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Infineum TrendsIndustry Drivers

Climate change, fuel economy, emissionslegislation, globalisation, and the rise ofnew markets have all created changes andopportunities in our industry. The futurethat is emerging looks very different fromour pre-recession world – and it’s likely totake us all some time to adapt.

Uncertainty and caution have been thethemes in recent Trends presentations.This year’s theme is ‘The Opportunities ofChange’ and we hope to explore some ofthe growth opportunities building on theinitial signs of recovery we saw last year.

Undoubtedly, the biggest driver forchange is the environmental legislationarising from concerns about climatechange. Last year climate talks took placein Mexico, and over 190 countriesadopted the Cancun Agreement, settingthe stage for ongoing negotiations ongreenhouse gas reductions.

While several positive steps were taken –including a way to help developing nations,recognition that some in-place targetsmust change and a framework to limitdeforestation; neither a mechanism fordeeper cuts nor agreement on the legalstatus of any new global limits were agreed.

Whatever the outcome of that politicalwrangle, governments around the worldare introducing and tightening both CO2

emissions limits and fuel economytargets. As an example, the USA fueleconomy target for passenger vehiclesincreases from about 25 mpg to 35 mpgby 2020. In Europe already tight CO2

emissions targets of 140g/km will bereduced to 95g/km by the same date.

None of these targets are easy to meetand they will drive changes in bothvehicles and power trains around theglobe. OEMs will need to do some verycreative juggling of product mix tomaximise fuel economy and profitability– something we are already seeing withthe emergence of the smaller carpremium sector.

CO2 reduction legislation will affect almostall forms of transport in the not so distantfuture and present new challenges to fluidformulators. OEMs will be looking forevery possible way to improve fueleconomy and reduce CO2. No doubt theywill be expecting even more help from thefluids we supply. However, this improvedfuel economy cannot come at theexpense of either engine protection or oildrain interval!

Globally, governments are alsocontinuing pressure to reduce emissionsof other pollutants through the use ofmore efficient engines andaftertreatment technologies. They arealso looking to improve the security oftheir energy supplies through increaseduse of indigenous fuels and sustainablebiofuels.

In the USA the Environmental ProtectionAgency celebrated the 40th anniversaryof the Clean Air Act Amendments, underwhich the EPA has gradually introducedmore and more stringent tailpipeemission standards. Having alreadyreduced on-road emissions by over 90%,the scope is widening to now addresspollution from a wide range of non-roadsources.

If you believe the mainstream consumermedia our new found environmentalconscience means all of us will soon bedriving plug in electric, hydrogen or fuelcell vehicles. However, Infineum andmany other informed commentatorsbelieve the internal combustion enginewill continue to be the powertrain ofchoice for the foreseeable future.

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Lube-TechIn a competitive industry that is alwaysgoverned by cost, it is simply more costeffective to improve conventionalgasoline or diesel engines than it is tomove to alternative technologies.

The cost of hybrid vehicles is really quitesignificant compared with the environ-mental benefits they deliver, while plug-insand fuel cell vehicles depend on a carbon-neutral energy source for any significantenvironmental benefits to be achieved.Without very significant governmentincentives or taxation, product cost willrule and powertrain developments will beevolutionary, not revolutionary. Althoughthe powertrain picture to 2030 is far fromclear we think the internal combustionengine will have a major part to play.

However, as alternative power systemsenter even as niche markets, they maybring new challenges.

In the short term we see an assortmentof advanced internal combustion enginepowertrains, along with the emergenceof a variety of hybrids and a few electricvehicles.

In the medium term, electrification islikely to take a bigger role, but advancedengines, either alone, or deployed in hybridvehicles will remain dominant in the mix.

The long term trends are difficult to call. Asthe demand for personal mobility continuesand fossil fuels are replaced by alternativesit is likely the number of electric and fuelcell vehicles will grow, but such growthmust be accompanied by fundamentalchanges in the energy supply sector.

Internal combustion engines will seedownsizing, lean operation, alternativefuel use, valve train complexity, turboboosting, the use of new materials andimprovements in emissions controls.Automatic transmissions will have six,seven or more gears and some regionswill use DCT and CVT technology.

