WAITE MEMORIAL BOOK COLLECTION DEPT. OF AG. AND APPLIED ECONOMICS 1994 BUFORD AVE. ~ 232 COS Agricultural Economics Department UNIVERSITY OF MINNESOTA University of Missouri ST. PAUL, MN 65108 U.S.A. Paper Number 1984-39 STRUCTURE, CONDUCT, AND PERFORMANCE OF THE U.S. FARM EQUIPMENT AND MACHINERY INDUSTRY by Jorge Angeli and Gary Devino*
Tractors and agri cultura 1 equipment constitute the 1argest expenditure for manufactured inputs that farmers make, amounting to over $13 billion in retail sales annually. 1 Together with improved seeds, fertilizers, and other items, agricultural machinery has allowed the American farmer to become one of the world's most efficient food producers. This industry has recently experienced severe financial stress. High interest rates, low commodity prices, and the depressed economy have produced low farm incomes. Sales of tractors and other farm equipment have declined considerably. A number of dealers have gone out of business. Dealer inventories have risen to unhealthy 1eve1 s, and several manufacturers have been on the brink of bankruptcy.
The value of shipments dropped from $12 9 998.2 million in 1979 to $9,938.6 million in 1983, a 23.6% drop. (Table 1.) Reports from the Farm and Industrial Equipment Institute (FIEI) show sales of the most important products of the industry have decreased substantially s i nee 1979. The market has decreased for all types of tractors, ranging from 55.5 percent on four-wheelers to 41.4 percent on two-wheelers (Table 2). Massey-Ferguson was reported on the verge of co 11 apse in October 1980 after experiencing a fourth quarter loss of $122 million (U.S.) and an
*Jorge Angeli was formerly a graduate student in Agricultural Economics. Gary Devino is a Professor of Agricultural Economics. N
TABLE 1 ::z= 'f!l·~::i °""' Farm Machinerv and Equioment: Trend in the United States f{) ey-· ;CJ --
1 1963 1967 1972 .L 1982
Value of Shipn1ents (Mi 11 ion Dollars) 4531 10282 10856
To ta. l Employment (Thousands) 105 131 109
Production ~Jorkers (Thousands) 80 96 74
Companies 1481 1526 1465 1868 1771
Establishments 1568 16 1548 2004 1906
tablishmer: th ;;.: 80 Employees 558 661 563 664 623
Source: Census of Manufacturers~ Bureau of the Census (STC-3523), TABLE 2
Percentage change 1977 1978 1979 1980 1981 1982 1983 1979-83
Tvw ivhee 1 drive:
40 - 99 HP 62;529 65,336 65,000 58,,121 50,973 41,134 389083 -4L4
100 HP or more 60, 0 65,527 62 9 50,328 43,179 29,247 28; 154 -55,0
Four wheel drive: 7 t:n""' _lh__ 11,455 10,887 F 763 5,099 -- o •JO.) - 9; 683_ ~~ ----55.5 Total 130,382 139,882 138 '990 119,336 103,835 77. 144 71,336 -48.7
,.,,.. Self prop~1led combines 28,831 31,494 32,246 25,760 i::::o' 1 16, 12,751 ~60.5
7 Balers (bales under 200 lb.) 24,418 21,086 18 '750 14,022 13,647 8,905 9, ' -51~8
Forage harvesters 13,154 11,523 12,451 9,461 7~604 5,145 4,091 -67.1
2'f 1?1 conditioners L ~A.'-• 24,957 25~600 19,452 18,525 13,981 14,261 -44.3 li>Jindrowers 9,257 8,708 8,615 7,705 6,606 4,162 3,047 -64.6
Grinder-mixers 8s999 10 ,544 11,673 8,468 5,945 5,176 4,018 -65.6
1 1 l ·1F1j Corn heads 20, .I. 21,196 22,374 J,t,10'1· 15,700 9, 29r4 6,830 -69.5
Source: Farm and Industrial Equipment Institute. 4 outstanding debt load of $2.64 billion (U.S.) 2 The firm had a $262~4 million (U.S.) loss in 1978, a modest profit of $36.9 million (U.S.)c in 1979, and a $225.2 million (U.S.) loss in 1980. 3 White Motor Co. for reorganization under Chapter 11 of the Bankruptcy Code or. September 11, 1980. The rm completed the le of its U.S. farm equipment operations early in 198L 4 Manufacturers have reduced production and personnel. Massey-Ferguson closed several plants in the U.S. and Canada. International Harvester, Deere and others also had cutbacks.· In 1979 the industry had 140~300 emp.ioyees on its payroll. By the end of 1983 it had 95,800--a 31. reduction in pc~rsonne l. The majority of the people were 'laid o 1;/ere production 5 11mrkers. In 1983 the industry was running about 50% of capacity.
