Markets have tendency to over-react to recent news and undervalue the longer term data.
Bearing this in mind, an interesting tension currently exists for analysts when it comes to Chinese statistics. On the one hand, there are reports of “stalling Chinese manufacturing output” after HSBC’s PMI figure for China fell to 49.6 - indicating a contraction. At the same time, GDP growth predictions were reduced to 7.7%.
An indicator is Zoomlion, China's second largest construction equipment maker, which reported a 72% plunge in its first-quarter earnings from a year earlier. Taking this data in isolation, clearly all is not well with China's economy.
However, taking the long view, the Chinese automotive industry seems to be bucking the trend. Production rose 15.3% in April and sales increased 13.3%. This is set to put China ahead of European automotive production. In 2000, Europe produced 35% of the world’s cars. This year it will be closer to 20%. Over the same period China’s automotive production has grown 10-fold, with a forecast figure of 19.6m cars and light vehicles. This has is certain to driven down the market share of older vehicles with less demanding requirements.
From around 110 million cars now, by 2020 China is forecast to have 220 million vehicles on the road - 20% of which (44m) are expected to be SUVs. Given that the overwhelming majority of this production will come from JVs, combined with tighter environmental and global manufacturing standards, the demand for higher quality lubricants can only continue to rise.
That being said, a recent report from the Shanghai Lubricants Trade Association examining the challenges faced by Chinese lubes producers, both at home and abroad, suggests that the local producers may be ill-equipped to deal with an increasingly competitive environment.
Some domestic producers are already keenly aware of the need to upgrade their technologies. In a recent press statement, Kunlun Lubricants, a wholly-owned subsidiary of China National Petroleum Corporation (CNPC), announced it would increase its total spend on research and produce better, cleaner lubes.
As has occurred in Russia, (and former CIS states) the local producers have to compete with the Western brands. For the local majors, this presents the challenge of how to create brands that can compete. This is about marketing as well as technology.
Amongst the hundreds of smaller lubricants businesses, there is a clear need to try to avoid a race to the bottom on price, as well as avoiding a market in fake product. A quick search on Taobao.com, China’s largest online marketplace, will lead you to a four-litre bottle of Kunlun 15W-40 for just 65 yuan ($10.5).
While China's automotive lubes sector is likely, ultimately, to emerge in good health, the picture for industrial lubricants in the short term is less clear with the risk of a significant increase in competitition. However, as Kunlun has demonstrated, the drive to keep improving standards, using enhanced base oils and additives, will continue. This, of course, will need to be combined with brand building and the internet marketing trends being seen elsewhere around the world.
OATS is continuing to build its database of Chinese equipment, allowing it to provide advice and assistance to both lubricants producers and OEMs in developing their short and long-term marketing strategies.
To find out how OATS can help your organisation, or to comment on anything you have read in this month's Bulletin, please don't hesitate to contact Diana at DShen@oats.co.uk. We look forward to hearing from you.
Published 28th May, 2013
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