Some of the technologies that started inpassenger cars, such as hybrid drives andexhaust aftertreatment, will expand toother vehicles segments. These changesprovide opportunities for thedevelopment of innovative andadvantaged lubricants and fuels.

One growing market that is presentingsignificant opportunity is China. Reportsfrom the IMF indicate that in 2010 itovertook Japan to become the world’ssecond-largest economy.

Vehicle sales topped 18 million in 2010 –up 32% on the previous year. Some90% of last year’s economic growth wasdriven by domestic demand, and GMreported more vehicle sales in China thanin the USA. Some industry analystssuggest that there could be 125 millionvehicles on China’s roads by 2020. Chinais a huge market and most OEMs arelooking to increase sales in the region.This changing market offers opportu-nities for fuel and lubricant suppliers.

Recognising this growing demand, globalautomakers are investing in productionfacilities through out Asia.

Trends 2011 looks at how Global changesand industry challenges are impactingspecifications, formulations anddevelopments and aims to share Infineum’sviews on some of the key issues.

Power Transmissions

Improved fuel economy, to meet toughCO2 targets in Europe and escalatingCAFE Standards in the USA, is the keydriver for changes in transmissions. It isincreasingly important that bothtransmissions and their fluids help improvefuel economy – while simultaneouslyenhancing other performance attributes.

Several alternative transmissiontechnologies are currently in use, andthere is no consensus about which is thebest. DCT growth is expected in Europeand China, where the existing manufac-turing infrastructure makes productioneasier. CVT are more popular withJapanese and Chinese OEMs for small

low torque vehicles. However, it is theconventional planetary automatic – withan increasing numbers of forward gears– that will continue as the dominantauto-shifting technology.

Historically, automatic transmissions useda torque convertor and had three or fourspeeds – with just a handful having five.In North America, DEXRON® andMERCON® fluids represented more thantwo-thirds of ATF volume and weretypically formulated in Group I basestocks to provide the high viscosityrequired.

The need for improved low temperatureoperability led to specifications which cutBrookfield Viscosity by more than 60%.At the same time, requirements forbetter fluid durability led to tougheroxidation tests and essentially eliminatedGroup I base stocks from ATFapplications.

OEMs began to look at how to minimiselosses by reducing the viscosity oftransmission fluids. A number of lowviscosity fluids followed and today thereare more than half a dozen low viscosityfluids in the marketplace, along with amyriad of high viscosity fluids – makinglife more complicated for service centresand lube shops.

Today, there are at least ten OEMs thateach produce over a million automatics ayear. Most make multiple transmissionmodels – each being slightly different indesign, size, torque capacity and eachusing different materials for gears andclutches. To optimise performance, fluidsare specified to provide exactingperformance requirements. The net resultis that ATF’s must be pretty much OEM-specific – or even transmission specific!The ATF service fill business, once basedon bulk economics, is quickly becoming abusiness of expensive small volume fluids.

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Just when you thought it couldn’t get anymore complex today’s ATFs must havelower viscosities to reduce fuel consumption– while at the same time maintainingprotection for gears and bearings despitethe lower lubricant film thickness.

In an attempt to reduce complexity almostevery major ATF marketer offers a Multi-Vehicle fluid of some sort. However, mostare formulated to meet high viscosity ATFrequirements. Today’s market is clearlyready for a low viscosity multivehicle ATF toreduce complexity and provide the requiredfuel economy and hardware protection.

Looking to the future, demands toreduce fuel consumption and improveefficiency will increase.

OEMs will continue to increase the numberof gears and transmission components willcontinue to get lighter and smaller. Withsmaller sump sizes, containing less fluid,new fuel-efficient transmissions will havehigher operating temperatures addingextra stress to the ATF.

The question that remains is just how lowcan the viscosity of future fluids go?Whatever the answer, the desire forimproved fuel economy must be carefullybalanced with the need to deliver theexcellent hardware protection.

PCMO (Passenger Car Motor Oils)

Once again, the improved fuel economyand reduced CO2 emissions are the maindrivers of change for passenger cars. Aslegislation is introduced across the worldand penalties for non-complianceincrease, OEMs are looking for everypossible saving.

