Agriculture Machinery Report

HOW TO MAINTAIN POSITION AS AN IMPORTANT GLOBAL PLAYER IN THE AGRICULTURE MACHINERY INDUSTRY!

16.02.2015! ICA-Agricultural Machinery! 1!

AGRICULTURE MACHINERY INDUSTRY!

EIVIND AAS - JESPER GUNNERLINGCARINE TRUONG - KARL ERIK MORTHEN BENEDIKT SCHMIDT - ARNAUD PINCET!

The agriculture machinery industry is a huge and stable industry. The most profitable players are present in many geographical areas and with full- line and standardized equipment. Emerging markets are the most promising for future growth. Sub-Saharan-Africa is particularly interesting, mainly because of unutilized arable land, government support, low mechanization level and increasing global attention. !

The project group is suggesting how a virtual firm, Field&Track Co, should maintain their role as an important global player in the industry. Ultimately we will be giving an entry strategy specifically tailored for entering Kenya with the intention of, in time, expanding to other African countries. !

Executive summary!


Agenda!


Part I: Global Scope!

Part II: Africa scope!

Market & Industry environment!

Industry analysis! Competitive analysis!

1)! 2)! 3)!

Where is the future!Growth potential?!

1)!

Market & Industry environment in Kenya!

Industry Analysis of Kenya!

2)! 3)! 4)!

Strategy for virtualglobal player toenter Kenya!

4)!

? Scenario !analysis!

•  The food challenge!•  Definition of Industry!•  PESTEL Analysis!•  Future Trends!


MARKET & INDUSTRY ENVIRONMENT

The global food challenge!

•  Although the population growth rate decreases in most developed countries, the rapid increase in developing countries still causes rapid growth worldwide. !

•  The demand for food increases with population growth and higher average standard of living.!


260

470

2010 2050

+81%!

Meat consumption worldwide, in Mt!

•  Higher standards of living imply higher demand for proteins and thus meat. !

•  Huge increase in meat consumption in developing countries!

•  Additional 1000 Mt of grain needs to be produced in order to meet the demand in 2050!

•  On average, 5 tons of grain is needed to produce 1 ton of meat!

The food Challenge! Definition of Industry! PESTEL Analysis! Future Trends!Market & Industry Environment!

Rising population and changing diets causes scarcity of food !

0!1000!2000!3000!4000!5000!6000!7000!8000!9000!

10000!

1500! 1700! 1900! 2100!

Mill

ione

n!

Years!

Chart Title!

Population evolution!

Sources: VDMA, Freedonia, FAO, CIA World Fact Book, Oliver Whyman Analysis!

Severe challenge – solutions are known - machinery is needed!Severe challenge – solutions are known!

Increase yield!•  High quality seeds and

fertilizers can substantially increase yield/ha !

•  Mechanization level in developing countries is very low. Mechanization would increase yield!

Exploiting unutilized land!•  ~ 970 million has

available cropland world wide!

•  As mechanization, irrigation and quality of seeds and fertilizers improve it can increase further!

2010 2050

70-150%!

•  Increasing population and meat consumption vastly raises the demand of food production!

3!5!61!

1018!1586!

China!Africa!Brazil!

Germany!

USA!

Mechanization level comparison!

(unit of tractor/1000 farmers)!

Extensive demand for agriculture machinery

to increase yield in developing countries

in the future.

Solutions!Global food Challenge!




Equipment type!

Farm tractors!

Harvesting machines!

Planting & fertilizing!

Haying machinery!

Plow & cultivating!

Others (incl. spraying)!

Spare parts & attachments!

Example!

Definition of Product Range!


0 5 10 15 20 25 30

Farm Tractors Harves3ng Machinery

Plan3ng & Fer3lizing Haying Machinery Plowing & Cul3va3ng Others Spare Parts & AEachments

For easier comparison: A prerequisite for being regarded as a competitor in the analysis is that the firm at least offers either tractors, harvesting machines or both!

•  Tractors and Harvesting machines are core products for the largest agricultural machinery companies!•  Companies that produce tractors and harvesting machines often have a similar product portfolio!•  The two segments counts for almost 45% of the total market in terms of sales (2008)!

Size in $B (2008)!



North America!

Europe! Japan! China! India! CIS! Latin America!

RoW!

Size in $B, by product segments and geographical areas (2008)!

Farm Tractors!Harvesting Machinery!Planting & Fertilizing!Haying Machinery!Plowing & Cultivating!Others!

Geographical regions!

Market size segmented by products and geographical areas!


60 % Established markets with CAGR 4 % (2009-2012)!40 % Emerging markets with CAGR 8 % (2009-2012)!

The market size of harvesting machinery is a good indicator of the level of mechanization!

–  20 % of total market in Established markets!–  5 % of total market in China and India!

Established markets: 60%!

Emerging markets and others: 40%!

Global scope, with the market segmented in two very different market segments in terms of industry environment, customers, competition, growth potential.!

Established markets!•  Defined as US, Europe & Japan!Emerging markets!•  Defined as BRIC countries (Brazil, Russia, India and

China), Latin America & Africa!Sources: VDMA, Freedonia, FAO, CIA World Fact Book, Oliver Whyman Analysis!


Impact of Industry Environment is huge!


PESTEL Drivers! Established Markets! Emerging Markets!

Farm Cash Receipts!

Price increase on farm commodities due to:!Population growth!Rising GDP levels!

Scarcity of fertile land!Urbanization!

Governmental Support!

Reduced subsidies in the long term:!Farmers need to finance investment

by internal and/or debt financing!Increasing subsidies:!

Drives investments in machinery!

Financial Services! Developed financial services:!No impact!

Development of banking systems:!Machinery financing options for farmers!

Farm Size! Farmers strive for cost-efficiency:!Consolidation, which requires new

machinery!

Fragmented landscape:!Consolidation still not observable!

Technology & Environment!

