Value Chain Analysis

Across the world, lubricant oil is primarily used for cooling automobile engine,

marine engine and for industrial purposes.

Globally, more than 50% of the total lubricant volume is being used for automobile,

around 40% is for industrial purpose and rest is for marine industry.
Shell, ExxonMobil, BP - Castrol, Sinopec, Chevron Texaco, Total, Lukoil, Fuchs,

Nippon Oil and Valvoline are the major global players in lubricant manufacturing
industry.
In the coming future global demand of lubricant will remain stagnated or grow at a

very low rate due to following reasons:

Low emission norms for industries and automobile sector
Advancement in engine oil technology
Use of high performance oil
Saturation in automobile sector for developed countries

Currently, USA is the largest consumer of lubricant oil across the world. China and

India comes at second and third position respectively. But, in the next 7-8 years china
will overtake USA in terms lubricant consumption. Reason behind this is that US
automobile sector has reached at its saturation level, while the developing countries
like India and China, it is still growing.

 The consumption pattern In Indian lubricant oil industry is similar to world lube

industry. Majority of lubricant is being consumed by automobile sector (55%), rest is

being used for Industrial purpose and marine industry.
Bazaar segment currently accounts for around 40 per cent of the sales of the

automotive lubricants in India.

Major players of the Indian lubricant oil industry are IOCL - Servo, BPCL-MAK, HPCL

and Castrol, holding 80% of the market share in Indian lubricant industry.
IOCL is the market leader in the overall lubricants industry, with its market share at

40%.
Castrol dominates the automotive lubricant oil market, with 19% share of the bazaar

segment, followed by IOCL, which has 14% share of the bazaar segment according to
industry estimates.
Private players like Castrol, Shell, Gulf Oil, etc. account for 75% of the bazaar segment

while the oil PSUs account for 25%.

 As demand in the sector is expected to rise in the recent future, foreign companies are

keen to invest investing in India. Gulf Petrochem made an opportunistic approach in

investing in Indian lubricant market. Gulf Petrochem acquired Sah Petroleums Ltd and
now plans to take the brand IPOL international.
Volume consumption of lubricants in India has consistently declined over past few

years as a result of improving lubricant and engine quality. In addition the year 2013
was accompanied by slower GDP growth rate and subdued industrial activity that also
affected the industry margins.
The rate of growth is at 2.3 and 1.6 per cent per year vis--vis 0 2 per cent globally

2.5 per cent of world lubes market, perhaps, amongst the highest in the world.
The Indian lubricants market would grow at a considerable CAGR rate thus exceeding

USD 7713 million by 2017. India is a massive market for process oils.
Process oils are the biggest contributor within industrial lubes. India is a huge market

for process oils as well, accounting for 53 per cent of the overall industrial lubricant
demand.

 Rapid expansion of the power generation and distribution infrastructure has created

a strong demand for transformer oils in India.

Industrial engine oils including marine and railroad, metalworking fluids, and

hydraulic fluids are other important product categories.

Industrial lubricant demand is dependent on industrial production and growth trends

in the economy.
The per capita lubricant consumption in India is quite low compared to developed

countries. However, a comparison with other developing countries like China and
Indonesia reveals significant potential in India for growth in lubricant consumption.
Decline in margin due to rising base oil (main raw material for lubricating oil

production) prices, increasing competition due to large number of private players,

very low consumer awareness about the brands and quality and too much price
sensitivity has led Indian lube oil industry to a major marketing challenge for the
companies involved with it.

 Manufacturing ventures are absorbing best practices from around the world. In this

process, they are changing their approach from buying the cheapest lubricants to
reducing the overall cost of lubrication. This takes into account the life of the
lubricant and cost of downtime. This portends well for higher-performing
lubricantsespecially synthetics and semi-synthetics.
Power generation, automotive manufacturing sector, higher investment in

infrastructure division and project execution by construction companies generate

excellent demand in machinery manufacturing, metals and other core industrial
segments.
Industrial lubricants are majorly used in the core industrial sectors such as spamming

cement, coal, steel, engineering, sugar, marine, defense, railways, power, surface
transport, fertilizer and others.
The business is driven by growth in infrastructure investments, manufacturing,

mining sector and increased manufacturing exports.

In this segment demand for high performance lubricants are driven by applications

such as compressors, textile machinery windmills, captive power plants and others.

 One of the essentials in lubricant science is world-class technology. Lubricant technology

is driven by the changing needs of the customers and stakeholders.

Different models will require different types of advance technology lubricants as stress

factor will vary from model to model.

Improving engine and lubricant technology has resulted in the decline in the lube for fuel

ratio. In India, improving lubricant technology has progressively increased the drain life of
lubricants.
As industry faces the challenges of lower production, a key requirement is to lower the

operating costs and total maintenance costs leading to rapid adoption of leading edge
lubricants that provide energy efficiency benefits and lowers the total maintenance costs.
Development in power, automotive, manufacturing and construction sectors generate

excellent demand in core industrial segments.