ILSAC GF-4 and GF-5 quality oilscomprise some 60% of the NorthAmerican PCMO market, and the move

towards GF-5, which started lastOctober, is progressing. Top tier, highmileage and other SM licensed productsaccount for another 30% of the market.

SAE 5W-20 and 5W-30 viscosity gradesaccount for almost two thirds of thismarket, and SAE 0W-20 for Honda andToyota and have reached measurablevolumes. Responding to requests fromsome Japanese OEMs, the SAE EOVC(Engine Oil Viscosity) Task Force isworking to define even lower viscositynew grades for addition to SAE J300.However, much work remains beforethese new grades are finalised.

In Europe, December 2010 was the lastdate for oil marketers to upgradeproducts to meet ACEA 08 requirements.ACEA also released some minorupgrades which become mandatoryDecember 2012. New chemical limitsdrive a split between the A/B and Csequences, and TBN limits were added toA3/B4. Hardware and fuel issues maylimit availability of some tests and causedelays in approval programs.

This plot of light duty engine testing overthe last decade represents over $1B in2011 money, with GF-5 alone costingover $100M.

As with any new category development,viewpoints differ regarding its success.ILSAC GF-5 is expected to last until at

least 2015, but replacement parts formany of the current engine tests may runout before then. Also, it is not clear thatall ILSAC members are committed tofuture test or standard developments.

Industry is already behind on developingreplacement tests to evaluate key oilproperties. In addition to replacementsfor existing performance parameters,several new issues may require new testdevelopments.

While most OEMs are expected to specifyILSAC GF-5, GM has taken a differentpath. GM produces vehicles in 37countries, and had previously setlubricant specifications on a country orregional basis. Last year it introduced itsnew global engine oil specifications forgasoline and light-duty diesel engines,which will replace all previous specifi-cations.

GM charges fees for approvals, and thishas both caused concerns with some oilmarketers and added uncertaintyregarding market penetration. Ourindustry experts shared varyingcomments and view points regardingdexos™. As of early 2011, the estimatedNorth American market volumes fordexos licensed and unlicensed productswere almost evenly split.

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Heavy Duty Engine Oils

As we predicted last year, 2010 was arecovery year for the heavy duty vehiclemarket. However, the rate of recoveryhas surprised most industry observerswith sales bouncing from a low of1.4MM units in 2009 to 2.4MM units in2010, matching the previous high in2007.

API CJ-4 oils were developed to protect2007 and newer engines and theiremission control systems. Volvo Trucksdeveloped their own global oil specifi-cation using the CJ-4 tests as its core.

Starting last year, NOx limits werereduced for all on-highway diesel enginessold in the USA. Most engine manufac-turers are using SCR with DEF as theirprimary NOx control technology.However, Navistar continues its use ofheavy EGR and advanced combustioncontrols. The use of SCR, EGR and DPFseems to be the global standard foremission control in markets with strictlimits.

While API CJ-4 oils are performing well,several of the engine tests used to definethe category have experienced issueswith both fuel and hardware.

While there is general agreement thatthere is no short term need for a new HDcategory, there is a potential needaround the middle of this decade. The

API DEOAP met in March 2011 to beginplanning for this possibility. EMAmembers are not yet ready to make aformal new category request, but theyexpect to develop a request by year end.Several potential areas for improvementwere noted. They did note that CJ-4testing can be supported through 2015.

With rising fuel prices, HD truck fueleconomy and the potential contributionof lubricants is rapidly gaining interest.

Reduced HTHS viscosity is a powerfullever to improve fuel economy. However,OEM concerns about increased wearhave forced an HTHS limit of 3.5 cPminimum into CJ-4 as well as manyother global specifications.

Changing HTHS limits will requireuniversal support from Global enginebuilders, and that may be difficult toachieve. In addition, comments from APIstaff suggest that concern overbackward compatibility could force achange in category rather than a‘supplement’. Individual OEMs may bewilling to make changes to allow theuse of lower viscosity oils, and thesechanges could represent opportunitiesfor oil marketers.

In Europe, the ACEA HD requirementswere updated late last year, but thechanges were relatively minor.

We concentrate on oils for engines withadvanced aftertreatment systems, butalmost half of last year’s global truckproduction was not so equipped! Chinais one market where this is true, andengine builders there are reluctant tomove to higher quality lubricants.