Increasing demand for renewable energy:!Partly driven by increased demand from pharmaceutical and petroleum industry!


Established markets will demand bigger and higher performance machinery!Emerging markets will demand more machinery adapted to local needs!

The food Challenge! Definition of Industry! PESTEL Analysis! Future Trends!Market & Industry Environment! Impact on demand!

Trend! Established markets! Emerging markets!

Demand for precision farming!

Farmers has yield pressure in order to make a solid living. Precision farming important to maximize yield.!

Not a major driver in the next decades. Customer needs are very fragmented. Mass market demands low-end affordable machinery. !

Larger and specialized equipment!

Huge farms allows for large and more specialized machinery. Increasing monoculture will further trigger the demand for specialized equipment!

Markets are fragmented and thus the demand for large and specialized machinery is low. Must increase machinery level and consolidation before this will become a future trend!

Exhaust emissions legislation!

Higher requirements on engine technology. Pressure on established players!

Still relatively low significance of emission standards. !

After sales business!

Farmers loose money for each day they are unable to use the equipment. High demand for fast and great service. Emerging independent parts resellers decreases the potential for the profitable parts business!

Increasing yield pressure puts pressure on the parts business. Important with reliable low-end equipment.!

Sources: VDMA, Freedonia, FAO, CIA World Fact Book, Oliver Whyman Analysis (slide 16 report)!

Consolidation & specialization!

Bigger and higher performance agriculture machines!

Generally low yield, and fragmented needs !

Mechanization needed, adapted to local needs!

The Industry Environment impacts the future needs of farmers!



•  Overview of Players!•  Porterʼs five forces!

•  Intensity of Rivalry!•  Bargaining power of buyers !•  Bargaining power of suppliers!•  Threat of new entrants and substitutes !


INDUSTRY ANALYSIS!

16.02.2015!

The main players and their biggest brands!

ICA-Agricultural Machinery! 12!

Overview of Players! Intensity of rivalry! Buyer Bargaining Power! Supplier Bargaining Power! Threat of new entrants! Threat of substitutes!Industry Analysis!

•  John Deere as major player globally with AGCO, CNH and Kubota as competitors!

•  High concentration in established markets!•  Top-6 playersʼ tractors sold in Europe > 85

% of total (2010)!•  Economies of scale (together with high

transportation costs and tariffs) drives M&A activities and strategic partnerships!

•  Technology, experience and size required to offer high-end machinery!

•  The global leaders are in general full-liners!•  Players want to leverage from economies

of scope (e.g. distribution, sales, service)!•  The global industry growth is expected to be

roughly 7 % from 2012 to 2016!•  Players will boost revenues as long as they

have unutilized resources and want to reach a higher level of economies of scale!

•  There is a risk of being outcompeted in the established markets if other global players find revenue sources in emerging markets!

The Intensity of Global Rivalry!


Rivalry among competitors is moderate on a global level. !Players grow mainly by market development rather than market penetration. !

Sales revenues (2011)!

AGCO Corp!CLAAS!CNH Global!Deere & Co!Kubota Corp!Mahindra & Mahindra!SAME Deutz-Fahr!Other!

Sources: Bloomberg, Google Finance, Annual reports of Deere, AGCO, CNH, CLAAS, Farmers Guardian 2008, Interview with Marco Sigg, AGCO Corp. !


The Intensity of Rivalry in Local Emerging Markets!


A general rule: The smaller the machines, the more intense is the rivalry.!

The global incumbents face competition from adaptive local players in many markets. !Nevertheless, to which grade a global player is willing to adapt its products to local needs, is highly dependent on how much that player is willing to give up economies of scale!

Local players! Global incumbents!

Economies of scale!

Financing options!

Superior service !

Proprietary technology!

Customer knowledge!

Low-end smaller machinery!

Knowledge of specific topologies and farming!

Adaptation!


•  Customers strive for cost-efficiency by consolidation and thus, are willing to pay for global playersʼ high-end machinery!

•  John Deere has grown with the US market and found itself in a very profitable situation!

Well-established firms: Deere, Iseki, Kubota, Yanmar, CNH, Mahindra & Mahindra!

Local firms: China Yituo Group (First tractors, Shandong Shifeng, Shandong Foton, Jiansu Yueda, Changzhou Dongfeng, Anhui Changiang!

The competition is fiercer in China!

USA! China!

Primary brand of tractors & combines in the US Market!

John Deere

Case ICH

New Holland

Agco

Other

US-China Rivalry Comparison!


US market: !Oligopoly and moderate market growth!

Chinese market: !Global incumbents compete with local players!

Sources: Financial reports of all the agricultural machinery industries, Bloomberg, FAO!


Farmers in Emerging markets!

•  Valuation of low price, financing options and proximity to dealership. !

•  The buyer power is higher due to financial constraints!

The buyer bargaining power differ among customers and markets!


Farmers in Established Markets!

•  High quality, improved efficiency, and service are needed and thus, price sensitiveness is low!

•  Switching costs due to brand loyalty (e.g. knowledge and experience of a certain tractorʼs brand)!


Contractor!

•  Contractors demand both high-performance tractors and harvesting machinery!

•  Contractors value efficiency, service and quality !

•  Put pressure on players to offer top-performance technology on both tractors and harvesters!

Dealer!•  Many dealers!•  The more low-end

machinery (less differentiation), the increased bargaining power, due to easier comparison!

•  No threat of vertical integration!

Established markets: !!Low/moderate bargaining power of buyers!

Emerging markets: !!The financial constraints of farmers lead to !moderate/high bargaining power of buyers!


Bargaining power of suppliers!


The bargaining power of suppliers is very heterogeneous. !General rule: The more high-end the segment, the higher bargaining power of suppliers, due to

technology differentiation. !

Most of the suppliers have low bargaining power

•  Low differentiation in components and raw materials!•  Backward integration possible for certain components!•  Low concentration on supplier side (e.g. motors and standardized components)!•  Most of the suppliers are required to communicate on their structure and on the way

they produce: John Deere has a supplier quality manual that demands high quality level off their suppliers!

