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Trends in China’s lubricant market in 2007: By the end of 2006, China would fully open its domestic wholesale market for refined petroleum products to foreign investors, in line with the commitments made upon joining the World Trade Organization. There is no doubt that a new round of expansion by foreign oil and petrochemical companies in the Chinese market is about to begin, and this will have an impact on an important part of China’s oil and petrochemical industry – namely, the development and structure of China’s lubricant market in 2007. From the recently held 7th China International Lubricants, Greases, and Processing Technology Equipment Exhibition, which covered the entire industrial chain of China’s lubricant industry, it is possible to clearly see some signs of development in this sector. It is foreseeable that foreign brands of lubricants will continue to make efforts, while domestic small and medium-sized brands are at a critical point in their development. Domestic well-known brands such as Kunlun Lubricants will also face both opportunities and challenges in achieving new breakthroughs. Who can stand out in this era that needs heroes? Let’s take a look together at China’s lubricant market in 2007. Strengthening the concept of localization: A foreigner must follow Chinese rules. Starting in the early 1990s, some well-known foreign lubricant companies took advantage of the opportunity to supply oils for the initial installation of imported vehicles in order to enter the Chinese lubricant market. Subsequently, they established a competitive advantage in high-end lubricants by specifying branded products through authorized automobile repair shops. As the date for the full opening of the refined oil market approaches, foreign oil and petrochemical companies are increasing their efforts to penetrate the Chinese market. We have found that in the refined oil distribution market, foreign companies are increasingly improving their industrial chains and organizational structures. In the lubricant industry, where business hours are earlier and the level of openness is higher, European and American companies have long been key players in terms of investment. Upon entering the Chinese market, they began the process of localization through various means. In September this year, Shell acquired a 75% stake in two companies under Unipetrol, drawing attention from the industry. At the 7th Lubricants and Greases Exhibition, Middle Eastern oil companies such as Abu Dhabi Oil Company were all present, while the American company Ashland became a diamond sponsor of the exhibition, demonstrating the determination of foreign brands to enter the Chinese market. At the site, reporters observed that ExxonMobil’s booth also incorporated elements of traditional Chinese architectural design; it even featured classical Chinese rosewood furniture, clearly emphasizing its localization in China. Industry analysts believe that once the wholesale market for refined petroleum products is opened up, foreign brands will gain the rights to wholesale such products as well as the authority to import and export them. They will accelerate their investments and establish a comprehensive presence in China’s refined petroleum product market, which will undoubtedly have a penetrating effect on the lubricant market, which is still not open to foreign competition. In addition to the oil product sales business, foreign brands also actively extend localization efforts to sales channels and marketing management. For example, foreign brands will continue to improve their sales network in the southeast region and expand into the interior and western areas ； Accelerate the establishment of wholly-owned oil product sales companies, and increase capital in the previously established joint ventures. Of course, this cannot be achieved in a short period of time. Moreover, due to differences in regional cultures, there will certainly be many difficulties and obstacles in the process of localizing foreign brands, and it remains uncertain whether they will be accepted by Chinese consumers. Ways to strengthen the development of local small and medium-sized brands in niche markets To counter the impact of international brands continuously entering China’s lubricant market, local small and medium-sized lubricant brands are also seeking to make positive changes. As can be seen at the 7th Lubricant Exhibition, domestic lubricant brands are adopting a strategy of focusing on specific niche markets. For example, a lubricant company in Shandong specializes in ultra-low noise lubricants. In addition to developing different products for various road conditions, smaller local lubricant brands can also consider creating more specific types of lubricants tailored to different seasons and climate conditions. Small local lubricant brands can only create a space for themselves to survive by uniting their efforts and focusing their core resources on in-depth development in specific market segments. Furthermore, the advantage of smaller private lubricant brands in targeting specific market segments is also reflected in their ability to manage channel outlets effectively. The sales of lubricants ultimately come down to competition among channels, and this competition among channels is reflected in competition at the retail level. For the end-stage development of lubricants, only by staying close to consumers can diverse information and service needs of those consumers be met. The integration of terminal resources is an important aspect of terminal development. For different types of terminal resources, smaller local lubricant brands should formulate flexible marketing strategies to demonstrate their value and advantages in the combined use and management of these resources. To the encouragement of private small and medium-sized lubricant brands, they have made significant progress in certain sectors of the petrochemical industry such as lubricant sales and gas stations, as well as in downstream processing and sales areas. Currently, private gas stations, including those that are joint ventures, account for about half of the total number of gas stations in the country, and some private enterprises have obtained the rights to import crude oil as well as fuel oil. Experts predict that if small domestic lubricant brands can adopt an open mindset in the face of market changes and avoid short-sighted practices such as mixing vegetable oil into lubricants, then these private small and medium-sized brands, which will become more standardized during the 11th Five-Year Plan period, will achieve greater progress in areas such as lubricants. Domestic lubricant brands with a strong local presence are fully demonstrating their overall advantages. In recent years, well-known domestic lubricant brands such as Kunlun have seen rapid growth; they not only possess substantial strength but also employ strategies such as using high-profile advertising campaigns combined with various offline marketing tactics, as well as working closely with automobile manufacturers. By taking these actions, they have managed to capture market share from the source, successfully regaining some of the high-end lubricant markets that were previously held by foreign brands. As a result, the share of high-end lubricant markets held by foreign companies