The Chinese commercial vehicle marketis dominated by local producers.However, these companies currentlycannot compete in markets withadvanced emission control requirements.Recognising the importance of theChinese market, both Cummins andDaimler have formed JVs with localcompanies, and this could allow theChinese OEMs access to advancedtechnologies and enhance their futureglobal competitiveness.

In the more sophisticated markets therewill be continuing pressure to reduce

CO2 emissions and improve fueleconomy. In the US, the EPA and NHTSAhave proposed harmonised limits whichwill phase in from 2014 through 2018.

Europe is expected to impose newtargets later this decade. Infineum doesnot believe these changes will drive‘breakthrough’ technology into themarket. However, there will beincreased emphasis on ‘known’technologies which are alreadyrecognised by the EPA ‘Smartway’program.

For well into the future, the four strokecycle compression ignition engine willremain the power system of choice forcommercial vehicles, with somepenetration of hybrid drives for stopand go service. Biodiesel usage will varywith local mandates and taxationpolicies, and natural gas usage maydevelop in market niches where thedistribution infrastructure either exists oris installed.

China Market

With China’s economy now holding thenumber two slot globally, it seemedappropriate to move China to a standalone segment in Trends 2011. China’spopulation is over 1.3 billion peoplemaking it the most populous nation inthe world. One of every five people onearth live in China, and if everyone linedup to walk past you in single file theline would never end.

In 2009 the global economic downturnreduced foreign demand for Chineseexports for the first time in many yearsbut China rebounded quickly outper-forming all other major economies. Lastyear China’s GDP grew to just over $6BUS – a year on year change of just over10% after correcting for inflation.

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China’s vehicle population hit 74MM lastyear, and it is estimated to reach 125MMby 2020.

Still, car ownership per 1000 people islow compared to other markets –indicating the probability of even moregrowth.

With these additional vehicles come thechallenges of increased congestion andpollution in major cities. In Beijing forexample – a city that covers a similararea to Las Vegas but has a populationover six and a half times larger – themunicipal government announced that itwill take steps to limit car ownership.Total vehicle sales and production hitsome 18MM units in 2010, truckproduction rose almost 30% to justunder 4MM units.

Last year the Chinese governmentimplemented Euro IV emission limits forPassenger and Commercial vehiclesnationwide. This provides an opportunityfor oil marketers to promote high quality,long-drain lubricants to meet the needsof the advanced hardware technologiesof Euro IV vehicles.

The government has concerns about theenergy sector’s ability to supportcontinued economic growth. Fuel priceshave risen since market changes 2008,and fuel economy is becoming animportant consideration for car buyers.

However, hybrid cars have not caughton. Passenger car fuel economystandards move to phase III in 2012, butSAE 15W-40 viscosity oils still hold mostof the market – presenting anopportunity for the use of lower viscosityoils to improve fuel economy. HD fueleconomy standards are underdevelopment.

Pollution and energy security concernshave prompted the Chinese Governmentto focus its attention on new energy andclean-energy cars. The current five yearplan makes the development of new-energy cars a top priority for the autoindustry. To meet the target of onemillion new-energy vehicles by 2015China plans to invest more than 100billion yuan – or 15 billion dollars – overthe next decade and make China theworld leader in green car production.

Emerging Economies

Beyond China, Brazil, Russia, India andKorea present significant new opportu-nities to vehicle OEMs and to lubricantand fuels suppliers – but they also bringa set of unique challenges and a certainlevel of uncertainty.

We’ll start with a look at Brazil, acountry with a population of over 200million – the 5th largest in the world,behind China, India, the US andIndonesia.

The onset of the global financial crisishit Brazil late in 2008, and the countryexperienced two quarters of recession.However, Brazil was one of the firstemerging markets to begin a recovery.Consumer and investor confidencerevived and GDP growth of over 7%,was reported in 2010.

Vehicle sales in Brazil hit an all timehigh in 2010 – up almost 12% on theprevious year – surpassing Germany tobecome the fourth largest car market inthe world.