For the high-end segment and specific products, supplier power is high

•  The high-end machinery segment have components supplied by few high-technology firms (e.g. GPS suppliers have high bargaining power)!

•  Boschʼs unique know-how on motor pumps are an example where players are price takers!

Sources: John Deere supplier quality manual, Inteview with Marco Sigg, AGCO Corp.!


Threat of new entrants!



Capital requirements are high!

Large investments needed due to heavy machinery production and sales, R&D expenses and factories: !•  AGCO own 10 large factories worldwide!•  Equipment and inventories account for 24%

of John Deere total assets!•  John Deere invested €784M (4% of sales) in

R&D in 2010!•  Estimations show that around 120 Sales

offices are required to cover the UK market!•  High end segment is even more intensive as

long as it requires specific technologies (A/C devices, touchscreen technologies)!

Economies of scale!

The well performing firms are either enjoying economies of scale or are making an effort to standardize production of multiple brands in order to gain economies of scale:!•  John Deere is today the top performing

firm, and through standardize production of parts they have a profit margin of 14%!

•  Other high performing incumbents are switching towards using standardized parts in multiple brands to mover towards the same level of economies of scale as John Deere !

New entrant will find it difficult to meet the capital requirements needed to enter and will have trouble differentiating themselves on price due to economies of scale !

Threat of new entrants!



Switching costs!

•  Many farmers are emotionally attached to the brands and will not consider purchasing another brand!

•  Network effects may also occur if the market share is large. A new high-end tractor bought by a farmer might positively affect the brand awareness from neighbor farms.!

M&A activities!

Many large players uses M&A activities as a growth strategy. If a new player develops a strong brand, the well performing players has opportunity to buy the firm either to increase their product portfolio or leverage the technology into existing product offerings. Recent M&A activities among the well performing players:!•  Kubota acquired Kverneland in 2012!•  CLAAS acquired RENAULT agriculture in

2010!•  AGCO acquired Valtra in 2004!Yes!

62%!

No!38%!

Brand Loyalty in the US marketWould you consider yourself as brand loyal when you purchase agricultural machinery?!

New entrants will also have trouble with capturing market share due to network effects and customer loyalty. If a new entrant is well performing they face the threat of being acquired by the

large players in the industry!

Threat of substitutes!



Direct substitutes! Indirect substitutes!•  Human capital !•  Agricultural tools!

•  Robots!

•  Production of normal food by other means that normal agricultural production (3D printing)!

•  Substitution of land: water, air!

•  Change in consumer behavior!

Not relevant even if the cost is lower: they are not efficient

compare to machinery (increase from 60 to 70q/ha in France from 1989 to 2005

through mechanization)!

Might not affect the agricultural industry: meat production requires even

more cereals than when they are directly consumed!

Higher threats of classical machinery, they are however already integrated in some

AMCs!

Because the industry is related to food production, the threats of substitutes are very low!


Buyer power is low to moderate!

Low in the established markets, due to differentiation in terms of technology!

Moderate in emerging markets due to farmerʼs financial constraints!

Supplier power is moderate!

Mostly low supplier power due to a large number of suppliers!

High-end products that require engineering skills has larger bargaining power (Motor pumps, GPS etc.)!

Threat of new entrants is low!Capital intensive industry!

Differentiation and economies of scale highly crucial on a global scope!

Threat of substitutes is very low!Probability of a major disruptive technology in agricultural machinery is low!

Rivalry is moderate!Moderate in

established markets!Moderate/High in emerging markets!

Takeaways from Porterʼs Five Forces on the global industry!Overview of Players! Intensity of rivalry! Buyer Bargaining Power! Supplier Bargaining Power! Threat of new entrants! Threat of substitutes!Industry Analysis!

•  Strategic groups!•  Firms analysis: What do certain market leaders do good?!•  Future key factors for competitive success for market leaders!


COMPETITIVE ANALYSIS!

What strategic dimensions are of relevance in this industry?!


Strategic groups! What certain firms do good! Key factors for success!Competitive Analysis!

Hypotheses from the Porterʼs Five Forces!•  Economies of Scale should yield a

correlation between EBIT margin and Revenues!

•  If a player offers a wide product range, revenues should be higher and economies of scope should lead to higher EBIT margin!

•  Global coverage should yield higher revenues!

•  High-end incumbents get a premium from established market customer and thus, EBIT margin for those players should be higher!

Measures to support/reject hypotheses!

•  EBIT margin & Revenues (including D&A which is an important post due to high fixed costs)!

•  Width of the product range (specialist, multi-liner, full-liner)!

•  Continents present in (1-6)!

•  Quality aspect (Low-end, High-end)!

Size is crucial!


Revenue!

CLAAS!

CNH Global!

Dae Dong Industrial Co Ltd!

Deere & Co!

Escorts!

Iseki & Co Ltd!

Kubota Corp!

Mahindra &! Mahindra!

AGCO!

First Tractor Co Ltd (YTO)!

0.00!

2.00!

4.00!

6.00!

8.00!

10.00!

12.00!

14.00!

16.00!

0! 1! 2! 3! 4! 5! 6!

Profi

t mar

gin!

Continents present in!Sources: Annual reports, Google finance, Bloomberg, financials.morningstar.com≈!


Companies able to ensure a large

geographic coverage can usually enjoy

better margins.!

The Economies of Scale holds

within the high revenues interval, but not in general.!

Size is crucial!


Sources: Annual reports, Google finance, Bloomberg, financials.morningstar.com≈!


Companies able to enter the high end market can usually enjoy

better margins.!

A wider product range product range usually

increases margins, too.!

CLAAS

Dae Dong Industrial Co Ltd

Deere & Co

Escorts

First Tractor Co Ltd (YTO)

Iseki & Co Ltd Kubota Corp

Mahindra & Mahindra

CNH Global

AGCO Corp

0.00!

