Do Disruptions Damage Durability?

09.05.2018

Do Disruptions Damage Durability?

E-mobility, digitalization and sustainability are three major disruptors that impact how lubricant marketers do business. FUCHS' VP of Sustainability Apu Gosalia examines each in his following article published by the Independent Lubricant Manufacturers Association (ILMA).

In industry, “disruptors” are practices or trends that can fundamentally change the way business is done. Today, lubricant marketers are facing three big ones: electric mobility (e-mobility), digitalization and sustainability. Here is a closer look at what these disruptors might mean for the lubricants industry. Let's start with some data first.

Data

“Data” in this sense refers to lubricants data, and the numbers show demand is up. According to FUCHS Intelligence, global lubricants demand (without marine oils) was at 35.9 million tons in 2007, before the worldwide economic crisis began. That number plunged more than 10 percent year by year until it hit roughly 32 million tons in 2009. And some regions, especially Europe, were hit much harder. In 2010, modest recovery began as the crisis eased, and that growth continued. In 2017, global lubricants demand reached 36.1 million tons, exceeding pre-crisis levels for the first time in 10 years.

The very slight difference between the 2007 and 2017 numbers, 35.9 million tons versus 36.1 million, could lead one to believe that very little had happened over those 10 years. But this was not the case. Consider the dynamics of the regional lube market in terms of quantity and quality: As a result of growing industrialization and motorization and consequently higher consumption, the Asia-Pacific region and Middle East-North Africa region together increased their share in the global market by 9 percent and now account for more than half of global volumes. Meanwhile, the mature markets of Western Europe and North America have been moving over those 10 years to higher-quality lubricants, resulting in extended oil change intervals and consequently lower demand.

Comparing 2017 with the previous year, we saw stagnation in North America, but there was a 2 percent drop in Latin America, all from Venezuela, where demand fell in double digits because of hyperinflation, economic strife and falling oil output, among other issues. Western Europe witnessed a healthy increase for a mature market — 1.5 percent— in 2017, mainly from Spain and Portugal, which showed growth of over 5 percent. In Eastern Europe and the Middle East, demand was stagnant in 2017, while Africa showed a significant decline of around 3 percent, mainly because of Egypt, which was contending with inflation, soaring prices and cuts to energy subsidies. The highest regional demand increase in 2017 came from the Asia-Pacific region, where mature markets, such as Japan and South Korea, plus emerging markets and markets in transition such as China and India, showed positive volume growth.

Turning from regions to countries, the list of the top 20 lubricant- consuming countries, which make up close to three-fourths of world- wide lube consumption in terms of volume, is headed by China and the U.S., which together account for one-third of global demand. In terms of per-capita consumption, the U.S., as the second-largest single market, has the second-highest per-capita consumption — roughly 19 kilograms per person in 2017. Interestingly, China, the largest market in the top 20, has the second-lowest per-capita consumption at 5 kg per person. These numbers show the growth potential in a country like China, although it is unlikely to ever reach the per-capita demand of the U.S., as quantity and quality growth work against each other. Instead, China should be considered an emerging market which is starting to transition to a mature market; a more probable model is to reach Europe’s lube appetite — around 8 kg per person. If China reaches that level, its total lubricants market would someday be some 12 million tons.

There are six European countries in the top 20 lube nations: Russia, Germany, United Kingdom, France, Italy and Spain.

As noted, Europe’s overall share of global lubricants demand declined from 23 percent to 19 percent between 2007 and 2017. Interestingly, the split between Western and Eastern Europe remained nearly the same in this time frame: Western Europe at slightly above 50 percent, and Eastern Europe slightly below 50 percent of total European consumption, then and now. The top three countries in the Western/ Eastern European subregion comprised approximately 60 percent of their respective subregional demand in 2017, with the two top countries, Russia and Germany, accounting for one-third of total European volumes thanks to their large vehicle populations and strong manufacturing bases.