Although diesel fuels with sulphur levelsof 1800 and 500ppm are still in use –50ppm sulphur fuel is now available forurban transport fleets in selected cities,and 10ppm will be available from 2013.There is concern that the availability ofvarying sulphur level fuels may lead toconfusion and misuse.

Biofuels usage has been promoted forsome 40 years, and ethanol use ingasoline grades is currently E25 andE100. B5 has been mandated sinceJanuary 2010, and requirements will risegradually to B10 by 2015. Thesechanges in fuel quality present newopportunities for both auto and truckmakers and fuel marketers. In addition,upcoming changes in emissions limitswill impact both light and heavy dutyhardware, fuels and lubricants.

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Russia

Our next look is at Russia. At over 17million square miles Russia is the largestcountry in the world. Although it is 1.8times the size of the US its population ofjust over 139 million means it has lessthan half the number of people.

In the last 10 years the country has had ahigher GDP growth than other Europeancountries, the USA, and Brazil althoughnot as strong as China and India. Beinglargely dependent on crude oil, gas andraw material exports, the Russianeconomy was battered by the recession.With crude and gas prices soaring, theeconomy is now recovering and theoutlook is that GDP growth will remainstrong.

Russia ranks 10th in the world forpassenger car sales and in 2010 sales ofnew passenger cars and light commercialvehicles in Russia rose by 30%. Foreignbrands account for over 60% of the newsales market. With a relatively low cardensity compared with developedeconomies – there is clearly significantgrowth potential in the future. Highimport duties and bureaucracy makelocal manufacturing attractive and themost major players either have or arebuilding their own plants in Russia.

Despite the recession, Russia is thelargest truck market in Europe. However,high import duties – currently running at25% – and slow replacement of thevehicle fleet mean foreign brands have amuch lower market penetration.

Russia is the fourth largest globallubricant market, with future growthexpected to be significant as the vehiclepopulation builds. However lubricantquality is fairly low and almost all highquality lubes are imports from the west.The quality of lubricants is being driven

up both by plans to move to Euro Vemissions standards and the increasinguse of foreign vehicles requiring higherquality lubricants.

India

From Russia we move to a country onethird the size of the US, but which hasthe second largest population in theworld – India. Last year, the Indianeconomy grew by more than 8% –largely from strong domestic demand.

The Society of Indian Automobilemanufacturers – SIAM for short – reportsthat local vehicle production grew almost33% last year to over 17 million unitswith most going to export markets.However, rising disposable incomes, thelaunch of new models and a robusteconomy are driving more customers intoshowrooms, and industry analystssuggest India will become the fourthlargest auto market in the world,overtaking Europe, by 2015.

India expects to benefit from a period ofdirect foreign investment as over twobillion dollars a year comes in over asustained period to enable automanufacturers to set-up more newplants.

In spite of this significant growth inpassenger car production, currentproduction in India is still dominated bytwo wheelers – predominantlymotorcycles. In 2009 India was thesecond largest motorcycle producer inAsia at just under 10 million units.

The Indian government is also supportingthe introduction of alternative energywith a 20% subsidy for two and fourwheel Electric Vehicle makers on the ex-factory prices of their vehicles. In thefuture, the Electric vehicle incentive will

be merged into the National ElectricVehicle Policy that is currently beingformulated.

Korea

For a relatively small country Korea’scapital city, Seoul, at over 10 million isone of the most populated cities in theworld!

With the global economic downturn inlate 2008, Korean GDP growth slowed,but by the third quarter of 2009, theeconomy began to recover, and last yeargrowth exceeded 6%.

Korean emissions standards are based onEuropean specifications and manyvehicles now have to meet Euro V limits.Both gasoline and diesel fuel have comeunder new specifications with limits on anumber of chemical and performanceattributes. A Fleet Average System or FAScovering CO2 limits, similar to the USCAFE standards was introduced inJanuary 2009. It allows OEMs to producecars with various emission levels andbank and trade credits as long as theiraverage emissions meet FAS limits.

Korea has had a biodiesel mandate,starting at 0.5% since 2006. Last yearthe blending ratio was increased to 2%as part of the government’s aim to havealternative energy sources contribute upto 5% of the nation’s energy demand by2011. It is also working to increase thequality of Biodiesel to meet the EuropeanEN14214 standard.

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