0.50!

1.00!

1.50!

2.00!

2.50!

3.00!

3.50!

4.00!

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

Low

/ hi

gh e

nd p

rodu

cts!

Width of product range!

Profit margin!

Four defined strategic groups!



To ensure that the market leaders outperform the other strategic groups in emerging markets, the key factors for future competitive success within this group must be considered. This is done by

analysing what certain players within this group have done good. !

Market leaders Firms!Deere & Co!AGCO!CNH Global!(SAME Deutz-Fahr)

•  High revenues and margins in general!

•  Great global coverage!•  Wide product range (i.e.

full-liners)!•  High-end machinery!

Low-‐end global players Firms!Mahindra & Mahindra!Kubota!

•  Great global coverage!•  Small product range!•  Low-end machinery!

Low-‐end local players Firms!Iseki!First Tractor Company Ltd.!Dae Dong Industrial Escorts!

•  Lower global coverage!•  Small product range!•  Low-end smaller

machinery!

Specialists Firms!Claas

•  Lower global coverage!•  Specialized products!•  Extremely high-end

machinery !

What Deere & Co has done well!



0!2!4!6!8!

10!

2008! 2009! 2010! 2011! 2012!

Fina

ncia

l Lev

erag

e (in

X)!

Financial leverage !(Assets over Equity)!

Deere!AGCO!CNH!

-5!

0!

5!

10!

15!

20!

2008! 2009! 2010! 2011! 2012!Ope

ratin

g m

argi

n (in

%)!

Operating margin (in %)!

Deere!AGCO!CNH!

Sources: Bloomberg, Google Finance, financials.morningstar.com, Annual reports of Deere!

•  Deere leverages from debt financing and thus has lower weighted average cost of capital (WACC) !–  Deere could “live with” their inefficient distribution

networks!–  The Return on Invested Capital (ROIC) could be lower

than the other market leaders, but the Economic Value Added (EVA) is still higher !

•  Enables platform production and thus economies of scale in the manufacturing process!

•  Standardized components lower the bargaining power of suppliers (multiple sourcing) and thus, Deere could lower the purchasing costs!

Highest revenues, highest profit margin!

High financial leverage!

What AGCO has done well!

• Centralization of distribution centers, sales, services and thus more efficient distribution network !

•  Higher fixed assets turnover !•  Lower working cap than Deere and CNH!

•  Access to new markets and fast adaption!•  Synergies, e.g. Strategic Alliances, Marketing,

Sales!•  Access to Technology, which is crucial to gain a

competitive advantage in multiple product segments!

•  Early positioning in growth regions!•  Relatively adaptive due to wide product

range!•  Entering strategic partnerships or acquiring

local players which speed up adaption and keep assets as low as possible!

Inorganic growth through market development!

Strategic aspects of AGCOʼs acquisitions!


0!

5000!

10000!

15000!

20000!

25000!

2008! 2009! 2010! 2011! 2012!Wor

king

Cap

ital (

in M

$)!

Working Capital (in M$)!

Deere!AGCO!CNH!

0!

2!

4!

6!

8!

10!

12!

2008! 2009! 2010! 2011! 2012!

Fixe

d A

sset

s Tu

rnov

er (i

n %

)!

Fixed Assets Turnover (in %)!

Deere!AGCO!CNH!

Bloomberg, Google Finance, financials.morningstar.com, Annual reports of Deere!


What are the key factors for market leaders to ensure competitive success in the future? !

Profit

Revenues Costs



Continue to position early in future market growth regions (e.g. emerging markets)!•  Focus on adaption !•  Consider the price sensitivity of

customers in those markets!•  Offer financing options!•  M&A activity or strategic

partnerships to speed up local adaption!

Increase Revenues!

Reach higher level of economies of scale and lower bargaining power of suppliers through:!•  Streamlining of product portfolio!•  Standardization and

modularization of components!•  Platform production!Supplier segmentation to leverage from knowledge or buy cheaper!•  Supplier of strategic components

-> Partnerships to leverage from suppliersʼ R&D and knowledge!

•  Suppliers of less strategic relevant components -> Opportunistic relationships or consider outsourcing (e.g. engines)!

Long-term cost reductions!

Capacity reduction to increase ROIC, especially after M&A!•  Centralization of distribution

centers, sales and service centers!

•  Elimination of duplicate support activities (e.g. HR, Legal)!

•  Decrease working capital!Increase financial leverage!•  Debt cheaper than equity

-> Lowered WACC increases the economic value added (EVA)!

Short-term cost reductions!

Parts leverages the profits heavily and is therefore important for future competitive success!•  Contracts with dealers!•  Patents!

(Secure Parts business)!

•  Key factors for scenario analysis!•  Impact-probability analysis!


SCENARIO ANALYSIS!

Possible threats to change the industry - Scenario Analysis!


http://www.pcmag.com/article2/0,2817,2419277,00.asp&utm_source=feedly!http://moneymorning.com/2013/02/12/two-reasons-to-expect-greater-volatility-in-oil-prices/!

Type! Key factor! Why important?!

Factors that could threaten

industry profitability!

Raw material price volatility! Cost driver in machinery!

Fuel price volatility! Cost driver for end customer!

New entrants from automobile, forestry, construction or mining industry!

Potential of intensified rivalry!

Environmental factors that limit crop production / reduce land fertility!

Productivity decreases!

C02 emission taxes skyrocket! Cost driver for end customer!

Factors that could threaten demand for the industry output !

Substitutes such as chemical production / 3D printing of food!

Key driver of demand for crops!

Diets switches from meat to seafood! Key driver of demand for crops!

Population growth not as expected! Key driver of demand for crops!

Key factors for scenario analysis! Impact-Probability-Analysis!Scenario Analysis!

We analyse what impact and probability these factors have to decide whether to investigate further!