It has been suggested that this 'industry is highly concentrated, and that it wi 11 become more concentrated, 6 {iAe purposes of this paper are: to identify structural changes that have taken place during the nineteen seventies and early nineteen eighties; to detect how these changes have affected the degree of concentration of this industry; to appraise any re-lated changes in conduct of the most important firms; and to evaluate how well the industry is performing.]
A. Size and Number of Estab_l!shm~.rrts _i!!1d...f.g_~anies. The census of manufacturers reported that the farm machinery and equi prnent industry in 1982 was comprised of 1906 establishments belonging to
1771 companies. In 1963 there were 1~568 establishments. Most new companies had only one establishment. The growth in the number of establishments occurred in those with less than 20 employees.
Previous studies have shown the same In a forthcomi report Serletis found that in 1981 about 2000 firms were producing only rm implements for specialized crops~ livestock and regfona1 markets. 7 i\nother
USO/\ study found that the growt[1 in the industy ich occurred between 1958 and 1963 was entirely in establishments t'h 1ess tnan . 1 emp ·1 oyees. g· Larger firms such as Deere have diversified into construction equipment and other markets to attain lower overall costs and bet r economies of scale.
They have not become more specialized in farm equipment because they cannot fully integrate production of ricuHural implements e sales are highly seasoned or have only a regfona l demand. This has provided a p that has been filled by new rms.
!3, Market Shares.
The tractors and combine market is highly concentrated$ and -includes full-line producers and several -iine ones. former manu cture tractors. self-propelled equipment~ attachments~ a other implements. The
·1atter manufacture farm equipment imp.lements and some types of seH-propell machinery.
The fui-1-'i"ine producer enjoys a clear advantage at the production and distribution level, The production of most farm imp.lements is seasonal.
Tractor production is not seasona 1. Fu 11-· l '.l ne are a e to rotate production and keep their plants continuously working. It is at the distribution level, however, that full-line producers have their greatest advantage. They are able to provide fun·-time employment for thefr dealers, an important factor in the competition for dealers.
The most recent tractor and combine market share data published by the USDA (Table 3) shows that in 1980 the four top firms accounted for 67% the tractor sales and 88% of the combine sales. When compared to 1966 there has been some deconcentration at the level of the top four firms. New firms have 6
Tr~BLE 3
Tractors Cornb·i nes
1966 1 1
Deere and Co. 25 35 40
1r International Harvester 23 _,_:) 25 17
Massey-·Ferguson 14 10 0 1Ll
Ford 14 17 0 N/A
J.I. Case (Tenneco) 7 7 11 0
Allis-Chalmers 6 6 22 17
White Motor Co, 8 3 0 4
r:: Other 6 17 J 8
------··------..·------·--~------Top Four Firms 73 67 95 88 ------
N/A = Not Available 1Production numbers.
') '-Sales numbers.
Source: USDA Economic Resi::arch Send ce 11 Inputs--Out·l ook & Si tu at i on 11 , June 1983. 7 entered the market. One of these is Versatile, a firm that successfu-ily gained a large share of the four-wheel tractor market, about 25% by 1979. 9
Th·is was also the experience of White Motor Co. and Sperry-New Honand 'in the combine market. Deere was able to increase its share in both markets. Ford increased its share of th~ tractor market. Massey-Ferguson gained a 14% share of the combine market.