As the global lubricants market volume expected to grow from an estimated 38,635.3 KT

in 2014 to 42,780.7 KT by 2019, with a CAGR of 2.4 per cent between 2014 and 2019,
India is set to put its foots into the path of economic growth as well.
On the other hand, there has been a shift in the preferences amongst the consumers in

buying lubricants. Brand name, price, accessibility and services offered are becoming the
deciding factors for choosing between brands.

Company Blending Plant

Carrying and Forwarding
agents

Primary Sale

Fleet Owners/
Bulk buyers

Distributors
Secondary
Sale
Wholesalers

Dealers
Tertiary Sale

Consumers

Mechanics

 Blending plant is the place where base oil is processed; additives are mixed and

converted into final product i.e. lubricating oil.

These final products are move towards carrying and forwarding agents i.e. stock

points or depots, as the name suggests these C&F agents are third party and they
provide the infrastructure support for storing of goods and in turn earn
commission.
On an average 37-45 stock points or depots are there for any lube oil company in

India. That is on an average 10-12 distributors order from a single C&F agent or
depot, thus they are geographically positioned accordingly.
Primary sale is the C&Fs sale to Distributors, Secondary sale is the Distributors sale

to Dealers and Tertiary sale is Dealers sale to consumers.

Thus in this flow, three of the important stakeholders for lube oil sales are

distributors, mechanics and the DSRs (Distributors Sales Representative) employed

by distributors.

 Distributors is an important channel partner for sales of any product.

They can greatly affect the sales in a market that is driven on credit dealings.
The greater the credit period he can offer the more the trust the

mechanics/dealers have on him.

Robustness of distributor plays a major role.

In case of lubricant oils following are some of the important roles of a

distributor.

Market Information

Buying and Assortment Building

Selling and promotion

Customer Relations

Risk Bearing

Branding

Financing ,Warehousing & Transporting

Management of DSRs

 Another major stakeholder that affects sale in lube oil is mechanic.

End users are mostly less or not aware about the quality, brand and other technical

factors associated with the product. If it is a commodity like toothpaste or a

shampoo than consumer can differentiate but for the product that is meant for
their vehicle they usually follow the suggestions of their mechanic.
Mechanic is also a person who is less aware about technicalities and works with

different myths spread around in market and spreads that to end customers.
For a mechanic earning some extra money on filling a pack of engine oil of a

particular brand which gives him good return will be lucrative business and thus
comes the role of sales and marketing at the companies end.
Company which is able to come up with good promotional offer for their dealers

and mechanics wins the battle. It is sometimes distributor also who come up with
offers in order to increase their sales volume and get good return.
But, company can bear the cost of promotional cost all the time so comes the role

of advertising and branding.

 DSR that is Distributors Sales Representative, these are the people who become the

face of the company in terms of sales to dealers and mechanics.

Distributor must be smart enough to appoint them wisely and manage them

properly. They must be given proper route plans and soft skill training as sweetness
and calmness in their nature can earn more sales volume for the company.
They must strike the balance between distributors and companies reputation in

market, though they are paid by distributor but they are liable towards the brand
image of company.
Some of the major problems faced overall in the market are:
Delivery time from distributor to dealer,

Tracking of the scheme issued to dealers or mechanics

Proper use of branding materials.

So these are the things to be taken care by DSR.

 Trends shaping the Indian lubricants industry are:

oil marketing companies are shifting focus to the untapped rural market;
emergence of bio-based lubricants;
changes in engine technology;
OEMs introducing own brands;
focus on energy efficiency and total cost of ownership leading to adoption of

more leading edge products and solutions.

 The major parameters are margin, schemes, promotional activities, and branding of

product.
A product cant be placed in Indian market on the basis of brand only, without

matching the spending power of customers.

An industry where switching cost is negligible, person relationship plays an

important role to capture maximum market share.

Regular schemes have become part of the lube market.
Not only the product, but also the superior service differentiates one company

from another.
Thus, the strategy in the Indian automotive segment has progressively been shifting

from the sales push, commodity type marketing strategy to a brand pull, fast
moving consumer good (FMCG) product type of marketing strategy.
This is especially in case of the Bazaar trade, which currently accounts for around

40 per cent of the sales of the automotive lubricants in India.

 With the product definition of a lubricant is undergoing a change from a

commodity to a FMCG, a wide distribution network and a good brand image are
the most important success factors in the automotive lubricant industry.
In the medium term, the players are expected to increase advertising expenses

with a lot of focus on development of brand image and improving brand equity.
With the slower growth rate in the automotive segment, declining margins on

account of rising base oil prices and increasing competition on account of the
presence of a large number of players in this segment, players are expected to
focus on Industrial lubricants as the key area for future growth in the Lubricant
Industry.
Thus, with the competition in the industry intensifying, a period of price

competition followed by consolidation is expected over the medium term, with

smaller players either exiting the industry or merging with larger players.