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Yip’s Chemical: Why is the lubricant value chain so long?

By Vicky Villena-Denton and Aaron Stone

In China, a car is considered a status symbol. Following market principle reforms in the late 1970s and a consequent rise in wealth, sales of luxury automobiles have intensified as a material demonstration of prosperity. German automakers consistently provide the vehicle of choice for the affluent Chinese in the mainland. In September 2017, Audi was ranked China’s number one luxury automaker with 58,100 units sold, followed closely by Mercedes-Benz [53,300] and BMW [52,700].

Economic reform and regional growth have certainly made vehicles, and indeed luxury, more accessible in China. Calvin Chen, general manager of Yip’s Chemical’s lubricant business, estimates vehicles valued between RMB 150,000 (USD 22,895) to RMB 500,000 (USD 76,318) currently account for 70% of market share. Ten years ago, this price range contributed only 25%, he says. No doubt, cars are becoming more affordable, financing is available, and in China more than half of married couples both work. However, Chen believes the driving factor behind this shift is that more Chinese families have become wealthy — initiating a movement from lower to higher priced vehicles.

Similarly, China’s automotive lubricant market has undergone noteworthy change over the past decade with consumers now demanding convenient, high quality, reasonably priced products. However, despite this transformation, one notable constant has remained — the decision maker on the engine oil selected for your vehicle when it’s time for an oil change. In “at least 70%” of cases the end workshop is still entrusted with the recommendation for its customers, says Chen.

There is no do-it-your-self (DIY) culture in China. Very few people possess the requisite knowledge of engine oils, there is no suitable location for a driver to complete their own oil change in major cities like Shanghai and Beijing, and seemingly little desire to do so. Fast lube outlets remain a principal channel for lubricant companies in China. Chen predicts this channel will undergo a substantive change in the near future.

The China fast lube market comprises an assortment of players with no established market leader. More than 24,000 Four Ace stores, 30,000 branded manufacturer workshops and 500,000 small one- to two-person garages are scattered throughout the streets, all competing to maintain your vehicle. Interestingly, while OEM dealerships remain a viable option for both repair and service, Chen advises that new Chinese government regulations are loosening the dealer’s grip, enabling consumers to purchase and service automobiles via alternative channels — despite the OEM still upholding accountability for the performance of the vehicle.

Yip’s Chemical started out as a small distributor of lubricants and coatings in Hong Kong in 1971. The company was founded by two Yip siblings and, 46 years later, the family still maintains a controlling stake in the Hong Kong Stock Exchange listed company. After China opened its gates to foreign investments in the 1990s, Yip’s Chemical made the decision to enter the market and began producing lubricants in China in 1992. The company now supplies a complete range of industrial, automotive and specialty lubricants under the Hercules and Pacoil brands.

There are four core businesses of Yip’s Chemical — solvents, coatings, inks and lubricants — with the group’s revenue growing 18% year-on-year to reach HKD 4.48 billion (USD 573.4 million) and sales volume achieving a new high of 590,000 metric tonnes for the six months ended June 30, 2017.

Yip's Chemicals Manufacturing PlantA former Shell employee of 13 years, Chen has been with Yip’s Chemical since 2015. He asserts that Yip’s focus is on “supplying good quality lubricants at a lower price than the multinational companies.” While competing with the large multinationals can be daunting, independent lube blenders like Yip’s Chemical can manufacture similar lubricant products at a more competitive price, he says.

However, it is Chen’s perspective on advertising that is perhaps most intriguing. While he concedes that the multinational’s large marketing budgets can be troublesome for smaller operators, he questions the benefit of expending efforts educating the end user in a non-DIY region like China. While advertising is helpful for consumer education, it is of no benefit to the people in the workshop — the real decision makers. Most large lubricant companies are currently marketing their products in essentially the same way, a distributed system where promotional or marketing expense is forwarded to the distributor, he says.

So why is this value chain so long? And how can we make the value chain shorter and deliver greater value to the end workshop? It is Yip’s Chemical’s desire to shake up the workshop space, though clearly, this is easier said than done, particularly with China’s extensive geography, logistical and technical issues.

Global headlines continue to prophesize the end of bricks and mortar retail. Credit Suisse has forecast that up to 25% of American malls will close by 2022, exacerbated by an over development of malls in the United States. However, Chen believes that the future of lubricant competition is not online versus offline. The fundamental challenge is reaching and controlling the end workshop with particular emphasis on how the people in the workshop benefit from this relationship.

Calvin Chen
Calvin Chen

This is not to say Yip’s Chemical doesn’t promote their Hercules or Pacoil brands online. In fact, the Yip’s Chemical’s Lubricants GM says the company has doubled their marketing spend in 2017 across both traditional and digital channels. Irrespective, the primary focus of the company is offline marketing. “We try to avoid the conflict of online vs offline,” he says.

What is this conflict? Chen supposes that online lubricant sales harbour the potential to damage offline networking efforts. With the emergence of giant e-tailers in China, such as Alibaba and JD.com, customers fundamentally believe shopping online should be cheaper. Lower online pricing places lubricant producers in direct competition with their offline partners.

While Chen concedes online selling is okay for a smaller company with limited offline networking, for Yip’s Chemical the potential to compromise offline relationships with online ambition is too real. Though the company wouldn’t rule out a dedicated online brand in the future, in the short to medium term Yip’s Chemical’s online efforts will be dedicated to selling the service, not the product, part of a strategy to control entry to lube shops.

Despite improvements in the quality of lubricant products and the development of a China National Standard “China still sell the idea of an oil change every 5,000-6,000 kilometers (km),” says Chen. This contrasts with the 25,000 km oil drain interval that is commonplace in Europe. The quality of petrol and air pollution is cited as contributory to more frequent oil change in China. A twice-yearly oil change ensures that lube shops in China continue to maintain a stranglehold on engine oil selection.

How will this change in the future? Chen believes we will continue to see a proliferation of multi-brand workshops (as opposed to single brands) yielding an opportunity to influence and drive faith in their products. Success will be bestowed on the companies that can shorten the value chain most effectively and optimize product channel marketing and promotion, he believes.