Another recent analysis of tractor and combine sales made by the Miller
Agrivertical Uhit showed that in 1979~ seven firms accounted for more than 95% of two-wheel drive tractor sales 10 ~ and more than 90% of the four-wheel drive tractors. (Tables 4, 5, and 6.) Deen~ accounted for a 29.94% share of the most important tow wheel drive market, Harvester accounted for 28.86%. Concentration ratios for the top four firms were 79.9% for two··wheelers, 68.0% for four-wheelers, and 83.4% for combines in 1979. The depressed economy that the industry has experienced is expected to increase the degree of concentration. 11 Leibenluft forecasts that by the late
1980 1 s Deere and Harvester will increase their combined market share to nearly 80%. He expects Deere to have the largest share. Other analysts expect Deere to attain about a 60% share of the industry market. 12 Such advantage is due to its high product loyalty, strong financial conditfon) 1arge research and development expenditure (4% of sales). and the fact that Deere has been the only manufacturer that has not taken money out of this business to reinvest it elsewhere, Some firms that were full-line producers are ded"icating their efforts to 1i nes where they are more efficient. This is the case \vith Ford
Motor Co. and J. I. Case. Short line firms are not expected to gain entry into the full-line market because of the ir.dustry 1 s strong barriers to entry. Massey-Ferguson and Harvester are facing severe financial difficulties and are reducing the size of their operatfons. Other firms, such as White~ have already gone out of business. H\BLE 4
U.S. Market Shares for Two-~~4hee 1 Drive Tractors (Percent)
Company 1973 1974 1977 1978 1979 Deere and Co. 37.35 32.39 29.94 35.66 39.40
International Harvester 28.17 24.28 28,.86 24.48 25.00 J.L Case (Tenneco) 7.06 7.83 7.57 9.26 7.90 l\11 is Chalmers Corp. 5.32 10.36 6.40 10. 54 6.50
~ih i te Motor Co. 4.33 7.83 4.49 6.97 7.60 Ford Motor Co. 9.53 9.54 8.94 8.95 6.50 Massey Ferguson ltd. 6.85 5.59 8.59 4.15 2.90 Steiger Tractor Inc. 0.05 0.05
Ve~satile 0.05 0.05
Duetz 1.49 Other 1.29 2.08 3.72 4.20
Top Four Firms 82.11 76.57 76.33 79.94 79.90
Note: Market shares are based on purchases in the respective years. Source: Miller Agrivertical Unit. ~; Tt\BLE '-'
U.S. Market Shares TOf' Fou r-·~lhee l Drive Tractors (Percent)
Cornpa n.x. 1973 1974 1977 1978 1979
Deere and Co. 28.60 20~00 25.40 28.47 24.70
International Harvester 7. 8.60 12.76 3.61 2L30
J.I. Case (Tenneco) 14.30 5.70 17.96 19.85 11.90
i Motor Co. 21.40 12.44 6,78 9~50
Allis Chalmers corp. 7 •.df u1 2.90 6.76 4.91 v.bu-~ -n Ford Motor Co. 2.40 14.30 2.36
')A "(l Massey Ferguson Ltd. 4.80 L.U~Uv
Steiger Tractor Inc. 4.80 8.60 2.36 11.74 10.10
Versatile 4.80 8.60 1.72 10.10
Duetz 4. 72 5.48 Belarus 2.36
Other 9.40 11.16 11.16 19.16 8.80
Top Four Firms 82.11 76.57 76.33 79.94 79e90
Note: Market shares are based on purchases in the respective years. Source: Miller Agrivertical Unit. TABLE 6 Market Shares for Prope11ed Combines (Percent)
1974 1977 1978 1979 Deere and Co. 33.20 32.84 42.78 35.00 International rvester 17.10 21.24 16.48 17.40 J.I. Case (Tenneco) Allis Chalmers Corp. 14.90 2L39 22.01 17.10
Massey Ferguson Ltd. 22.80 8698 7~53 13.90
\PJhite Motor Co. 3.90 5.74 3.68 3.60 Motor Co.
