Georgia-based tractor maker to 'localize' products for China, exec says.

On a recent day in Changzhou, China, Hubertus Muhlhauser took two different podiums to share the same speech. Each time, his audience included thousands of Chinese businesspeople, and he was one of very few speakers to use English.

The AGCO Corp. executive's translated announcement was a formality, a public acknowledgment of a deal already finalized behind closed doors, but that in no way mitigated its significance for AGCO itself or for a local government eager to draw more foreign investors.

The Duluth, Ga.-based tractor and agricultural equipment manufacturer will invest up to $100 million in a high-tech industrial zone in Wujin, a district in the southern part of Changzhou, said Mr. Muhlhauser, AGCO's senior vice president for strategy and integration and general manager of Eastern Europe and Asia.

An initial $50 million will go toward a new factory that will produce mostly low-horsepower tractors, engines and other equipment for the Chinese market. The starting capacity will be 5,000 units.

“Within the next five years, we plan to invest more than $100 million in our Changzhou site to support a new greenfield operation, absorbing more than 500 employees and reaching the capacity of 20,000 units per year,” he said in prepared remarks.

As large American companies complain that China's government is increasingly favoring domestic industry, AGCO's experience shows that its posture toward foreign firms often depends on the sector. And when the government, in its uniquely Chinese way, makes a decision and begins rushing toward its goal, it sometimes needs foreign companies' expertise or products.

That's the sweet spot where AGCO is banking its future in China. As Mr. Muhlhauser explained to his audiences, China has 20 percent of the world's population but only 10 percent of its arable land. At the same time, its agricultural methods in some areas are antiquated. As a result, the country imports much of its food supply, to the chagrin of leaders worried about the nation's security and stability.

“It's pure survival, basically, so the government has no other choice but to invest in mechanization because China is already very dependent in terms of grain imports and wants to become less dependent … and more self-sustaining,” Mr. Muhlhauser told GlobalAtlanta in an interview after his first speech.

That means hefty subsidies for farmers purchasing equipment like AGCO's, which can boost output on Chinese plots still plowed with animals or simpler tractors. Government rebates are available toward the purchase of tractors on an approved subsidy list.

“(The central government has) tripled the subsidies in 2009, will double them in 2010, and this trend is going to continue,” Mr. Muhlhauser said. Of course, for its products to be eligible, AGCO must invest in China.

“In order to get on the subsidy list you need to produce here, and in order to produce here you need to also sell here, so that is basically why it is so important if you want to participate in the relevant market segments that you have manufacturing presence here,” Mr. Muhlhauser said. “Once you have your presence, there's not a huge distinction that's being made between an international company having a site here in China and a local company having a site here in China.”

In the northern province of Heilongjiang, which borders Russia and is known as China's coldest region, AGCO is employing a different business model than the traditional dealer-distributor system. There, the company is selling directly to the government. State-owned farms, which occupy large swaths of land, need big commercial tractors like those used in the U.S. and other developed countries. Since the technology isn't available in China, the government is buying them from foreign companies in lots of 800-1,500, Mr. Muhlhauser said.

AGCO, which markets the brands Massey Ferguson, Fendt, Challenger and Valtra, has already made significant sales in northern China and has established training programs to help farmers learn to use the equipment. The company plans to invest $50 million to set up an assembly operation in Heilongjiang, Mr. Muhlhauser added.

China is an obvious fit for AGCO's efforts to boost its exposure in large emerging markets, but China is more than just a place to sell. AGCO plans to make China, particularly its Changzhou operation, a hub that will impact its factories all over the world, Mr. Muhlhauser said.

AGCO picked Changzhou partially for its quality suppliers in the machine manufacturing industry, he said. Currently the company, which has $8 billion in revenues, spends only 3 percent of its sourcing budget in China, a proportion the company would like to ramp up to 10-15 percent. Eventually, suppliers from China and India will send their parts to the Changzhou site for testing before they're distributed to other factories around the world.

It would've been difficult to source high-value parts from China a decade ago, but the country has steadily moved up the value chain, Mr. Muhlhauser said.

“It's possible today because China has developed rapidly, also quality-wise over the last years, and we're taking advantage of that right now,” he said.

AGCO will keep costs down by hiring a local workforce, which is still much cheaper than in developed countries, despite improvements in quality.

“The cost is rising in the last 15 years, but compared to Europe and America it is still very low,” said Russell Cai, deputy director for investment promotion at the Wujin Hi-Tech Industrial Zone, where AGCO put its Changzhou factory. “The cost increase is reasonable, because Chinese people would like to improve their living environment, but the labor cost is still only 8 percent of manufacturing cost.”

Changzhou has a 16-building educational complex that provides employee training so companies have a steady stream of qualified personnel, which was attractive to AGCO. 

In addition to workers, the Wujin government and the zone offered AGCO a period of free rent and exemption from sales tax and value-added taxes, Mr. Cai said.

Equally as important in the site selection process, though, was the local government's ability to relate to the western business mindset, said Andreas Weishaar, an AGCO vice president who is overseeing the establishment of the new factory.

“One of the reasons we went here is that it shows when cities or certain districts have experience with western companies, the way they deal. Generally you have that in some cities and in others you don't,” Mr. Weishaar said.

It's easier to work in zones in the Yangtze River Delta, a manufacturing hub that has long served as the engine of China's growth, but AGCO isn't waiting around for less-developed areas to reach Wujin's level, Mr. Weishaar said.

“We're also investing in places where this [mindset] isn't in place yet, but we are determined to go there and we will go there, and we're leveraging our local staff and our local knowledge,” he said.

AGCO has 15 percent share in the global agricultural machinery market, mostly in developed countries. Because of that, the company lost 20 percent of its profit during the 2009 recession compared to the previous year but remained in the black, Mr. Muhlhauser said.

AGCO wants more exposure to emerging markets like China and India, he said. It has already captured more than half the market in South America. In Africa, the "Massey," short for AGCO's Massey Ferguson brand, is “synonymous with tractor,” he added.

“We are very bullish on the outlook for our industry in general and specifically for us at AGCO because we feel we are very well positioned,” Mr. Muhlhauser said.