has dropped from 80% to 60% at present. According to the reporter, thanks to their strong research capabilities and precise understanding of factors such as vehicle conditions, road conditions, and climate in China, local brands like Kunlun Lubricants have developed a range of lubricant products with excellent adaptability to local conditions, which have won the favor and recognition of consumers. The representative of Kunlun stated that Kunlun lubricants are not inferior to foreign brands in terms of various indicators such as wear resistance and oxidation resistance. Moreover, the local suitability and cost-effectiveness of products from well-known domestic lubricant manufacturers represent another significant advantage over foreign brands. After successfully bringing foreign brands down from their pedestal in 2006, these domestic lubricant brands will continue to focus on fundamental tasks such as channel management and brand building, strengthening their internal capabilities in order to achieve further breakthroughs. Recently, at the 7th Lubricants and Greases Exhibition, reporters saw that major state-owned lubricant brands such as Kunlun demonstrated strong brand strength and advanced product technology. With a comprehensive range of products that included lubricants, greases, as well as various maintenance products, these brands offered products from various categories such as turbine oil, diesel engine oil, and gear oil for heavy-duty vehicles. A representative from Kunlun told reporters that Kunlun lubricants are becoming increasingly interconnected with the automotive industry chain; its research and development efforts always adhere to the concept of \"integrating lubricants with vehicles\" in order to meet the needs of local consumers effectively. At the same time, leveraging its extensive network of gas station outlets, Kunlun Lubricants is also attempting to integrate resources at larger gas stations in order to offer a one-stop service that includes car fueling and maintenance. Moreover, from Kunlun’s comprehensive and multi-dimensional presentation of its booth at the exhibition, we can also see the progress made by large state-owned lubricant companies in terms of brand awareness. At this year’s lubricant exhibition, domestic lubricant companies led by Kunlun Lubricants clearly put forward the concept of internationalization, which undoubtedly reflects the trend toward integration with the international energy industry chain in 2007. Local lubricant companies are rising rapidly, with their corporate and brand strengths continuously improving, enabling them to step onto the international stage. Leading domestic lubricant brands, with China National Petroleum Corporation’s Kunlun Lubricants as a representative, are working to strengthen their brands, enhance their research and development and production capabilities, and improve their management in order to boost the Chinese lubricant market. At the same time, they seize development opportunities by adhering to a strategy of expanding overseas; through sponsoring international automotive and sports events as well as exporting their products, they aim to counter the impact of foreign lubricant brands flooding into the Chinese market. A Brief Analysis of the Domestic Lubricant Market in 2008: Compared to the previous year, 2008 brought no new changes to the lubricant industry. Globally, demand for lubricants continued to show a steady growth trend, while the prices of base oils remained at relatively high levels due to high oil prices. In the domestic lubricant market, brand competition is fierce; however, private enterprises will face even greater pressure. It becomes inevitable for them to narrow their product lines, which will have a significant impact on their profits. I. External overall environment: 1. International oil prices are expected to fluctuate between $60 and $90, with many institutions raising their forecasts for crude oil prices. 2. Base oil prices remain high, driving up the prices of chemical and additive products as well. 3. Foreign oil companies are paying more attention to the Chinese market, leading to a process of survival of the fittest. 4. The domestic economy will continue to grow, but at a slower pace. 5. The machinery and equipment manufacturing industry will continue to show a rapid growth trend. It drives oil consumption. 6. Entering an era of high costs, the overall gross profit margin of enterprises has declined. II. Market trends in the lubricant industry: 1. The views of domestic upstream enterprises regarding market competition will significantly influence the operating environment for private enterprises; these enterprises will either expand or shrink their operations, which becomes one of the strategic options available to them. 2. The balance of interests influences market development; it determines that the development of companies like Kunlun and Great Wall will become the mainstream. However, there is still room for private enterprises to survive, but they must undergo changes and cannot compete by relying on their own weaknesses against others’ strengths. 3. The wave of mergers and acquisitions by multinational oil giants is coming to an end, and it is currently difficult to identify another lubricant company with a distinct identity. 4. It is foreseeable that, in an era of high costs, the gross profit margins of domestic companies will decline. 5. Looking at the development of the base oil market, there is little possibility of further increases; however, a market trend will still emerge after the Spring Festival, as has already been evident in the international market. Stability is possible, but the supporting forces are insufficient, especially as buyers lack strong enthusiasm; if profits exceed a reasonable range, it will force some companies to scale back operations or transform. 6. The situation of brand confusion leads to disorder and fierce competition, affecting the overall environment. 7. Environmental and energy-saving requirements are increasing further; alternative energy sources are developing, and new fuels such as various types of natural gas, methanol gasoline, and ethanol gasoline are being used. Therefore, the quality of automotive fuels needs to be improved. 8. Technical marketing is given more emphasis, with going deep into enterprises becoming the preferred approach for most. 9. The growth rate of lubricant consumption is slowing down. III. Development of lubricant products 1. The development of new environmentally friendly and energy-saving products has become a new highlight, but breakthroughs in technology and application are required to ensure their long-term success. 2、Under the pressure of costs, domestic private enterprises will further reduce their market share in low-end products such as CD, SF, and below, and shift their focus to products of the CF, CF-4, CH-4, SG, SH, and SJ categories. 3. Multi-stage oils will see broader application, while the single-stage oil market will continue to shrink. 4. New technologies and concepts for products will be continuously introduced. 5. Competition for products in the industrial oil sector is intensifying; foreign companies, Kunlun, Great Wall, and other private enterprises will increase their efforts in this industrial market. 6. The prices of lubricant products will rise further in 2008; this is an inevitable trend.