Avco-Nev1 Idea 4.60 3.19 0.54 3.50
Sperry-New Holland 1. 70 5. 77 4.96 3.70 Other 1.80 0.86 2.02 5.70
Top Four Firms 88.00 84.45 88.80 83.40
Note: Market shares are based on purchases in the respective years except in 1979 which are based on m\lnership. Source: Miller Agrivertical Unit. 11
C. Distribution and Retail Sales. The farm machinery and equ·ipment industry has tradHionany been characterized by high brand l oya 1 ty and high dependency of the rmer on good dealer service. Machine reliability and the service and repair i"!ities of equipment dealers are crucial considerations when purchase decisions are made.
One industry analys carried out by the Argus Research Corporation ·indicated that the most important considerations in buying new farm equipment, in order of importance, are (1) dealer proximity and reputation of service, (2) product capability, (3) product reliabil'ity~ and (4) Because of this, development of a good dealer network has primary importance.
Large farm machinery is distributed through a network of independent dea 1ers. Manufacturers generally use a system of regiona 1 branch houses that operate as sale offices and warehouses for goods and services. They provide assistance and supervision to retail dealers. Credit for farmers and dealers is made available through manufacturer's finance subsid·iaries.
This credit availability can play an important ro"le in the competHion for buyers. 14 Almost all dealers are independent. Several factors contribute to manufacturers failure to fully integrate by ownership at the retail ·!evel:
11 the independents are more strongly motivated, work harder, and tend to be better sa 1esmen. Even profit-sharing schemes may not provide the necessary incentives which come with an ongoing equity stake. Retail profits are highly dependent on the skillful evaluation of trade-ins, and both company outlets and cooperatives have fared es pee i a l"ly poorly "in this aspect of the business. The dealers strongly favor their independence, a status they have en,joyed s·ince the pre-tractor era when most farm machinery was sold through retail outlets handling hardware and other merchandise. any attempt by a manufacturer to set up company outlets would meet stHf resistance. Given the shortage of qualified salesmen and servicemen, a defection of dealers d\~sat"isfied 11/ith a company 1 s integration forward could be a severe blow. 11 ·
The farm machinery and equipment industry presently depends on
approximately 10,000 retail outlets. In 1969 there were 16 1 739 dealerships in 12 the United States. Between 1969 and 1983 6,507 dealers went out of business. 16 About 10% of this number left the industry in the January 1981 - June 1982 period, Table 7.
D. Barriers to Entr~.
This industry presents very high entry barriers. Newcomers find it extremely difficult to develop a dealership network. Dealers carry a full line of .equipment and tractors and are discouraged by their franchisers from selling competitive products. A new firm would need a full line of goods, and a very strong financial condition to develop a dealer network. The size and product mix of full-line firms can also provide a buffer against the fluctuating demand for agricultural equipment. Market growth trends are sman •17 ,l8 New entrants find it hard to gain entry unless they offer significant technological advances. This is also an advantage for the big firms who have larger. research and development expenditures. New firms must provide extensive financing, assurance .of reliability, and quality of service that farmers want when they buy new complex machines. The third barrier of entry was already discussed: 11 the high brand and product loyalty. 1119 The last and not least important advantage of the big firms is that of substanti a 1 economies of size. The most recent study of tractor cost and economies of size was made by the Canadian Royal Commission on Farm Machinery, and it was based on 1968 data. 20 The study found that total cost per tractor decreased by 12 percent ($463) when·production increased from 20,000 to 60,000 ' units per year. An additional 9 percent ($291) reduction was realized when output was increased to 90,000 units. These economies were considered valid through the mid nineteen seventies beca.use very few technological improvements in production practices were made. TABLE '?
