Small Is Beautiful for John Deere
Deere & Co. has grown into the world’s largest farm equipment maker by churning out the mammoth 500-horsepower tractors and 12-row harvesters that work the 3,000-acre corn and soybean farms that dot America’s prairies. But it’s small farmers such as S. Pichandi of Kelur, India, who could well determine the Moline (Ill.) manufacturer’s prospects in the years ahead. Pichandi says he would rather use a 52-horsepower Mahindra & Mahindra tractor at his six-acre rice paddy. “I am told that John Deere tractors are good to use during harvest time but not in the initial stage of farming—the vehicle gets stuck in the slush,” says Pichandi, who has bought three Mahindras in four years. His latest cost 647,000 rupees ($13,463), more than twice his annual farming income.
Deere hopes to replicate its success in North America by rolling out a record number of new products overseas—including lighter-weight tractors in India. Chief Executive Officer Samuel R. Allen wants to double sales, to $50 billion, by 2018, something he can achieve only if Deere’s construction machines and iconic green-and-yellow farm tools turn more soil in emerging markets including India, China, Russia, and Brazil. Deere has made a greater push beyond the huge and expensive gear popular among U.S. farmers. “Our strength as we look at our global expansion is also our Achilles’ heel,” admits Allen. “We could still stay with this very strong presence in our traditional market. But if we don’t go into other areas, 10 years from now … it’ll be a smaller part of the agricultural equipment market—that’s not acceptable.”
Allen wants to lift Deere’s sales from outside the U.S. and Canada to 50 percent, from 35 percent in fiscal 2010. With almost all the arable land at home in use, farm equipment growth will come from overseas, where more land is coming under cultivation and more farmers are mechanizing, he says. Besides, North America’s farm machinery fleet appears to be the youngest in decades, according to a Robert W. Baird report. “While there could be some growth left, we’re nearer to the peak than the trough,” says Mark Demos, a portfolio manager for Fifth Third Asset Management.
To win over Indian farmers such as Pichandi, Deere last year introduced two models of 36- to 41-horsepower tractors to India. That’s lighter than the heavier 55-horsepower tractors designed in Waterloo, Iowa, that it initially sold on the subcontinent. “The tractor that we went into India with for us was the smallest tractor we made,” Allen says. Yet for the Indian market, where the average farm is about three acres, it “was the biggest tractor that was used.”
The new models were designed in Pune, in the Indian state of Maharashtra, and reflect feedback from 2,000 local customers. Allen is investing about $100 million to build a factory in Madhya Pradesh, for small farm tractors to sell locally and export, and has given Indian engineers responsibility for Deere’s global utility-tractor line. Since December, Deere also has announced investments of about $190 million to build factories in China to make engines, construction equipment, and agricultural machinery. Selling tailored machines or smaller products with fewer features at lower prices ultimately may limit profits, however, says Jeff Windau, an analyst at Edward Jones. For example, Deere is marketing a tractor for about $7,000 in India, while a new 8360R 296-horsepower tractor in the U.S. has a base price of $306,252.
Margins on sales in Deere’s fiscal third-quarter report released Aug. 17 were lower than some analysts had estimated. Deere officials laid the blame on costs related to “global-growth initiatives,” foreign-exchange rates, and jumps in pay incentives and raw material costs. The narrower margins weighed on investors, who pushed Deere shares down that day. Although Allen vows to use cost-cutting to raise operating margins to 12 percent by 2014, up from 10.6 percent in fiscal 2010, it surely won’t be his last challenge as he moves more business farther into the developing countries.