• Acquisitions have left many companies with costly, high-complexity product portfolios
• Lower farm subsidies expected as governments globally grapple with austerity
• Keys to success include managing brand/product/cost trade-offs in the face of low-cost competition
New ways to doing business, including complexity-reducing “platform” approaches borrowed from today’s auto industry, are required by companies in the $90-billion global agricultural-equipment industry hoping to stave off new, low-cost competitors in developed markets while at the same time trying to penetrate deeper into emerging markets which themselves are slowing down. That’s according to the AlixPartners Global Agricultural-Equipment Industry Outlook, released today by AlixPartners, the global business-advisory firm.
While macro factors such as rising populations and per-capita food-consumption globally provide good long-term fundamentals for the industry, original-equipment manufacturers (OEMs) are seeing their share in some established markets (e.g., Western Europe) under attack as new entrants grow by as much as 10% per annum in the low-horsepower equipment market , says the study. It also notes that recent acquisitions have saddled many OEMs with additional product complexity and costs, and that many are ill-equipped to fully manage the delicate trade-offs between brand image, product performance and low product cost that must be made to compete effectively in emerging markets such as China – where tractor sales (to single out one important agricultural product) are predicted to be down 1% to 2% this year and next, after growing 19% per annum from 2008 to 2010.
Meanwhile, as governments globally continue to grapple with austerity, farm subsidies – long a driver of equipment sales — are expected to decline markedly in coming years.
“Both in developed and developing markets, OEMs face big challenges – and big opportunities – in adopting automotive industry-like ‘platform’ approaches to standardization and cost-control,” said Francesco Barosi, managing director at AlixPartners and co-lead of the firm’s global Heavy Equipment Practice. “A coordinated, systematic approach to everything from engineering to manufacturing to supply chain can, however, allow companies to cut costs dramatically while at the same time maintaining and even enhancing the product characteristics that are so important to brand equity.”
Agricultural equipment production volumes in North America are expected to slowly recover, says the study, leading global growth over the next three years and to reach 2008 levels within the next four to five years. By contrast, Western Europe is not expected to hit 2008 production volumes (about 177,000 units) until after 2015 and to remain relatively flat over after that
Even though recent strong growth in emerging markets is expected to temper through 2015, these markets continue to be key targets for all OEMs. AlixPartners expects India to remain a strong growth engine going forward, while China’s unit sales level off and South America’s decline. To a large extent, emerging markets, especially China and India, are currently the domain of local players, and, according to the study, to advance in those markets global leaders will need to focus on capturing share from local players – which means managing yet more trade-offs, since maximizing commonality at the expense of market competitiveness is counter to the ultimate objective: maximizing profits.
While fighting that battle, OEMs also have to fight a rear-guard action against growing competition in their existing markets, according to the report.
“Many of the top players in the industry have emerged from the recession even stronger, and are now pouring money into new markets,” said Peter Busse, a director in AlixPartners’ Heavy Equipment Practice. “At the same time, however, new second-tier players are aggressively entering established markets and at a fast speed, with a focus on the low-horsepower end of the market.
“These new players are getting customers’ attention and gaining market share with equipment that costs materially less through well-developed commercial approaches,” continued Busse. “They are fundamentally changing the competitive landscape for agricultural equipment in established markets.”
The study also notes that fluctuating raw-materials costs can greatly affect the industry going forward, as the raw-materials portion of purchased content accounts for as much as 20% of dealer net pricing. To deal with this challenge, it recommends operational hedging – such things as price/cost-matching, which is ensuring that cost increases are matched by the ability to pass those increases along to the end-customer; indexing, which is the sharing with suppliers of cost movements in raw materials via pre-agreed-to triggers; and technical cost reductions, which is the offsetting of raw-materials costs through mechanisms such as supplier value-engineering (SVE) programs and internal value-add/value-engineering (VA/VE) programs.
AlixPartners LLP is a global business-advisory firm offering comprehensive services in four major areas: enterprise improvement, turnaround and restructuring, financial advisory services and information management services. Founded in 1981, the firm has offices around the world, and can be found on the Web at www.alixpartners.com.
A few findings from the AlixPartners Global Agricultural-Equipment Industry Outlook:
- Market-Share Game: Many top players emerged from the recession even stronger…but, new second-tier players are aggressively entering established markets (with a focus on low-horsepower), and giving the top players a run for their money. Second-tier players are fundamentally changing the competitive landscape. Francesco can discuss the environment, and what top players need to do to remain competitive.
- Production Volumes Outlook: In the U.S., Ag Equip production volumes will slowly recover & lead global growth over the next 3 years — and reach 2008 levels in the next 4-5 years.
- Emerging Markets: India will remain a strong growth engine; China unit sales will level off; South America unit sales will decline.