Total Interna anal Harvester 5
Ford Motor Co. 8L"
Allis Chalmers Corp. 58 J.I. Case (Tenneco) 44
Deere and Co. 40 t~hite Motor Co. 42 Short Unes 52
Not Identified Other Total
SourcE~: Implement and Tractor. At the time the Roya ·i Commission s was made~ tractor out t was approximately 275,000 unHs in the U.S. The U.S. 1983 production 71,,000 units was produced in plants with vastly different technol t n ex·i s the Royal Commission study period. This technology along the production 'larger has undoubetedly changed size es. tractors that are produced in the U.S. are mainly trac In
1977, the U.S. 'iriery industry ceased production under
40-horsepower, abandoning this nese ·i r, this market represented 42% of all unit il sa "!es of Secondly J with ve~y few ionss U.S. manufacturers are Hi fon of a11 farm tractors with under 100-H.P. t is market accoun 32% of tractors d at the retail level. rers have di their st efforts to production 100 .P. or more. Tractors of is size generally represent a little more 50% the dollar value of tractor sales the hi of 1 tractors.
E. I ----~~------~ Internat i ona 1 trade pl an i rtant ro 1e in rm machinery and equipment fodus The trade consists of f·i rd products~ and a ·1 a amount of parts that are imported and exported yea y us manufacturing level and prmf'i de ired service. U.S. exports have consistently 20% of the total value equipment shipments since 1980. fr in 1981 wi ahnost 3 billion dollars in exports (Table 8) 1 ing .3% of vahie of shipments that year. The de n~cess ion a frl loans to developing nations di export sales in n ng rs.
timates for 1983 ind1ca that exports experienced a net drop of $842.1 15
TABLE 8 u s.
Item l 19
1 $'1 Value of shi (mil '.I 4, 1 10 ~282 2 Value product shipments 1 $) 4,144 9, 9 '779
Va hie ( m·l 1 $) 1~5
Value of imports $) 421 Export/sh ratio 0.111 0. 0, Import/ne\v supply rati 0.092 0. 0.1
1In ude services. ? <-Do incl services. 3 except for exports 4-r.sti
shi plus ·imports.
Source: Bureau of s and Bureau Indus al CS~ 16 million since 1981--a 28.6% drop. 21 Imports of farm machinery and equipment reached their peak in 1979~ with $1,180 million. Some foreign firms already have joi ventures with domestic firms. Such is the case with Tractomotive Corp. in Deerfield, Illinois--an Allis~ "ln1ers Subs·idiary that joined with Fiat of Ita.ly.
F. V~rtical Rela~ionships and Conglom~@!_~. Most 1arge n1anufacturers are 1ly integrated the manufacturi wholesale, and retail stages. Vertical integrations are found by contract at the retail level and b_y ownership in other stages. This is the case of Deere
Co. and Massey-Ferguson. Some other rms even further, owning establishments that process raw materials (steel, plastics, etc.) and/or have engaged in mining activi es. Tenneco Corp. (J.I. Case), International . . 22 Harvester Co., and Allis-Chalmers Corp. are ln th1s group. ·
Most merger and expansion act1viti~s have occurred at the manu ring level. Here full-line some 1 producers have loped and produted their own engines, transmissions, and other parts. Product differentiation, reliabili and technical improvement have played an important ·role in i r competH·ion for customers. engines, transmissions, parts and even whole units are produced for smaller independent fi rrns. Some of them are fore·ign firms whose assets are sometimes owned by
U.S. manufacturers. For ·instance, Ford 1 s combines are a. West German corporation, Class OHG. Another example is the small tractor market
(under 40-H.P.). ,Most of them are sold by U.S. firms 1rJith their own names, but are not produced in the United States.
At· the raw material processing and mineral extractAon , several manufacturers have subsidiaries. International Harvester Wi scons -1 n 17
Steel Division which possessed coal and iron ning properties, the two lC for steel production. It also had the stee·l processing facilities. This business was sold in July 1977, but Harves reassumed ownership of certain mining properties in March, J.980. Massey-Ferguson and t-'\1lis Chalmers are proprietors of iron process i pl s, 11 M11 ndry and the Brantfo and
Cambridge steel processing plants are the main properties ssey--Ferguson.
