Shane Thomas, Upstream Ag Insights, August 28, 2002

Electric tractors and the view that we “need outside influence in the equipment industry” have been topical as of late and they will continue to be I am sure. This week I read the article by Todd Janzen talking about Tesla and disruption in agriculture. I thought it would be interesting to consider further.

Tesla has been a shock to the consumer car system and it’s worth considering how Tesla created those shockwaves (including whether they are relevant to agriculture), which at the most basic level is three pronged:

• Made electric “cool” with design and performance
• Brought a digital first mindset
• Rethought distribution
• Electrification

 Let’s start with electric tractors. They seem to be a ways out for the traditional large scale row crop farms. Though given the fact that Wright’s Law is always working, it is still worth watching closely.

Wright’s Law has an experience curve effect that expresses the relationship between experience producing a good and the efficiency of that production, specifically, efficiency gains that follow investment in the effort. Essentially meaning the more you produce something, the better it gets and the cheaper it is to do. 

The effect has large implications for costs and market share, which can increase competitive advantage over time in equipment. It has proven out in many industries, often showing gains in cost efficiency and effectiveness to the tune of 15% in aerospace and 10% in electronic good manufacturing for every doubling of output, meaning very rapid improvements. 

Wright’s Law plays out because of factors like standardization, labour efficiency, network effects, technology driven learning and product redesign to name a few.

This is notable for the strategy that we are seeing in electric tractors being in the smaller segments, and consistent to a degree, with the electric car industry.

The Tesla Secret Master Plan

In 2006 Elon Musk published the above “secret master plan” of Tesla, which is basically encapsulated below:

Almost any new technology initially has high unit cost before it can be optimized and this is no less true for electric cars. The strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model.

So, in short, the master plan is:

• Build sports car
• Use that money to build an affordable car
• Use that money to build an even more affordable car
• While doing above, also provide zero emission electric power generation options

We are 15 years later and Elon didn’t deviate from this basic plan.

The small tractor market in ag can be looked at in a similar way to the high end car market.

High end cars are more so used as toys and status signals. And while I would by no means call small tractors high end toys the reality is that where these tractors are frequently used is in orchards and horticulture areas where fields aren’t that big if battery performance isn’t strong (eg: dies quickly) and implements being pulled are much smaller.

This is a great proving ground and what could become a proxy of how fast we see the potential of electric tractors coming to the large scale market, will be watching how rapid adoption is in the small tractor market. As more electric tractors move into the small tractor market, the capability of companies like Monarch or John Deere goes up in terms of what they are learning and can apply to the large tractor market.

According to Wright’s Law, lithium-ion battery cell costs fall by 28% for every doubling of units produced. There are a lot less tractors produced than cars, but I assume there is still some synergy between the car market electric growth and what can be applied to tractors.

Digital First Mindset & Capabilities

What is also interesting with Tesla is not just the emphasis of electric, but how they emphasize software as part of the experience and improvement of their cars along with their autonomous capabilities.

This has become a novel revenue stream for Tesla as well as a key differentiator -- in the traditional world we had to wait for a new car to get new and improved features or buttons. In the digital world we send updates via internet connection, this is how companies like Tesla can rapidly iterate and improve and create a better customer experience.

This mind set shift will be worth watching in the ag industry. Consider John Deere who has been emphasizing their digital systems like JD Link and Operations Centre, or consider the CNH Industrial acquisition of Raven. Having a “digital first” mindset, combined with a wider array of digital capabilities and customers engaged with them better positions these organizations to create enhanced experiences and outcomes for their customers. I suspect just like with Tesla, we will see over the air updates to equipment.

In the consumer car market, this has been a point of disruption and shift in how car companies are being viewed. I highlighted some of the potential of that from the Rivian S-1 in the October 10th 2021 edition of Upstream:

Rivian is throwing the conventional automotive business model out the window. Rivian is shifting the industry away from the model of “# of cars sold per year x average selling price.” Instead, Rivian is leveraging “Rivian Cloud” and its proprietary data and analytics platform to offer a host of value-added services including telematics-based insurance, data-driven resale, FleetOS for commercial customers, charging-as-a-service etc. We were interested to learn that >50% of Rivian’s estimated market is driven by services revenue over the lifetime of the customer. In effect, Rivian has created the foundation for a SaaS-like business model which, if successful, could completely transform how investors look at the automotive industry.

We have begun to see this same shift from John Deere.

However, what is interesting is to consider the 3rd thing that makes Tesla unique: No independent dealerships.

Rethought distribution

Dealerships are core to the strength of any colour of equipment in the agriculture industry. Tesla went about owning their own dealerships and selling direct to the customer. In an electric world, there is theoretically less maintenance and work needed. In the article linked above the author alludes to a diminishing role of the dealership in agriculture.

Maybe this will be the case, I don’t know, but I think ag is slightly different because of the other aspects of “service” required for say spray booms and nozzles, pumps and everything else dealerships are supporting farmers on along with the fact the equipment space is core to precision agriculture and I think we are just in the beginning of seeing emphasis towards precision and technology from dealerships. So dealerships might not be a specific point of “disruption”.

With this said, what’s interesting is the dynamic around right to repair and a company like SwarmFarm.

SwarmFarm has stated they are going to go direct to the farmer without dealerships, empowering farmers to do maintenance themselves or however they choose with a 3-year lease direct to farmer model. This might not be every farmers preference as they tackle autonomy, but it will be some. This is related to the principle behind what would be “classic” Disruption Theory.

Clay Christensen is the god father of disruption. He identified disruptive innovation as the process in which a smaller company, usually with less resources, being able to challenge an established incumbent business by entering at the lower end of the market where a customer was over served or not requiring the full suite of capabilities and then moving up-market from there.

This process usually happens over a few occurrences:

• Incumbent businesses innovate and develop their products or services in order to appeal to their most demanding and/or profitable customers, ignoring the needs of those who may be “over served”.
• Entrants target this ignored market segment and gain traction by meeting their needs at a reduced cost compared to what is offered by the incumbent.
• Incumbents don’t respond to the new entrant, continuing to focus on their more profitable segments, in the equipment world, those that support their entrenched and valuable dealer network.
• Entrants eventually move upmarket by offering solutions that appeal to the incumbent’s “mainstream” customers.
• Once the new entrant has begun to attract the incumbent business’s mainstream customers en masse, disruption has occurred.

In this instance, the farmer not needing or wanting services from the dealership and wanting to try out a new pricing model like that of SwarmFarm would be considered “over served” and ripe for interest in a company like SwarmFarm. While the movement “up market” might not be perfect to describe what happens next, it might simply be the “in” with enough farmers to begin attaining scale and attraction to their ecosystem.

The above is hard to accomplish in the world of agriculture, but is one of the only ways that I see towards a potential bridge over the moat as it were of the large equipment companies.

Changes in the equipment landscape seem inevitable towards new models, autonomous capabilities and digital first products, but changes in brands seem less likely. It will continue to be a lively space.