan now includes risk matrix practices, such as listing all potential risks with possible solutions,” he continued, adding that Tongyi learned from Shell’s “very sophisticated” practices, including how to communicate to the government, public and media when there is a safety problem.

Tongyi also localized Shell systems in other functions including accounting, human resources management and health, safety and environment policy. Li said that while the initial implementation of Shell’s management practices may be difficult, it’s necessary because Tongyi will eventually go public.

“Our governance will be scrutinized by the Chinese securities authorities if we choose to go public, so we’d better start to make everything right sooner rather than later,” he said, but declined to disclose further information about Tongyi’s plan to make an initial public offering.

For now, Li said his goal is to make Tongyi one of the top three domestic suppliers in each of the seven lubricant sectors the company targets – passenger vehicles, heavy-duty trucks, commercial vehicles, motorcycles, agriculture, industrial, construction and mining, and marine.

With high-quality imported base stocks from ExxonMobil and Taiwan’s Formosa Petrochemical Corp., Tongyi has already achieved its goal in the motorcycle sector, and is gaining the ground in its other markets as well, Li claimed.

For example, Tongyi entered the agricultural sector in April with its G4 universal tractor transmission oil used for hydraulic systems, transmissions, gears and wet brakes, and already attracted interest from large Chinese machinery manufacturers including Foton Lovol International Heavy Industry Co. and Wuzheng Group. Tongyi’s higher-grade UTTO G4+ targets multinational manufacturers including John Deere and CNH Industrial.

However, its more affordable lubes, such as G1 for tractors, face big challenges as many Chinese farmers are not aware that tractors and other machinery need professional lubes to function well. “Obviously market education needs to be in place and it takes time,” Li said.