A11is--Cha1rners has m<111ed Stanstel1 Corp. s'ince January l Tenneco Corp. acquired a 11 of lL L Case by August 1980. TE~nneco 1 s major businesses a.re oil exploration and production. They have properties for the manufacturing of synthetic rubber, foam, polyvinyl chloride res-ins, a other polymers and plastics. There appears to be li le connection between these businesses and . . t, 23 t J•• I C,ase ac:1vL1es.t Two of the major farm equipment manufacturers concentrate mainly on one line of business. In 1982s 88% of Deere 1 s sales were in farm machines and equipment and 12% in i strial equipment. Massey·-Ferguson manufactures and sens farm machinery, industrial mach·inery~ and diesel engines.
III. CONDUCT
The main characteri cs of the farm machinery and equipment industry seem to fit those of a differentiated ·irJopo1istk model. ThE!re are few firms~ high barriers to entry~ low substHutabi"lity of products, price leadership, and high levels, of iture on research a deve l oprnent to achieve product differentiation.
A. Price leadershi
The Royal Commission Report found that du ng the t t~orl d l~lar II period, there generally was a price leader for most rm machinery products. 24 Most of the time it was Deere who led the market, even though other manufacturers have, at times s been the price leader competitor. Prices v.iere found to be closely matched in the long run, although price va ations ~vere found on year-to-year comparisons. Differences were found in prices of t rac t ors b e t ween t 11osei so l d rn. Miior· t'n Amen . ca an d GJ,rea,. t ·B n . t-am. . 25 I dent i ca ·1 machines were sold in Great Britain durh1g 1968 at 30 or 45 percent ·iower prices than in Canada, even though the manufacturing cost of North Amer"ican firms were about 25 percent higher due to input prices. No clear pattern of price leadership in the last several years is apparent. Much price discounting has been done by International Harvester and 2f Massey Ferguson as they attempted to raise cash. J Deere also lowered prices but it did not match Harvestor and other firm's prices. 27 Retail dealers with swollen inventories and cash shortages also discounted product. 28 W.A. Hewitt~ former chairman of Deere and Co. stated,
11 It 1 s easier to offer extravagant dea 1s when you 1 re losing lots of money. A dealer at that point figures he hasn 1 t much to lose. That can make it tough
on Deere to compete 1 but if somebody wants to give equipment avJay, there really 1sn• It muc h you can do. u29 Deere has managed to get small benefits and holds its market share strongly.
Annual price increases 'hi the last 10 years fluctuated between 6.8% in 1973 (tractors and self-propelled equipment) and 21.3% in 1975. (List prices were increased in the 1980-82 period, Table 9.) From Fall 1982 to March 1983, farm machinery prices increased only 2 to 3 percent.
B. Research ~· large farm machinery firms regularly spend about 3 percent of sales on research and development. lhe introduction of significant technological TABLE 9 Prices of Tractors, Combines, and Foraae Harvesters, 1975-1983
Self Tractors (horse12ower ranoe;\ prope 1·i ed Forage Year 50-59 110=129 170-240 combh:es harvesters
Do 11 a rs Percent Do 11 ars Percent Do 11 ars Percent Dollars Percent Dollars Percent ~t.) ~ ~ . chan_g_~ ~~ change ( ..,'e~,_ pi,' ) ch~~ (J~ntl__ __£hange
~11 1975 8,790 N/A 19,200 N/A 39,600 N/A 28,300 N/A 5,460 ~I ,f.1 ,
1976 9~350 6,4 21,300 10.9 43;000 8.6 32'100 13.4 6,070 11.2
1977 10 ;200 9 .1 23~600 10.8 45,700 6.3 36~100 12.5 69960 14.7 "':')
1978 11,200 9.8 25,000 5.9 48~300 5.7 419000 13.6 7,680 10.3
1979 12,300 9.8 28,300 13.2 55'100 14.1 44,900 9.5 8,620 12.2
1980 13~800 12.2 31,300 10.6 62,300 13.l 49~200 9.6 9 '720 12.8 1981 15,200 10. l 35,400 13.1 71,600 14.9 57,000 15.9 10;700 10.1 1982 16,200 6.6 38,000 7.3 74,300 3.8 59,900 5.1 11.800 10.3
".10 1 1983 17,0001 4.9 ·J':i ,~"001 3.4 77 ,800 tL 7 N/A. N/A N/A N/A
1March 1983
N/A = Not available Source: United States Department of Agriculture. 20 improvements can have substantial effects on market share. Holland and International Harvester breakthroughs in rotary combines gave thc-::m big leads in those markets. However,. a common practice thin the ·i ndu ry is to l "icense new technological i mprovE~men to other rms a they have 30 exploited them for one or two
The deteriorated market for fa.rm mac hi and equi t has forced I severa ·1 manufacturers make -in their research and development expenditures. Intern~tional Harvester~ about 1 research and development expenditures in 1982. Deere was the exception. Deere generally spends about 4 cents of each dollar of sales on resea and development, higher on the average than any other major company. 31 In
1982, Deere increased these expendi by 24. 4% even though i net sa ·1 es had decreased 15.4%. As a result~ Deere spent about 5.26% of sales on research and development year. 32