The newly created Union of the European Lubricants Industry (UEIL) Industry Statistics Committee (UISC) has had a very productive first few months of operation and was able to publish the first report on UEIL lubricants industry statistics in October 2017. The committee members were chosen to secure the right mix of skills, knowledge and industry experience. The first of what will become an annual report on lubricant demand in the European Union covers 2006–16 and 18 countries. The publication includes European market statistics where official data from countries exist as well as estimates based on a sophisticated algorithm where official data are not available. It is part of the UEIL’s mission to provide reliable statistics to support decision-makers and to deepen the understanding of the European lubricants market and product groups, both now and as new technologies call for new kinds of lubricants in the future.

Digitalization

Let’s turn now from data to digitalization. Digitalization is a disruptive development that lubricant manufacturers need to take charge of. Broadly, the term refers to employing information technology to make business practices more effective. Digitalization can be an opportunity for and a threat to the traditional lubricants industry. In the near future, data collection throughout the whole value chain will be widened compared to today’s standards. Direct and automated usage of information generated at a later step of the process will affect all steps that come before. Extended exchanges between customers and lubricants companies will allow for new services and therefore add extra value to businesses.

While this is often done by existing businesses, startup companies could use digitalization to nudge their way into the lubricants industry. There are startups today applying numerous statistical and simulation methods to dig into the relationships between lubricant manufacturers and customers. This trend is mostly visible in China. These startups serve manufacturers by offering to analyze part or all of their operations. They might advise the manufacturers not only about their lubricant usage but also on other aspects of their business, such as the raw materials or equipment used in the manufacturing process.

The potential threat to lubricant marketers is that these startups might also determine the lubricant characteristics that are needed, then take it a step further and identify the best source for such performance, rendering the lube supplier little more than a toll manufacturer. The startups could offer directly to the customer sophisticated tools such as sensory condition monitoring, explorative statistics, data mining and big data, all of which can be used for system modeling in the chemical, tribological, logistics and manufacturing areas.

Decarbonization

The other major disruptor facing lubricants marketers are sustainability and decarbonization, which refer also to e-mobility. The successful technical breakthrough of electric vehicle technology depends on three factors: competitive car prices, increased driving range and accessible recharging infrastructure. Electric vehicles have different lubrication needs, so factory fill engine and gear oil demand will shrink significantly, as will metalworking fluid demand, while aftermarket demand for automotive lubricants will shrink slightly each year as internal combustion engine vehicle stock is replaced. First-fill grease demand needs to be evaluated, too, as some applications will grow in volume and new applications could come up. Also, the trend toward lighter weight, as steel is replaced with more aluminum and thermoplastics, could lower the demand for forming lubricants and corrosion preventives. On the other hand, the batteries for electric vehicles will require new formulations of battery-cooling fluids. Overall, the impact of e-mobility on global lubricants demand over the next 10 years will be slightly negative on balance. Demand in Europe could decrease by up to 10 percent, and in the U.S., it could fall by up to 20 percent, while lube demand in China could increase by 15 to 20 percent as a result of increased car sales.

The evolution of e-mobility and the replacement of the combustion engine by a battery will create opportunities for lube manufacturers. The whole focus of carmakers, customers to the lube industry, will shift from their use phase to their supply chain regarding carbon dioxide (CO2) distribution. This means that the low-CO2 footprint of a sustainable lubricant will help car manufacturers lower their overall carbon footprint. In this way, sustainability becomes a potential differentiation criterion and competitive advantage for lubricant manufacturers when reaching out to customers.

The European Union will require lubricant companies, like other industries, to begin adopting sustainable business practices to cope with such aforementioned disruptions as e-mobility and digitalization. Rather than waiting for authorities to dictate them, it would be much better if the lube industry proactively came up with standards, benchmarks and key performance indicators of its own now, while there is still some breathing room to do so. German lube associations VSI and UNITI, together with independent lubricant manufacturing companies, have established an initiative named NaSch, which is short for Nachhaltigkeitsinitiative Schmierstoffindustrie, or sustainability initiative lubricants industry. Its objective is to establish sustainability standards, identify key performance indicators and benchmarks for the lubricants industry, and emphasize the industry’s value to society.

We need to pay attention to the disruptions of today and tomorrow, but they cannot kill demand for lubricants. We need to continue to adapt to new realities for the future of our industry.

Apu Gosalia, VP of Sustainability & Global Competitive Intelligence

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