As a logistical consequence of China’s vast exporting, manufacturing facilities tended to be coastal; however, in an effort to offset declining exports, China is increasingly shifting to a domestic consumption-driven economy and investing significant resources in developing infrastructure within the country’s interior thus encouraging companies to expand and establish a presence to service what were until recently low priority domestic needs. This realignment affords both opportunities and challenges. Backed by government incentives, the hitherto underdeveloped interior of the country is emerging as a new and hungry market. Astute marketers therefore need to employ dual strategies: one for the traditional and more sophisticated developed regions of China, and another for the upcoming interior regions.

Kline’s analysis also finds that China’s state-owned players dominate the market, with PetroChina remaining China’s leading lubricant supplier, claiming approximately 23% of the market mainly due to its strength in the industrial sector, while Sinopec claims a further 20% market share through its dominance of the automotive sector. These and other domestic companies, with their well-established reach and low price points, hold a distinct advantage in servicing the burgeoning lubricant demand and capturing market share. This is reflected by Shell, the leading foreign supplier in China, securing a relatively modest estimated 7% market share. Kline estimates that the combined sales of lubricants by foreign suppliers amount to around 27% of the total volume.

However, great opportunities exist for foreign lubricant suppliers as global companies increase their investments in China and are likely to choose the same or other trusted Western oil suppliers to fulfill their lubricant needs.

With the expectation that the car population in China will grow on average between 18% to 22% per year between 2010 and 2015, and given that most of the large automotive producers in China are multinational or joint venture companies with global sourcing as a common strategy, multinational lubricant producers can fare well by fostering and emphasizing proven and standardized product performance and value-added relationships. Additionally, with the absence of locally produced ATF and the growing popularity of automatic transmissions, there are largely uncontested opportunities for multinational lubricant suppliers to strengthen their position in the transmission oil market.

Due to increased investments in large power generation projects in recent years and further projects anticipated, more imported power generation equipment and other large electrical equipment will be introduced. “It is expected that this will lead to a rapid growth in demand for high-end lubricants in this market segment, with equipment manufacturers stipulating standardized, tested, and trusted fluids,” commented Geeta Agashe, vice president of Kline’s Energy Practice. “This is an opportunity for global majors, such as ExxonMobil, Shell, and BP, who have a strong relationship with the OEMs of imported equipment.”

China’s shifting economy offers considerable opportunities, offering value-added services, specialty, proven, or trusted fluids, and capitalizing upon relationships with OEMs of imported equipment and parent companies, will significantly benefit foreign oil suppliers.

Opportunities in Lubricants 2011: China Market Analysis is a comprehensive analysis of the Chinese lubricant market focusing on market size and growth, quality evolution, key trends, developments, challenges, business opportunities, and threats.

The vibe at ISSE is decidedly sex, candy, and rock-and-roll. At least half of the exhibitors boast a hot pink and black palette. Sugar-inspired concoctions are everywhere—as are bare-chested men, hair and feather extensions, and *BLING*.  The floor is teeming with stylists that don apparel, accessories, and hair reminiscent of 80s punk. Michael O’Rourke and countless other stylists pluck passersby from the crowd to give them instant (and occasionally unexpected) makeovers, Michael with his new “Rock Your Hair” collection. The booth for Moroccan Oil is huge, vibrant, and lined with hundreds of stylists patiently waiting to purchase product, illustrating this “one-hit wonder’s” staying power.

Activity surrounding nail care seems to be at an all-time high, with a flurry of colors, textures, and finishes. Appliance manufacturers have seemingly taken their cue from the nail care companies, showcasing flat irons, blowers, and accessories in a dizzying array of colors and patterns. All signs point to an interesting year for the professional beauty industry!

We will be tracking all these insighs in our continuous reasearch on Professional Skin Care - Global Series, and Salon Hair Care - Global Series. And we are adding two exciting reports from the professional beauty arena to our 2012 portfolio; Hair Appliances 2012: Global Market Brief and Professional Nail Care 2012: Global Market Brief.

View also the insights from Carrie’s Visit to Cosmoprof North America 2011!