C. Plant Investment.
Ouri ng the 1960 1 s and 1970 1 s, most of the large f·i rms used r rm . "t. 33 machinery divisions. as 11 cash cows 11 to reinvest in r 1v1 1es.
International Harvester t great emphasis on i truck business. As a result, investment in plant improvements and ion of new production techn-iques have been min·imal. In general~ it was during the perfod that the fl rms in the industry somevJhat improved their p·l It 1trn.s fueled by the dramatic increases in farm income. present, these plants are considered o1 d and outdated because of ne11~ tech no l developed by the automob e industry during the 70 1 s. Some experts suggest that most of them should be ken out of production. 34
This has not, however~ been the case with John Deere, Half its 21
manufacturing space is less than 10 years old~ the newest -in the industry,
Its plants are extremely automated and flexible, and it invested a lot of capital in manufacturing capability, Its potential increased profi as sales recover is high~
IV. PERFORMANCE
Technological eff"iciency and progressiveness, margins and profits~ and the cost of sales promotion are three dimensions of performance by ~vhi an industry may be judgect. 35
Recent studies show that wi in the U.S .• the farm equipment indust has experi productivi gains (output per emp 1oyee hour) about the same as the average for a 11 manufacturing industries. 36 During the period 1958-80, this industry had a produ~t-ivity growth of 2.6% a year, the motor vehicle in .ustry 3.2%~ and 2.7% for all manufacturing industr-ies.. It was also found that the industry was high progress·ive and that umajo firms had adopted new means of technology such as computers with several applications, robotic we1ders9 and so forth.
B. ~argins and Profi~s. Farm machinery represents less than half the sa-les dollars for several major manufacturers, Table 10. Publicly avai"lable flnancia·1 data typica'lly reports whole firm results. The analyst's ability to accurately identify marg·ins and profits associated with farm equipment is consequently ·1 imited,
Ins·ights may be gained on the overall financia·l st of firms and the l r potent"ial for sustaining their farm equipment bus·iness. E 0
U.S,, Al ·1 Businesses
88.0 77" International Harvester 37.0 8LO Mas Ferguson Ltd. 1979 83.0b ,0
J\llis mers Corp. .0 Ford Motor Co. 2.0
Inc. (J.I. • 2 White Motor Co. 1979 .o
b~1ncluaes ' i strial on unit sales.
cons i pment.
·- Not a.vid1o.b1e,
Source: Moody 1 s Industrial ( 1983). i.
23
Deere and Company and Tenneco (J.I. Case) have consistently made profits
over the 1as t sever a 1 yea rs. Deere 1 s prof it 1eve l has, however,. dropped to
very low levels as the fa~m equipment industry experienced extreme financial difficulty, Table 11.
As an industry, the farm machinery group has shown lower profit levels than were achieved by a 11 manufacturing corporatiOns and a 11 machinery except electrical firms. There is no evidence that this industry or individual firms. were able to achieve an inordinately high profit Jevel during the period studied.