Impact and probability analysis!


Impact-probability-plot! Register of threats!

Profitability driver threats!1.  Raw material price volatility!2.  Fuel price volatility!3.  Increased competition through entrants from

automotive, forestry, construction or mining industry!

4.  Environmental factors that limit crop production / reduce land fertility!

5.  C02 emission taxes skyrocket!

Demand driver threats!6.  Substitutes such as chemical production / 3D

printing of food!7.  Diets switches to seafood!8.  Population growth much lower than expected!

Key factors for scenario analysis! Impact-Probability-Analysis!Scenario Analysis!

No threat combines high impact with high probability, and we conclude that major changes in the industry from external factors are unlikely. !

Threat 1

Threat 2

Threat 3

Threat 4

Threat 5

Threat 6

Threat 7

Threat 8

0

1

2

3

4

5

6

7

8

9

10

0 1 2 3 4 5 6 7 8 9 10

Impa

ct

Probability

Low High

High

Low

http://www.un.org/esa/population/publications/longrange2/WorldPop2300final.pdf!http://moneymorning.com/2013/02/12/two-reasons-to-expect-greater-volatility-in-oil-prices/!http://newsfeed.time.com/2013/01/11/overcrowding-nah-the-worlds-population-may-actually-be-declining/!


Part 2: Growth Strategy !

5)! 6)! 7)! 8)!

Where is the future!Growth potential?!

Market & Industry environmentin Kenya!

Industry Analysis of Kenya!

Strategy for !entering Kenya!

Which emerging market is of highest attractiveness for market leaders? !

Part I: Global Scope!

Market & Industry environment!

Industry analysis! Competitive analysis!

1)! 2)! 3)! 4)!

? Scenario !analysis!

Where is the future growth potential?!


WHERE IS THE FUTURE GROWTH POTENTIAL?!•  Comparison of emerging markets!•  African comparison!

Comparison of emerging markets! African comparison!Future growth potential!

Overview of important factors in different emerging markets!

Indicator! Brazil! Russia! India! China! SS Africa!

Agricultural preconditions!

59 million ha of arable land.!

Increasing consolidation!

123 million ha of arable land. Consolidated agricultural sector!

161 million ha of arable land. Very fragmented

agricultural sector!

142 million ha of arable land. Fragmented agricultural sector!

237 million ha of arable land. Very fragmented!

Productivity/ Mechanization!

Relatively high productivity and

mechanization level (61)!

Low productivity despite high mechanization level

(96)!

Relatively low mechanization level (6)!

Low productivity!

High productivity despite lowest emerging market mechanization level (3)!

Very low mechanization level, high potential

growth!

Yield Pressure (needs footnote)!

Medium due to balanced ratio of

population to utilized land!

Weak due to low population!

Strong, due to imbalance between

population and utilized land!

Very strong, due to imbalance between

population and arable land!

Very strong, due to potential huge

agricultural growth thanks to mechan.!

Government support! Strong with focus on national players!

Mainly limited to national players!

Moderate, as India has a current focus on

infrastructure!

Very strong focus on the agricultural sector!

Emerging government initiatives, cooperation

with development programs!

Local and global suppliers!

Developed network with both local & global

suppliers!

No network of global suppliers and low quality

of national suppliers!

Fully developed network of local suppliers, but

limited number of global suppliers!

Developed network of both global and local

suppliers!

Emerging global suppliers, few local!

RANKING! 3! 4! 5! 2! 1!



Sub Saharan Africa seems to be the final frontier with huge arable land and low mechanization level. The potential for an increase in mechanization might be large and are depending on external

factors. !

Introducing the Sub-Saharan-African region!

Political!Instability in some countries Growing commitment for some governments encouraged by international development programmes!

Economic!Huge potential growth rate (based on potential growth for agricultural goods of 50% to 68% by 2030)!More than 50% of the population work in agriculture manually !

Technological!Lack of technological knowledge !Lack of infrastructure (transportation, irrigation, electricity)!

Social!Fast growing population!Education and training needed for the use of new technological material!Small-scale farming!



Legal!Problems with property rights, Farmers usually rent land from the government. In many countries women are not allowed to own land.!

Environmental!Holds around 60% of the worlds remaining uncultivated land. Environmental circumstances allows for two seasons of crop per year. Global warming increases yield pressure.!

Sources: FAO, CIA World Fact Book, IMF reports (Regional Economic Outlook: Sub-Saharan Africa, Oct 2012)!

Region II stands out as the most promising region. To decide which country to enter, we need to compare agricultural demand drivers and PESTEL factors for the countries in region II!

Determining a region with the highest potential for mechanization!


Angola!

Cameroon!

Côte dʼIvoire!Ghana!

Kenya!Tanzania!

Mozambique!

Nigeria!

Ethiopia!

Sudan!

Madagascar!

75 % of the absolute increase in output is expected to occur in two clusters of countries !

Region II!•  Higher political stability!•  Vast investments from abroad in practically all

the countries during the last decade!•  Higher increase in the Human Development

index the last couple of years!


Sources: Four lessons for transforming African agriculture, McKinsey Quarterly, April 2011, FAO Statistics 2012!

Region II!

Region I!


Country! Arable Land (1000ha)!

# of tractors!

Tractors/arable land!

Fertilizer/arable land!

Credit rating!(Fitch)!

C. R. Outlook (Fitch)!

Infrastructure inv.!

Mozambique! 2ʼ800! 9400! 3.35! 17.95! CCC! negative! low!

Ethiopia! 13ʼ606! 3000! 0.22! 32.20! CCC! stable! high!

Kenya! 5ʼ300! 14000! 2.64! 95.44! B+! stable! high!

Madagascar! 37ʼ500! 30000! 0.8! 0.99! BB-! stable! high!

Sudan! 20ʼ698! 22600! 1.09! 4.0! CCC! negative! middle!

Tanzania! 9ʼ600! 6000! 0.625! 9.66! CCC! stable! middle!

Agricultural factors and credit ratings in region II !


Sources: faostat.fao.org, tradingeconomics.com, afdb.org!

The promising countries differ very on each factor. Kenya has overall strong agricultural numbers and strong credit rating !


•  Financing and Infrastructure are the two main factors that drives success in Africa for the MAS1!

•  The competitiveness comparison shows that Kenya has an overall higher ranking than neighbouring countries. !

•  Kenya ranked first compared to the other 5 countries in terms of overall infrastructure2!

•  Also, Kenya is located in the middle of the region, making it a geographically strategic starting point.!

Sources: 1US agri equipment giant AGCO explains why it will invest $100 m ion Africa 2The Global Competitiveness report 2011-2012, World Economic Forum!

A selection of PESTEL factors for the region II countries!

Competitiveness comparison!

By its central position in the region as well as its high ranking compared to neighbouring countries, !Kenya is the most promising country to entry for an agricultural machinery company.!


0

1

2

3

4

5 Ins3tu3ons

Infrastructure

Macroeconomic environment

Health and primary educa3on

Higher educa3on and training

Goods market efficiency

Labor market efficiency

Financial market development

Technological readiness

Market size

Business sophis3ca3on

Innova3on

Tanzania Ethiopia Madagascar Mozambique Kenya

*No data on Sudan

*

Kenya as a favorable point of entry!


Strengths and opportunities! Hindrances!

•  Arable land!•  Need for mechanization!•  Yield pressure!•  Mechanization readiness!•  Foreign investments and

global attention!•  Government commitment!

•  Lack of infrastructure even though highest among region II!

•  Mainly small farms!•  Training of farmers

to use equipment is required!


Africa seems to be the last continent that is not dominated by the market leaders. Presence in this continent is important for future growth. Without conducting an industry analysis, Kenya seems to be a favourable entry point in Africa for an agricultural machinery company. We now need to look at the industry environment in Kenya to develop and implement an appropriate strategy for entering the market!

Global… ..Analysis.. ..Kenya


INDUSTRY ANALYSIS OF KENYA!Porterʼs five forces!•  Competition!•  Bargaining power of buyers and suppliers!•  Threat of new entrants and substitutes!

Existing players in the Kenyan market!

70%!

30%!

Market share in terms of sales!

CNH! Others!

The industry is very concentrated with CNH enjoying ≈ 70% of the market!However, they are struggeling with sales due to the level of maturity in the market. !

The state of the market indicates that competition is not a major threat.!


Competition! Customer characteristics! Bargaining powers! Threats!Industry Analysis of Kenya!

CNH was first to move in to the Kenyan market:!•  Joint venture with CMC motors, located in

Kenya, Uganda and Tanzania!•  Domestic assembly to avoid high import tariffs!•  Increasing brand recognition through training

farmers in a model farm!•  Putting huge efforts in making sales!Late entry of other large competitors by joint venture!•  John Deere entered through Tata Kenya!•  AGCO entered with Massey Ferguson

through Tractor Corner!•  Kubota entered through Car & Company!

Sources: CMC motors, kmi.co Kenya & John Deere, Tractorcorner, Capitalfm.co.ke!

Customer characteristics – Kenya!

Hirers! Farmers!Some large and small scale farmers are hirers. They predominantly rent machines to their neighbouring farmers. !

Number of medium to large farms !( < 3 ha ) !

Number of small farms!( 0,2 – 3 ha ) !

< 25%! > 75%!

End-customer!types!

What are the farmers producing? !

Farmers produce a wide range of products!Food crops! Cash crops! Diary and

meat!Cereals!Pulses!Roots and tubers!

Coffee, Tea, !Sugar cane, Cotton …!

Cattle meat!Milk!

Tractors will increase production efficiency of all crops. !Other machinery must be quite specialized. !There are some differences but the small farmers (> 75%) have basic needs.!

Differences and farmers needs!

What differences are there between farmers!

What do the current farmers value !

•  Land holding!•  Farm family labour!•  Resources!•  Types of animals!

•  Increase household food!•  Income security!•  Employment opportunity!•  Life style enhancement!



Sources: FAO reports!

Moderate buyer bargaining power – suppliers are negligible!

Buyer bargaining power is low to moderate! Supplier bargaining power!

Buyer price sensitivity: !•  Kenyan farmers are largely very price sensitive.!

Availability of substitute products: !•  Most farmers are using animals. Choosing to keep

using animals, is indeed a possibility.!

Buyer concentration!•  There is little cooperation between farmers by

now, and few manufacturers providing machinery. !

Business model in Kenya!

1. Produce

2. Assemble!

3. Export!

Interaction with Kenyan suppliers!

Yes! Little or no !

No!

The likely models for a firm entering, is either 2 or 3. !Either way, there is little or no interaction with Kenyan suppliers.!The supplier power will therefore be according to the Porterʼs on the global level. !

Buyer price sensitivity!

Availability of substitute products!

Buyer concentration!

Bargaining power of buyers!

High! Moderate! Low! Moderate!



Sources: FAO reports!

Threat of entry and threat of substitutes in Kenyan market!

An entry in Kenya demands a long term strategy and large investments in order to capture a substantial part of the market. The risk, and possibly the return, is therefor high. The capital investments needed in order to implement this long term strategy is high, and the threat of entry is only from the large players!

Entry strategy!Joint venture!Acquisitions!Start from scratch!

Deals !with policy makers and NGOs!

Education !and training!for farmers and!local policy makers!

Trust!from the com-!munity to increase productivity!

Machinery resale!Resale of second hand tractors!enables farmers to get powerful and!reliable machinery for about half the price of a new machine !

Manual labor!Both prices and access to manual labor is good. Farm animals can also be a good substitute for Kenyaʼs many small-farm owners!

Crop substitutes!Farmers might shift their food crops to crops that does not!demand a high level of machinery!

1!