With over 25 years of industry experience, Kline’s Eric Vogelsberg, Senior Vice President of the M&A and Corporate Development Practice, brings an authoritative and qualified perspective.
While 2011 ended in uncertainty, Eric sees the M&A environment as remaining fundamentally strong and fecund.
On April 18, 2012 at in-cosmetics Barcelona Eric will discuss the current M&A environment and key underlying trends and drivers and share his views on the impact on the personal value chain. He will examine how the continued consolidation and evolution of players will alter the structure of the business and the competitive landscape, and he will help you understand why personal care remains one of the hottest spaces in M&A.
Hear Eric speak on Future M&A Trends and Drivers Across the Personal Care Value Chain at in-cosmetics Barcelona, April 18, 2012 at 12:30PM in the Marketing Trends Theatre.

Within the specialty actives market, consumers are often the trend-setters. A growing consumer understanding of active ingredients in personal care products driven by extensive media coverage is compelling active ingredients manufacturers to innovate. The desire to look younger has raised consumer expectations regarding efficacy of active ingredients, resulting in functionality becoming increasingly important. Consumers expect results, and this is reflected in the trend towards more effective skin care products where validated active ingredients are the key. Consistent above average growth rate in active ingredients in general, particularly specialty actives, is the consequence. Nikola’s presentation will explore new trends in the specialty actives market and the parallel between consumer demands for skin care products and actives offerings. An overview of the present global active ingredients market and its outlook will also be discussed.

Hear Nikola speak on Opportunities in Skin Care: Exploring Specialty Actives at in-cosmetics Barcelona, April 17, 2012 at 10:30AM in the Marketing Trends Theatre.

Traffic? Change for a parking meter? Not issues when shopping’s effortlessly done from home or the office.

On January 31st at 1:00 PM US ET, catch a video recapitulation of a panel of leaders in the world of virtual beauty as they discuss beauty retail options outside the traditional bricks-and-mortar model in the Virtual Beauty Retail Webinar. Topics will include: what virtual retailers are looking for, different models for success, and how to capture the short attention span of the digital-age consumer.

Karen Doslow, Kline’s Consumer Products Practice Industry Manager will participate and discuss trends and insights gleaned from Kline & Company’s recently published report Beauty Marketing 2011: U.S. Promotional Activities and Strategies Assessment. She will also be available during the live questions-and-answers session after the webinar.

Virtual Beauty Retail: Video Recap from HBA, Tuesday, January 31st 1:00 PM US ET.

To register for this timely event, click here.

What has been the impact on the global lubricants industry? As per Kline & Company’s estimates, global lubricant consumption peaked in 2007 at about 39.8 million tonnes. Consumption declined by 3.5% in 2008 to 38.4 million tonnes and by a staggering 9% in 2009 to reach 35 million tonnes. Consumption grew by 7% in 2010 to reach 37.4 million tonnes. In 2011, we estimate that the industry grew by 2% to reach 38.2 million tonnes. The economic rollercoaster ride of the past three years has generated a debate on the nature of lubricant demand and its growth in context of economic growth. Does lubricant demand growth track GDP growth rate? Can we define a relation between GDP growth and lubricant growth? Has the lubricant market grown at all in the last 10 to 15 years? Let’s try to lay out our view on these questions.

