Completing strategic initiatives
09 August 2017
09 August 2017
Exploring the trends, challenges and opportunities in the China lubricants market
As Chinese regulators introduce tough emissions and fuel economy regulations, the automotive industry is gearing up with technology solutions to ensure compliance. Infineum’s new Sales General Manager for Greater China, Wei Wang, looks at the need for next generation lubricants to support this fast changing and complex market.
As Wei Wang takes up the role of Sales General Manager for Greater China in his native Shanghai, his first task has been to understand where the Chinese market is heading, so that he can help to create the maximum value for his customers.
“In my first few months, I have travelled across China meeting customers. I’ve spoken to both international oil majors, some already building their second or third plants in China, and to new start-up lube oil companies, using asset-light approaches such as toll blending and online marketing. Interestingly, I have seen something in common between them: confidence and vision. You know we are serving the fastest growing oil market, which looks set to become the largest lubricant market in the world in the next few years. That means a China strategy is a must win for all our customers and for Infineum.”
2016 figures revealed that China already accounts for 30% of global automotive production and Wei says that the potential for further growth is huge.
“We have an aspirational population, which is becoming further urbanised and eager to own a car. This means the growth momentum is expected to continue. However, given the existing challenge with poor air quality, particularly in the major cities, action is required.”
The Government has responded by cutting NOx, SOx and particulate matter emissions limits, in line with global trends. An upgrade to the China 5 emissions standard nationwide for passenger cars and heavy-duty diesel (HDD) vehicles took place in January and July 2017 respectively. While this may not have needed additional hardware change, Wei expects the upcoming move to China 6, which will be implemented by 2020, to impose a tremendous challenge for the technology providers.
“What I have observed is that local Chinese car manufacturers are gaining momentum in the market. Their share is approaching the pinch point of 50%, which means that China-born technology is becoming far more important."
"We certainly expect China 6 to herald the wider use of EGR, SCR, DPF and even GPF aftertreatment systems, all of which will have significant implications on the lubricant formulation and additive selection.”
China is also phasing in some of the most stringent fuel economy requirements over the coming years to cut CO2 emissions. “For passenger cars the limits will be cut from 2015 figures of 6.9l/100km to 5l/100km in 2020 and then to 4l/100km in 2025. These limits are comparable to EU and US counterparts and pose an extremely challenging target for OEMs.”
“This trend will inevitably encourage OEMs to consider the use of low viscosity grades to improve fuel economy. However, it is absolutely vital to strike the right balance between engine reliability and fuel economy performance. In my view, that means these thinner oils must still be able to deliver excellent wear protection.”
On the HDD side, although the limits are different, changes to emissions and fuel economy requirements mean these OEMs are facing similar challenges. “On top of the regulatory changes, the market dynamics are different here,” Wei explains. “Under the economic new normal in China, HDD fleet managers are looking at every line item in their bills to identify cost saving potential. Extending oil drain intervals certainly provides one good opportunity to optimise total operating costs but also imposes a high requirement on lubricant robustness and reliability balanced with cost optimisation."
"I think the latest North American HDD categories API CK-4 and FA-4 provide a good example of how to address these challenges and, although they are not mandatory in China, many lube companies and OEMs I have spoken to are interested in adopting them.”
All these rising technical requirements lead to constant quality upgrades in the Chinese lubricants market. “We have already seen obsolete categories, such as API SG, CF-4 and CG-4, rapidly phasing out of the market. Today, API CH-4 and CI-4 are the mainstream HDD grades and API SL and above are in most demand for passenger cars.”
“However, I expect the quality upgrade to be further accelerated. The average age of a car in China is only around four to five years, a very young car parc compared to developed countries. The newer the car the higher the quality standard, which means the average oil quality is shifting upwards very quickly. In support of this trend new high quality base stock capacity is coming on stream in the region – mainly Group II in China and Group III in Asia. As these become available to Chinese oil blenders, they will be able to choose the most cost effective and suitable products.”
Two other factors that are affecting lubricant quality are the growing preference for independent aftermarket maintenance services and, with China’s booming e-commerce market, the trend for many lubricant marketers to move to online sales channels. “In my view, both of these drivers mean the demand for market-general service fill lubricants, that are fit for purpose and good value will grow.”
It would be impossible to talk to Wei about the automotive industry in China without covering the topics of new energy vehicles (NEV), vehicle automation and shared mobility.
“NEV is considered as a natural alternative to the internal combustion engine (ICE) in China, as we work to combat the severe air pollution in our major cities."
"The Chinese Government is already laying out a technology roadmap for vehicle electrification. However, challenges and uncertainties remain about the future of pure electric vehicles (PEV) in terms of battery efficiency and cost, charging infrastructure and electricity capacity. These are likely to continue, especially if the Government starts to cut the subsidies before the commercial break-even point arrives.”
“It looks likely that for HDD vehicles, battery technology will not disrupt the market for the foreseeable future, with ICE remaining the technology of choice. But, even if we look at passenger cars, which are potentially more receptive to battery technology, there are still millions of cars equipped with ICE leaving OEM plants every month. With a growing vehicle parc, we can expect lubricant demand to continue to grow in China for many years to come.”
We expect hybrid technology to gain popularity and there is still a need to lubricate the ICE part of the engine. “What I see is that hybrid OEMs can have very specific lubricant requirements and may require differentiated performance depending on the technology deployed for hybridisation. This could open the door for very specialised, high value lubricants.”
China technology companies are leading the way in two other automotive market disruptors - autonomous driving and shared mobility. And here, local technology companies such as Baidu, Didi and mobike are reshaping the transportation industry. “However, neither of these initiatives impacts the engine, which means they are not directly relevant to the demand or quality requirements of the engine oil – as long as the vehicle has some form of ICE. However, I think we can expect to see disruption in the value chain and operational model in China as a result.”
According to Wei, the most exciting part of doing business in China is that it is a highly complex and constantly developing market. “We adopt EU-style emissions standards and oil categories from North America and there are engines and cars from all over the world running on China's streets. I have to say that this is a very short description of the complexity of the Chinese market!”
“But, what it means is that it is not possible to take an EU or US product off the shelf and apply them to China, there is always a specific demand for customisation and differentiation.”
"Infineum’s ultimate goal in China, is to help its customers to deliver value to their end users."
“That value might be, for example, in the form of differentiated cleanliness performance, optimised total formulation cost or advice for state-of-the-art oil service. I am totally convinced that Infineum is in the best position to achieve that goal. We are operating a global network with over 80 years experience in additive technology development. Infineum was established in China in the ‘90s and now has a best in class business and technology facility in Shanghai for local deployment and interaction with customers. Our local manufacturing plant in Zhangjiagang has been fully operational since early last year, which provides additional flexibility and security of supply.”
“But, most importantly, our sophisticated technologies, superior products and successful results are built on a team of exceptional talents, with both international experience and local focus. We are not only expanding our presence in China, but we always do our best to grow our people so that they can eventually deliver the products on which our customers can rely.“