3!

2!

Threat of new entries – !only from market leaders! Threat of substitutes !



•  Strategy outline!•  Two phase model!•  Product portfolio!

•  Entry strategy!•  SWOT!•  Issues and challenges!


STRATEGY FOR FIELD&TRACK CO TO ENTER KENYA!

Gap! !

Unable of expanding the market and increasing the machinery

readiness in Kenya.!

Gap!!

Strategic goals for market entry!

•  Expand market!

•  Capture market share!

•  Kill competition!

•  Strengthen brand image!•  Maintain position as

market leader!

Traditional strategy for market entry!

•  Joint venture with local firm!

•  Sales model!

•  Low end products!

•  Internal or external financial solutions!

Strategic goals and the traditional strategy for market entry in Kenya!


There is a gap between the goals and what the firm can achieve by entering with the same strategy as the incumbents. How can F&T fill this gap? !

Strategy outline! The two phase model! Product portfolio! Entry strategy! SWOT! Issues and challenges!F&Tʼs strategy!

Strategy outline!


F&T will ensure a profitable business in Sub-Saharan-Africa by implementing a two-phase strategy with the aim of gaining market share and making small and mid-size farmers use agriculture machinery.!

Phase I:!Renting!

Phase II:!Selling!

The first phase will make less affluent farmers able to use machinery and strengthen F&Tʼs brand.!

The second phase will in turn serve a large market and ensure a profitable business.!


What is meant by the renting model, and is it feasible ? !

Renting model !


Strategy!

•  Renting easy-to-use machinery!•  Joint venture with local firm to benefit from

existing distribution network.!

•  Resale of used tractors!

Support activity – Demo Farm!

•  Educate farmers!•  Allow farmers to familiarize themselves with

F&Tʼs products!

•  Demonstrate for policy makers that higher mechanization increases yield!

The main reasons for entering with a renting model is that it will:!•  Boost the machinery readiness

development!•  Enable F&T to defeat competition by

providing a cheaper alternative!•  Give fast product feedback which is very

valuable when adapting to local needs!

But can the renting price be low enough? !


Pricing example - Tractors !


Engine size!(in HP)!

Unit price!to buy ($)!

Fuel cost +!($/h)!

Maintenance +!($/h)!

Depreciation +!($/h)!

Overhead =!($/h)!

Total costs!($/h)!

60! 26000! 10,45! 0,33! 3,47! 3,83! 18,08!

105! 80000! 18,30! 1,00! 10,67! 11,79! 41,75!

Renting model makes sense from a financial point of view. The price of renting tractors is low compared to buying. !

This also makes the small farmers likely to directly use the service without a middle man (contractor) !

Break even renting price!


Based on!Insurance & housing! 7%!

Nominal interest rate! 1%!

# years in use! 12!

Fuel consumption gallons/hp/hour! 0,044!

Price of diesel/gallon! 3,6!

Lubrication costs in % of fuel consumption!

10%!

Salvage value! 36%!

Repair cost as % of machine price! 0,06!

Sources: Lazarus, William F. "Machinery cost estimates." University of Minnesota Extension, St. Paul (2009)., http://www.farmdoc.illinois.edu/manage/machinery/machinery_tractors.html !

The two phase model!


Evolving into selling model!

•  Higher mechanization readiness, increasing yield and income of farmers expands the market willing to buy tractors!

•  The time it takes for the market to mature, largely depends on external factors!

Possible evolution!

(# of tractors rented or sold)!

Recall: Filling the gap with a renting period!


Sales model is introduced when the market is ready for it, gradually taking over for renting!

Ren3ng

Selling

Simulation of the sales over time!


0

10000

20000

30000

40000

50000

60000

70000

Evolution of the number of tractors!

The number of tractors is likely to increase steadily for the 15 years to come. It is then expected to increase more rapidly, time around which the

selling phase can start.!After farmers get used to machinery thanks to the renting schemes,

revenues up to $ 180 millions can be generated. !

0 20 40 60 80

100 120 140 160 180 200

2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

Evolution of sales ($ Millions)!

-‐

0.50

1.00

1.50

2012

2014

2016

2018

2020

2022

2024

2026

2028

Renting phase!


Sources: FAO stats, Agriculture statistics on www. Nationmaster.com (data for Mexico), http://thepeople.co.ke/story.php?com=41&item=3059#.UYai_0o_iSo!

Product Portfolio!


Tractors Harvesters Add-‐ons Spare parts and

•  30 to 150hp!•  Lower range for

small farms!•  Higher range for

larger farms or contractors!

•  Adapted to local needs and to local products!•  Coffee!•  Sugar cane!•  Grain!•  Corn!•  ++!

•  Seeders!•  Ploughs!•  Cultivators!•  Harrows!

ConservaHon add-‐ons

Tractors are the core of the portfolio. To increase efficiency in all steps of farming, !harvesters, add-ons and conservation parts are included. !

Maintenance and service requires the supply of spare parts.!


M & A!Pros! Cons!

Possible to locate suitable company!

Work moral in acquired company!

Use existing suppliers and distribution channels!

Capital intensive!

Private ownership!

Risky!

Problems during merging process!

Joint venture with an existing African firm is the most promising entry strategy. Efforts is needed to find a suitable, multinational partnering company.!

Why joint venture? !


Joint Venture!Pros ! Cons!

Lowest risk! Must agree on final assembly!

Lowest capital requirements!

Must agree on “Hilti”-strategy!

Easy access to distribution channels and suppliers!

Many possible partnering companies!

Start from scratch!Pros! Cons!

Private ownership!

Time consuming!

Capital intensive!

Build up distribution channels and relations with suppliers!Build up trust with authorities and end customers!


Threats!•  Slow adaptation to new technological

machinery!•  Slow creation of adequate infrastructure!

Opportunities!•  Possible market expansion to neighbouring

countries and to the whole continent!•  Possible joint-ventures with Kenyan agricultural

machinery manufacturers or local players!•  Possible partnerships with increasing number of

agricultural projects!