Does lubricant demand growth track GDP growth rate?
Lubricants permeate every aspect of our life and are needed wherever machines are used. For our convenience, we break down the industry in terms of consumer segment which covers all privately owned cars, SUVs, motorcycles and small engines; commercial segment which covers all trucks, buses, tractors, and other commercial vehicles; and industrial segment which covers lubricants used in machinery in all industries and also includes metalworking fluids used in variety of metal processing industries. If we take a broad time horizon, then lubricant consumption growth should indeed track GDP growth rate given its wide usage. However, there are two caveats. First, not all sectors of the economy use lubricants to the same extent so lubricant demand growth is dependent on which part of the economy is growing. GDP is divided into manufacturing, services, and agriculture. Manufacturing GDP is most lubricant intensive, and services are the least intensive. In most affluent economies (Germany is an exception), GDP growth is primarily driven by growth in services hence the impact on lubricant demand growth is weak. Growth in manufacturing intensive economies will have a strong relation with lubricant growth. The second factor to consider is the degree of mechanization in the manufacturing sector. Many growth economies may have a large manufacturing sector, but their manufacturing is labour–intensive, using less mechanical power and hence less lubricants. As such economies grow, lubricant consumption would show some growth, but this growth would have been much stronger if it were to occur in an economy which is highly mechanized. Similarly, if growth comers from the Agricultural segment it is important to understand if agriculture is primarily mechanized or labour intensive. In our view lubricant demand growth is driven by GDP growth. However, the relation between the two is nebulous and changing based on where economic growth occurs.

Can we define a relation between GDP growth and lubricant growth?
To be able to quantify the relation between GDP growth rate and lubricant demand growth rate, we need a repeatable, consistent measure of “actual” global lubricant demand, as opposed to estimates. Unfortunately, lack of common definitions and spotty reporting by marketers means that we do not have consistent measure of actual lubricant demand. Data is indeed collected by various national associations but the data is strictly not comparable year to year as the list of participants keeps on changing. Also, differences in what is included make comparison between data from two sources difficult. Is process oil included? What about marine oils? How do re-refined oils get counted? Unless we have a robust, repeatable measure of global lubricant consumption covering all market segments (top tier to bottom tier), the correlation with GDP growth rate is not representative of the total market.

Even if we can’t quantify lubricant demand, we can quantify growth. It’s how much more was sold this year compared to the year before. We can therefore track lubricant demand growth with GDP growth and determine if there is a relation, right?
The answer is: maybe. The lubricants industry is very vast in terms of products, market segments, supply chain position, and geography. The growth rate experienced by industry constituents is based on their position. Niches within the total market may have high or low growth rate because of some underlying trend which drowns out the “real” demand growth. For example, an installer may experience a better than average growth rate if there is a significant shift from DIY demand to DIFM demand. Similarly, a Group III supplier may experience strong growth far in excess of the industry growth due to shifts in blending approaches. An additive company may experience a sudden spurt in demand related to the introduction of a new quality level. These market participants would experience some slowing down if the total market declined, but they would not be able make out if this was due to the slowing down of the market trend or slowing of the overall growth.

Due to supply chain effects, growth rates can be all over the place during times of economic turbulence. When growing at a steady pace, the lubricants industry is like a taut railway train with all chugging along at more or less the same pace. When economic growth stalls the impact on different supply chain levels is different. We did see in the latter half of 2008 and early 2009 massive destocking by lubricant marketers. This caused a more rapid contraction in demand for baseoil and additives suppliers than would have been justified by the contraction in the true demand. Similarly during the upswing in second half of 2010, these suppliers benefited from restocking. As a result, during this turbulent period, it would have been difficult for basestock and additive suppliers to relate their business growth to the GDP growth.

Finally, even if there is no special trend in play and no economic turbulence, growth of individual marketers will be higher or lower than the total market depending on whether it is gaining or losing market share. The point is that growth rates of individual market participants are unreliable indicators of overall market growth. The growth rate of the individual market participant may have been influenced by some major market trend unrelated to overall demand. It could also be the case that the company in question is losing or gaining market share.

Has the lubricant market grown at all in the last 10 to 15 years?
We cannot hold both views that lubricant demand tracks GDP growth and that lubricant consumption today is at the same level as it was 10 years ago, for the real GDP has grown in this period.