V. CONCLUSIONS The farm machinery and equipment industry has traditionally been concentrated and is likely to get even more concentrated. John Deere ·is evidently the industry 1eader and wi 11 probably enhance its position during the rest of the decade. International Harv.ester will probably continue to offer some substantial competition, even though it has already sold and.given up production of some types of units. Other full-line producers were found to have a tendency to become .1ong-:-1 ine producers, dropping some 1i nes to produce what they do best. ·High barriers of entry are present. Well-established dealer networks, economies of scale, high capital requirements, reputation for dependability and service, limit entry. Financing to dealers and farmers is
one of the most impo.rtant weapons to enhance market shares. Deere and Co. 1 s financial strength places it in an advantageous position. Foreign firms have already entered the U.S. market. Foreign-made small tractors and se 1f-prope11 ed combines are so 1d under private 1abe l. Other firms have joint ventures with some U.S. manufacturers. That is the case of
Italy 1 s Fiat with Allis-Chalmers Corp. and Heston. TABLE 11
Profitability Fa:m Mach~ and Other U.S. Manufacturers After Tax Return on Equity (Per~ fprnpan,r 1977 1978 1979 1980 1981 1982 1983
., h 1 Deere and Co$ .4 1;,; 0 J_ 15~8 10. 7 10~2 2 • ·"'t.. LO
International Harvester 11. 7 10.0 174'2 -23.4 -3 6 N/E N/E sey Ferguson Ltd. 4.1 -48.5 6.4 -63.8 -48.8 N/E N/A Allis Chalmers Corp. 12.8 ,0 12.0 7.2 -4.2 -46.l .4 White Motor Co. 0.1 0 .u'" 2 .. 1 * ·Jr * * Ford Motor Co. 19.8 16.4 ~ 1L2 11.2 -18.0 -10.8 24.74
Tenneco Inc* {J. L Case) 14.6 15.8 17.l 17.4 16.1 15.0 12.3 l Machinery, Except ectrica1 16.7 1706 16.9 15.1 14.6 8.7 8.2
All Motor Vehicles and Equipment 18. 7 16.9 .9 -9.4 -0.7 2.7 18.8
A11 Manufacturing Corporations 14,2 15.0 16.5 14.0 13.7 9,3 10.6
Notes: N/E = Corporation stockholders did not have equity. * = Company filed a Chapter XI petition (Bankruptcy Law). Source: Moody's Industrial Manual (1977-1983); FTC Quarterly Financial Report. N/A = Not Available 25
Foreign firms wi"ll probably increase their pa icipat"ion in U.S. market, but how much genuine competition they will offer is not kno1rm. Price competition, will few except1 s been restrained and ce leadership has / been commonly exercised. ·a result, prices of some product lines may at . supracompetitive levels in the North American market. Nevertheless, the study showed that overall prices were not.
F·inally, the data on profitability for manufacturers and dea·lers sugg1~st that profi and margins were not excessive, ew.H1 though these figures 1r1ere difficult to interpret. Furthermore~ the industry was nd some1:'1hat
·inefficient in its production tedmiques, which in general have not modernized, and in its failure to achieve lowest possible costs of production. NOTES
1. Department of Commerce, 1980 U.S. Industrial Outlook 212 (1980). The value of U.S. shipments in 1980 was estimatea at $14.135 billion, with a· net export balance of $350 million. 2. Wall Street Journal, Sept. 10, 1980 at 16, Col. 2.
3. Mo9d~ 1 s Industrial Manual (1981), Vol. 1, p. 296.
4. Moody 1 s Industrial Manual (1982), Vol. 2, p. 6130.
5. Holman, Richard A., 11 Farm Equipment. 11 Wall Street Transcript, March 28, 1983, p. 69258. 6. Holman. Supra note 6, p. 69260.
7. Serletis, William S., Farm Machinery chapter in "Seven Input Industries, 11 U.S.D.A. forthcoming report. 1982 Draft. p. 11.
8. U.S. Department of Agriculture. 11 The Farm Machinery and Equipment Industry: Its Changing Structure and Performance, 11 Economic Research Service. Marketing Report No. 892. 1970. p. 2. 9. