March 15, 2019
Volume 6 Issue 11
Charting Success in the Chinese Market
LONDON - In a country where effective marketing techniques are already significantly different from those in the West, China’s lubricants market is poised for even more change in the near future, attendees heard during an industry conference held here last month.
Demand for lubricants in China reached 7.4 million metric tons in 2017 and is expected to hit 7.8 million by 2022, according to Annie Jarquin, a director with consulting firm Kline & Co., speaking during the ICIS World Base Oils & Lubricants Conference.
China consumed 3.3 million tons of industrial lubricants in 2017, said Jarquin. Process oil, which includes transformer oils, insulation fluids, white oils and rubber oils, held nearly half of the industrial segment. General industrial oils such as hydraulic and compressor fluids, refrigeration oil, turbine and circulating oil and industrial gear oil followed with over a quarter of demand. Metalworking fluids, industrial engine oil and grease accounted for the rest.
Commercial and consumer lubricants together totaled 4.1 million tons, with engine oil accounting for more than 70 percent of those segments. Heavy-duty engine oil made up most of the automotive demand, followed by passenger car oils and a small slice of the pie for motorcycle oils. The rest is composed of hydraulic and transmission fluid, gear oil and grease used in automotive applications.
According to Meredith Shan of Chinese law firm Zhong Lun, who also spoke at the conference, about ¥182 billion (U.S. $27 billion) of automotive lubricants were sold in China last year, and she expects that to jump to nearly ¥430 billion by 2030.
During a panel discussion, Jarquin noted that the average age of a car in China is just three to four years, compared to 12 years in the United States. With a brand new car parc demanding the latest engine oils and essentially no existing parc to replace, oil marketers have to produce the latest, most advanced lubricant technology.
These modern cars will drive demand for premium engine oils, such as synthetics, which will suppress volume growth, she said.
Jarquin also pointed out that the Chinese government is making the purchase of gasoline- and diesel-powered cars increasingly difficult while encouraging the uptake of electric vehicles.
While passenger car sales declined in 2018 for the first time in 20 years, government policies are already in place to encourage purchases by farmers and people in small cities. The country aims for new energy vehicles to reach 5 million units in 2020 and account for more than 20 percent of sales in 2025.
Commercial vehicles, on the other hand, are seeing particularly high sales in order to meet the latest national emissions standard, and further restrictions are on the horizon.
In the industrial segment, the steel and mining sector will continue its decline while oil, gas and chemicals will grow, she predicted. Industry consolidation will drive adoption of modern equipment that needs modern fluids.
The Chinese government is working toward higher quality economic growth, no longer viewing GDP as the most important metric, Jarquin noted, and automotive and industrial original equipment manufacturers will be the primary drivers for product evolution.
Automotive OEMs will continue to focus on fuel economy, reduced emissions and longer service life. On the industrial side, the government is working to shut down obsolete equipment and upgrade to modern machinery that operates under heavier loads and at higher temperatures. More high-speed machines will be used in manufacturing, and excess capacity will be reduced. Higher quality fluids will be required to meet performance demands, she noted.
The Chinese lubricants market is very crowded, Jarquin observed, with 40 percent of volume produced by major domestic players. However, these companies only sell about 15 percent of passenger car motor oil in the country.
International oil companies and local minor players evenly split the remaining 60 percent. The local players target the local market, and with improved access to quality base oil, are an increasing presence in the mid- to high-end commercial segment as well as the consumer segment, she said.
Alternative marketing channels will pose a challenge to the market positon of traditional lubricant distributors in China, Jarquin predicted. While channels such as e-commerce, car insurance companies, car sharing platforms, OEM-owned chains of workshops and online-to-offline platforms accounted for 4 percent of PCMO service fill in 2017, that could reach 20 to 30 percent by 2022.
Audience member Mike McCabe of Lubrizol added that his employer conducts all of its business-to-business marketing in China through the WeChat smartphone app.
“Growth in alternative channels is uncertain, but awareness and monitoring of contributing forces is essential,” Jarquin emphasized.
One area of concern that was raised during the panel discussion was counterfeiting. Kline’s Deborah Powell noted that over 40 percent of major lubricant company products sold in China are counterfeit. However, James Brodie of the China-Britain Business Council reported that Chinese authorities have been proactive in addressing problems that have been brought to their attention. McCabe, who said that Lubrizol has found counterfeit versions of its own products on the market, observed that online channels have not been much of a problem in this arena compared to other distribution channels.
Shan of Zhong Lun noted that the Chinese government is now encouraging foreign lubricant companies to enter its market. One common way to do this, she said, is through an equity joint venture partnership with an established Chinese company.
In fact, one reason the government is modernizing the country’s industry is to encourage joint ventures with international companies, Jarquin said during her presentation.
Jarquin expects that the economic slowdown will increase competition and eliminate weaker players, creating a consolidated market in which strong partnerships are crucial. “Partnerships enable growth through a direct customer, a dedicated channel, and potentially fill a knowledge and skill gap in emerging channels,” she said.
Brodie, who also presented, encouraged companies to view China as more than an end market. It is becoming increasingly important to get close to Chinese partners that are winning contracts in third countries, he said.
Businesses should demonstrate to Chinese companies that they have existing relationships in other countries that would be beneficial to both partners. He recommended that companies pitch their offering in the context of China’s Belt and Road Initiative, a government development strategy.
Brodie also suggested establishing a presence in China before opening an office in order to nurture relationships.