Between 2000 and 2010, cumulative global passenger car and commercial vehicle production accounted for nearly 718 million new units¹. Even allowing for vehicle scrappage, there has been a big increase in the global vehicle population. Between 2001 and 2011, steel production grew by 408 million tons². Other industrial end-use industries saw similar growth in production levels. Did lubricant consumption remain flat in face of such massive growth in vehicles population and industrial production? To be sure there has been a dampening of lubricant demand due to longer lasting lubricants, lower losses in use due to better equipment design, smaller sump sizes, better housekeeping, better re-refining, and other such factors. However, they have not been enough to cancel out the growth in the underlying demand for lubricants. Innovations such as longer drain engine oils have not spread out to Asia where the cost of insufficient lubrication far outweighs the cost of the lubricant. In our view, global lubricant consumption is likely to exhibit growth due to increasing vehicle population, industrial production and increased mechanization in growth economies. This growth rate will be lower than what you would expect from the build-up of vehicle population and growth industrial production, but still a long way from a flat market.

Finally, a word on our methodology.
Kline measures lubricant demand by a combination of lubricant usage norms (covering crankcase size, drain intervals, and top up demand where applicable) applied to passenger car, motorcycle, and commercial vehicle populations; lubricant usage intensity in different end-use industries; and estimates of sales by major marketers and their market shares. Usage norms in automotive segment and usage intensity in industrial segment are developed on the basis of end-user and installer interviews. Projections are based on growth in end-user segment and any shifts in the usage norms.

What do you think are the important parameters to be considered for estimating lubricant demand? What factors should we look at for projecting demand growth? Please provide your feedback at vera.sandarova@klinegroup.com. We would love to hear from you.

In closing, we wish you a healthy, happy, and profitable 2012!

By Milind Phadke, Industry Manager, Energy

Milind.Phadke@klinegroup.com

The article points out that because of the major differences in competitive dynamics between these two types of businesses, management’s focus is also very different. Managers in commodity driven businesses rightly focus on cost minimization: low cost raw materials, operational optimization and efficient channels to market. Conversely, managers in specialty businesses focus on understanding and responding to customer needs, product innovation and targeted marketing and sales.

Acquisition is often a manner in which companies find themselves prone to falling into the specialty trap as they attempt to reconcile commodity and specialty business interests. A commodity-oriented company might decide to broaden its portfolio by acquiring a specialty business, attracted by faster growth, higher margins and lower cyclicality. The acquisition price is justified by seeking cost synergies, however given their disparate needs, critical challenges emerge and there is much less room for maneuver than in either an exclusively commodity or specialty business.

The authors call attention to the fact that both business types  have relatively clear – albeit different – approaches to business model design, technology, and market and portfolio management. By contrast, businesses at risk from specialty traps face dilemmas in many of these areas. Consequent business models lack the clarity of a low-cost or high-differentiation approach, but are blends of both with no clear basis for value creation. Once it is clear that a business is at risk, there are two fundamental approaches to avert a specialty trap.

One approach is to reaffirm the business’s position as a commodity or a specialty player – if the former, stripping away costs; if the latter, stepping up product/market innovation. The alternative and more radical approach is to transition from a commodity player to a specialty player, or vice versa.

The problem is that – given the hybrid nature of competition in the specialty trap – neither low-cost nor premium-pricing strategies are likely to be successful. Winning companies adopt an integrated approach: assessing the scope for value creation based on customer needs; using competitive intelligence to understand competitors’ cost structure, profitability and positioning, and how these influence competitive dynamics; then realigning business strategy, organization and resources to optimize performance. This is likely to require a remapping of business segments, and strategies that vary significantly by product, market and geographical cluster. Kline’s observations have found that companies that take active steps to ensure they are not trapped in the middle ground between commodities and specialties are much more likely to have sustainable business portfolios and higher quality of earnings.

Likewise, Clarisonic is a logical acquisition candidate. It is the #1 brand in the explosive $1 billion at-home skin care devices market in the U.S. It has the unique premise of sonic technology in addition to being fashion-forward and trendy. As we had predicted in our recent market research report, At-home Skin Care Devices 2011: U.S. Market Analysis and Opportunities, the market is ripe for acquisition activity, and we are happy to see L’Oréal be one of the first to make a move here.

There is a lot of potential for Clarisonic under its new owner. L’Oréal has strength in globalizing once-local brands, as it has done with Maybelline and Redken. The devices market is flourishing all over the world and is particularly advanced in Asia (which Kline plans to examine in the next edition of our study), so Asia could be a next logical step for Clarisonic.

