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Lubricant industry: Nuts & Bolts
Sep 18, 2006

Indian lubricant (lubes) market is one of the biggest markets in the world with estimated revenues in the region of Rs 70 bn. It is also amongst the fastest growing market with per capita consumption lowest among the developing countries. PSU oil marketing companies were the sole dominant players in the segment in the pre-liberalization era with a market share of 90%. However, post opening up of the sector, it turned into one of the most competitive sectors with presence of several multinational companies in the domestic arena like- Castrol (British petroleum, England), ELF (Total, France), Gulf oil and others. The presence of international players in the segment can be understood from the fact that western markets have saturated and developing countries like India offers them the place to keep their growth engines moving. However, the presence of several players has pushed the margins downwards due to creation of surplus capacity along with fierce competition. In this backdrop, we analyze the structure of the Indian lubricant industry and its various segments. History of Indian lubricant industry
Prior to de-regulation of the lubes segment in 2003, IOC was the sole canalizing agent for the import of key raw material (base oil). Also, there were quantitative restrictions in the form of quotas along with price regulation. Lack of availability of key raw material and high import duties deterred MNCs to set shop. Deregulation, where quantitative restrictions in the form of quotas and regulated pricing were phased out, had a significant impact on the structure of the Indian lubes market. Also, the custom duty on the base oil stock has been progressively reduced. This has encouraged foreign majors to set shop in India. The number of players increased to over 25 in a short span of time, with entry of MNCs like Shell, Exxon, Mobil, Caltex, Elf, etc. High quality lubes are now available to the Indian customers.

What are lubricants?
Lubricants are used to reduce friction between moving parts, thus resulting in lower wear and tear. In many machines, lubricants also play a role in cooling, rust prevention and help to avoid deposition of solids between closely fitting parts. Liquid lubricants are most commonly used, but for some special situations like extremes of temperature or where renewal of liquid lubes is difficult, solid lubricants like graphite or molybdenum are being used. Typically, 1 ton of lube needs about 0.83 tons of Lube Oil Base and 0.17 tons of additives. Material cost is about 56% of net realization, of which 50% is base oil, 33% is additives and 17% packaging.

Lubricant industry
Lubes industry is broadly classified into 2 categories:

  • Automotive
  • Industrial

Automotive segment: In India, the automotive lubes account for over 60% of the market. The automotive segment can further be divided into following vehicle categories: Trucks, tractors and off road equipments – mainly diesel engine oils, passenger cars- mainly petrol engine oils, motorcycle and 3 wheelers – mainly 2 stroke/ 4 stroke petrol engine oils. Diesel lubes share is estimated at 70% of the total automotive lubes market, while petrol lubes account for the rest.

For the purpose of better understanding we can classify the automotive segment into personal mobility two- wheelers and cars, commercial vehicle segment and agricultural segment.

Robust growth in the economy and increase in disposable income coupled with cheap financing costs will translate into higher demand for automobiles going forward which in turn will drive the automotive lubes industry.

However, owing to improved technology, both in engines as well as lube manufacturing, consumption of lube per vehicle is on a decline thus restricting growth in this segment. Considering all these facts, we expect the segment to register a growth of 3%-5%.

Marketing channels for the retail automotive segment are petrol pumps and retail outlets. Under APM, ownership of petrol pumps was restricted to four major oil-marketing companies, i.e. IOCL, HPCL, BPCL and IBP, thus it provided them with a ready made platform for selling lubricants. With the de-regulation of the downstream petroleum segment, Reliance and Essar have ventured into setting up their own petrol pumps, which will provide platform to private parties such as Castrol to sell products as owing to conflicts of interest, the four major oil PSUs refrained from selling products of private players at their own petrol pumps. These companies then had to set up an independent distribution infrastructure comprising stockists and dealers throughout India. This segment is popularly referred as the "bazaar" trade with Castrol showing excellent reach via this segment with more than 18,000 retail outlets and 5,000 dealers. Tie-up with OEMs (Original equipment manufactures) such as Tata Motors, Maruti Udyog and M&M is also an important marketing platform for the lubricant industry. With the advancement of vehicle engine technology and increasing customer orientation of OEMs, the warranty stage is becoming increasingly important, as car/motorcycle owners prefer to service their vehicles at OEM franchised workshops. This has lead to a shift in lubricant demand for personal vehicles from petrol pumps to workshops and the transition is likely to sustain itself as sales of lubricants from petrol pumps is set to reduce.

Industrial segment: Industrial lubricant demand is dependent on industrial production and growth trends in the economy. Output in some of India’s core industry sector – Automobiles, primary metals, sub-assembles, cement and textile has been on the higher side in the last few years. Given the fact that industrial production is expected to register good set of numbers, the demand from this segment is likely to witness strong growth. Industrial segment/ non-automotive segment/ business-to-business segment largely depend upon the direct sales marketing efforts and tie-ups with various user companies.

Key success factors:

  • Branding: Differentiation is the key to success in the Indian lubricant segment. Brand image plays a key role in affecting the consumer’s decision to buy a lubricant. The branding and marketing is particularly essential in the business to consumer segment (i.e. automotive segment). Vehicles owners’ decision to buy a certain lubricant is affected by the endorsement of quality by a garage mechanic, retail storeowner, or a celebrity. Awareness campaigns also play a critical role. Thus, in order to differentiate and create the superior brand image marketing is essential.

  • Distribution channels: Given the fact that Indian lubricant industry is highly fragmented and plagued with over supply, distribution channels play an important role in reaching out to customers. In the automotive segment, PSU OMCs leverage their retail outlets to achieve deeper penetration levels. The private parties on the other hand, have to rely on retailers for the sale of their products. Also, tie-ups with OEMs help to increase the penetration levels and reach of the products.

  • Pricing and promotion: Tough competition along with fragmented nature of the industry has made the fight for market share intense amongst the existing players. Thus, in order to combat competition, pricing and promotion plays an important role

Influential variables: Base oil is the critical raw material for the lubes industry, accounting for 56% of the net realisation. With inbuilt or captive base oil facilities, OMCs are well poised to handle the rising base oil prices. Given the fact that demand for petrol and diesel has been robust in the international markets, international base oil producers have shifted to production of petrol and diesel, as against the production of base oil. This has further fueled the increase in the prices of base oil in addition to rising crude oil prices. Another important input variable is the packaging of the product, accounting for 17% of the total realisations. Of late, with an increase in petrochemical prices, the packaging raw material cost is also on the higher side. The pricing in the Indian market is also a concern for the segment with overcapacity being the key issue. Thus, with pressure on margins from all sides, the sector is expected to see consolidation going forward with the fittest player emerging as the survivor. The recent cool down of crude oil prices however has emerged as a silver lining.

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