Editor's note: This article originally appeared in the Farm Equipment November/December 1998 issue.
By Bill Fogarty
To me, the farm equipment industry has always been a grand theatre, and I've had a front-row seat for 40 years. It's not always a spectacular show, but it's constantly changing.
I have mixed feelings about going to part-time status at a time when the action is picking up again. The action I'm talking about is not in sales growth; it's the action that goes with changes made for survival. The question today is the same one that has always been tossed around in this business: Who's going to make it? Who'll fall by the wayside?
Whatever conclusions you have drawn about what the industry will look like in a few years and who the remaining players will be - be prepared to be fooled.
For instance, International Harvester was doing well at the end of the 1970s, as was everyone else who had been through the farm boom of that decade. But Archie McCardle came in as CEO and decided to duke it out with the United Auto Workers. Interest rates soared; industry sales fell off. And the built-in weaknesses of IH began to bring the company down. Who'd have thought that five years after the strike, International Harvester's farm equipment division, once the biggest in this industry, would be sold off to Case? Certainly not I.
As this industry struggled through the 1980s, who would have thought that not one but two corporate giants would want to get into North American agricultural equipment? But Caterpillar entered on a niche basis with the Challenger tractor in 1987 and Fiat cut a deal with Ford Motor to acquire Ford New Holland in 1990. Again, I would have bet against both events.
When people sit around talking about who might acquire whom, the conventional wisdom is that when you put two ailing companies together, you get one very critically ill entity. Makes sense, so who would have thought that Bob Ratliff could start AGCO with the remnants of Deutz Allis, then pick up Hesston, White Tractor, part of Massey, White New Idea, the rest of Massey, Germany's Fendt and other acquisitions?
One key feature about all these historic industry moves: The dealer organization.
Tenneco CEO Jim Ketelsen held a press conference after the purchase of IH for Case. It became clear that while IH had the Axial Flow combine and some other fine products, the $450 million outlay was mainly for the IH dealer organization. Asked one reporter: "Was it a bargain?"
"Was it a bargain! Hell, yes, it was a bargain," he replied.
Fiat bought control of Hesston in 1977, knowing that there were around 1,200 Hesston dealers in North America. It seemed an ideal way to get a tractor foothold over here. What was missed, apparently, was that almost all Hesston dealers already had some other tractor franchise. Said a former Hesston executive to me: "They wanted to market a long-line product through a shortline organization, and you can't do it."
Fiat stayed in an American niche until it was able to put together the Ford New Holland deal in 1990. With that, it found the dealers it had been looking for years before.
AGCO developed a strategy different from Case's. Case felt it had to have a unified tractor line, so the Case and IH dealer groups were crunched together. But the AGCO take was, if dealers sell products, let 'em keep on selling the ones they have, and offer them the chance to sell other lines of AGCO, too, depending on what was available in individual areas. It worked.
Caterpillar moved into ag and it already had an organization of distributors for its construction line. Said Donald Fites, Cat's chairman: "We haven't changed; agriculture has."
It judged that big farm country was ready for Cat's kind of distribution and marketing, then came in with its rubber-tracked tractors and, later, combines. It has all been a matter of those distributors moderately adapting themselves to take care of farmers.
Depends on Dealers
It seems clear to me that companies without a substantial corps of strong dealers won't be able to weather a serious downturn. I mean their worldwide dealer orgnaization, not just North America.
A strong dealer organization isn't necessarily the biggest one. But in a horrible period of attrition, such a group will probably have more live bodies remaining to carry on the line when business improves. A strong dealer organization is loaded with dealerships whose wholegoods sales are largely produced because the excellence of the parts and service operations drives the business.
This is something that some marketing organizations lose track of in favor of pushing more iron - and that others never really grasp. The pressure for iron-pushing gets increasingly intense when the market is pinched, and a lot of dealers find themselves stacked up with used equipment that may be too hard to move at prices that will insure survival.
Will only the megadealers survive? That seems unlikely. These operations offer many economies of scale and provide the opportunity of trying new ways to please the customer. But I think that individual one- and two-store dealerships can weather just about anything if the management is tight enough and they understand and act quickly upon changes their farmers are making. Of course, they must be able to generate more profitability per dollar of sales. Make no mistake: Capital demands on dealerships are getting more intense all the time, and if small dealerships can't generate enough profits, they will have to drop out of the game.
The Products
Another mark by which survivors can be spotted: They come on with new, important products when times are tough. They give their dealers something really different to sell, something that farmers can recognize as a real advancement in productivity. Deere took a chance in 1960, dropping the two-cylinder tractor in favor of its "new generation of power." It worked. New Holland dealers stayed busy in the late 1960s delivering the Haybine, a substantial improvement in haymaking.
Those things happen when top management relentlessly plows earnings back into engineering development. When they don't, and new products lag, dealers can lose heart. That's what happened with the old Ford Tractor unit of Ford Motor Co.; they lagged in the horsepower race of the 1960s and it cost them.
A Current Concern
When I look at what the stock market has done to the spares of publicly traded farm equipment companies during 1998, I worry about something else.
What happens when the price of a company's shares falls below book value? Suppose one of the vultures that prowl the stock markets decided to stage a raid and buy up controlling interest in such a company - and then sell off the assets to liquidate the enterprise. It can happen.
Several farm equipment companies have recently announced programs to buy back some of their publicly issued shares. This may be a hedge not only to support their shares' price but also to ward off any rapacious takeover artist.
Maybe some of today's farm equipment manufacturers, major or shortline, will have to bite the dust in the next recession. I just hope that any such departures are a result of actual market forces, not somebody's manipulation.
So now you have my guideline to informed speculation: Dealer organizations and fearless product development. Am I missing anything?