Essie is another good example of Clarisonic’s potential at L’Oréal. In just a little over a year from its acquisition, Essie’s share of the U.S. mass nail polish market has reportedly grown from virtually nothing to more than 10%. L’Oréal clearly recognized Essie’s potential and quickly married it with the booming nail polish market to successfully generate quick results.

Clarisonic has strong potential in its own right. Its patented sonic technology is unique and could be extended beyond cleansing and anti-aging to other skin care concerns, perhaps at different price points and in different channels under L’Oréal’s other brands like Vichy or Garnier.

This definitely seems like a good match and we believe it is a win-win for both L’Oréal and Clarisonic.

This is great recognition of our positioning and offerings both on the KMC and KMR sides of our business, with many people contributing to our success. Well done, everyone! We’re now going to figure out how to leverage this to maximize our exposure in the industry.

]]> http://blogs.klinegroup.com/2011/11/04/kline-wins-agrow-award-for-best-supporting-role/feed/ 0 Kline Blogs agrow http://blogs.klinegroup.com/2011/11/03/the-widening-of-the-panama-canal-the-potential-game-changer/ http://blogs.klinegroup.com/2011/11/03/the-widening-of-the-panama-canal-the-potential-game-changer/#comments Thu, 03 Nov 2011 16:45:24 +0000 Geeta Agashe, Vice President - Energy http://blogs.klinegroup.com/?p=1551 ]]> Historically, the U.S. East Coast (Atlantic region), led by New York, dominated trading activities with other nations. This makes sense as most of the trade those days was between Europe and the United States. With the emergence of the Asia-Pacific region (first with Japan and now China and the East Asian Tigers) the U.S. West Coast (Pacific region), led by Los Angeles and Long Beach, grew in importance. This certainly had an impact on the local economy in terms of growth in related industries such as shipping, trucking, railroad, and other such industries which resulted in the growth of marine engine oils, railroad engine oils, and HDMOs.

We may now see a shift in trade on a similar scale, with the U.S. Gulf Coast, led by Houston, New Orleans, and other ports in the region being the beneficiaries. A potential game changer, as announced by the Wall Street Journal, is the $5.25 billion widening of the Panama Canal scheduled to be completed in 2014. The widened canal will allow the passage of ships carrying twice the cargo as they are able to carry currently. This should open the Gulf Coast to megaships coming in from Pacific ports such as Singapore, Shanghai, Pusan, and others which have traditionally sent their cargos to the U.S. West Coast. Some leading analysts, according to the Wall Street Journal, predict that more than 25% of this traffic could shift to the Gulf and South Atlantic ports.

In addition, Latin America is now home to many of the world’s fastest growing economies including Brazil, with overall growth rates in 2010 exceeding 6%. Increased shipments are expected to come from Latin America to ports such as Houston, Corpus Christ, Brownsville, New Orleans, Pascagoula, and Gulfport-Biloxi.

The global lubricants market is estimated at around 36 million tonnes in 2010. Latin America now accounts for about 7% of the total. Due to the significant growth predicted over the next decade, this region is expected to increase its appetite for lubricants, with marine engine oils playing an important role as a contributor to this growth in demand. This is expected to have a positive impact on the demand for baseoils, lubricant additives, and finished lubricants.

This shift in trade patterns will have an impact on where lubricants are consumed. As per the recently published Kline study, Opportunities in Lubricants, North America, Petroleum Administrative for Defence District (PADD) 3 accounts for 16% of all lubricants consumed in the United States in 2010. Based on all of the changes highlighted above, we expect this number to grow significantly over the next decade.

What impact will these developments have on the supply chains of various participants in the lubricants industry? Would the sales force, technical support, and blend plant locations need to be re-aligned? Astute marketers will be well served to stay on top of these developments, which could have a significant impact on the U.S. lubricants business. Kline will investigate this issue in a FlashPoint report, The Widening of the Panama Canal: Impact on the Lubricants Industry. Please click here if you are interested in this analysis.

Geeta Agashe, VP, Energy