Strengths! Weaknesses!•  Former adaptation to emerging markets!•  Kenya has a central position in the market

expansion region!•  Existing agricultural machinery supply chains!•  Government commitment to development in

agriculture and infrastructure !•  F&T is a global well-known player!

•  Relatively uncertain political evolution (although trend towards improvements and democracy)!

•  Specific farm configuration (ethnic groups)!

SWOT!SWOT – for F&T entering Kenya!



Issues and challenges! Possible neutralizing initiatives!•  High capital requirements! •  Import used tractors from other markets to lower initial

investments.!•  Reaching the farmers! •  Joint Venture with local firm provides distribution channels!

•  High service level and low prices make renting attractive.!•  Seasonal demand! •  Seasonal renting prices with lower prices during heat

periods to encourage use outside season!•  Need of marketing / sales force! •  Outsource renting service and only supply machinery. !

•  Too small farms: ! No need or money for machinery?!

•  Encourage coalitions of farmers to afford tractors. Higher utilization rate of machinery.!

•  Complete change in business model: Manufacturer as service company?!

Issues and challenges!



Summary!


1) Market & Industry environment:!

•  After decades of growth still high growth rates!•  Population growth and higher standards of living increase demand for crop!•  Global players reach out to emerging markets!

2) Where is the future Growth potential?:!

•  Low yields and mechanization in African countries!•  Much lowly unutilized arable land and ambitious governments!•  Biggest potential in Kenya and adjacent countries!

3) Strategy for virtual global player to enter Kenya:!

•  Two phase strategy: First renting – then selling!•  1. Renting at affordable prices to expand market!•  2. Selling to increase company profit!

•  Gaining market share and farmer loyalty!•  Preferably in joint venture with local player!•  Renting as tool for geographic growth!


BACKUP SLIDES!

Margins & growth rates!


-2!0!2!4!6!8!

10!12!14!16!

2008! 2009! 2010! 2011! 2012!

Ope

ratin

g m

argi

n (in

%)!

Operating margin (in %)!

Deere!AGCO!Kubota!CNH!M&M!

0!

10!

20!

30!

40!

50!

60!

2008! 2009! 2010! 2011! 2012!

Gro

ss m

argi

n (in

%)!

Gross margin (in %)!


The growth is heavily affected by the economic crisis!


-10!

-5!

0!

5!

10!

15!

20!

25!

30!

35!

40!

2008! 2009! 2010! 2011! 2012!

CA

GR

ove

r 3 y

ears

(in

%)!

CAGR over 3 years (in %)!


PROFITABILITY RATIOS!


-2!

0!

2!

4!

6!

8!

10!

2008! 2009! 2010! 2011! 2012!

RO

A (in

%)!

ROA (in %)!


-5!

0!

5!

10!

15!

20!

2008! 2009! 2010! 2011! 2012!

RO

IC (i

n %

)!

ROIC (in %)!


-10!

0!

10!

20!

30!

40!

50!

2008! 2009! 2010! 2011! 2012!

RO

E (in

%)!

ROE (in %)!


EFFICIENCY RATIOS!


0!

2!

4!

6!

8!

10!

2008! 2009! 2010! 2011! 2012!Fina

ncia

l Lev

erag

e (in

X)!

Financial leverage !(Assets over Equity)!

Deere!AGCO!Kubota!CNH!M&M! 0!

5000!

10000!

15000!

20000!

25000!

2008! 2009! 2010! 2011! 2012!Wor

king

Cap

ital (

in M

$)!

Working Capital (in M$)!


Working capital management by Mahindra & Mahindra!


-50!

0!

50!

100!

150!

200!

250!

2008! 2009! 2010! 2011! 2012!

CC

C (i

n da

ys)!

Cash Conversion Cycle (in days)!


TURNOVER!


0!

2!

4!

6!

8!

2008! 2009! 2010! 2011! 2012!Inve

ntor

y tu

rnov

er (i

n X)!

Inventory turnover (in X)!

Deere!AGCO!Kubota!CNH!M&M!0!

2!4!6!8!

10!12!

2008! 2009! 2010! 2011! 2012!

Fixe

d A

sset

s Tu

rnov

er (i

n X)!

Fixed Assets Turnover (in X)!



0

0.5

1

1.5

2

2.5

3

2008 2009 2010 2011 2012

Curren

t raH

o (in

%)

Current raHo (in %)

Deere

AGCO

Kubota

CNH

M&M

Investment ratios!


0!

2!

4!

6!

8!

10!

12!

2008! 2009! 2010! 2011! 2012!

CA

PEX

over

Rev

enue

s (in

%)!

CAPEX over Revenues (in %)!


Capital Invested!

Prod

uctio

n! R!

O! Q!

P!

R!

If farmers canʼt develop more than a family business, it is because they are

facing an investment trap!

•  Farmers are not rich enough to start a business at Q point, they start with nothing at O, the origin.!

•  Starting at Q (machinery instead of manual work) help farmers to go over the Marginal Cost curve!

•  Thus, production will increase significantly!Source: Poor Economics, Abhijit Banerjee, Esther Duflo, PublicAffairs, 2011!World development indicator, World Bank 2011!www.ruralpovertyportal.org!

•  79% of the population depends on agriculture!

•  45% of the population (14.3 mios) work on family farms, mainly womens!

•  The GNI/person of $820 and more than 45% of the people living under the poverty line!

•  Land ownership is not clearly define!

Even if Kenya is a strong African economy, it is facing extreme poverty

in the farming sector!

Banks are risk adverse, they will not lend to farmers. Even more because they cannot use

the land as a collateral!

Strategy!External factors!

TEMP: DELETED!Farmersʼ Investments in Africa!


Financials – Cost of renting!


Agriculture Machinery Report

Documents

Transcript of Agriculture Machinery Report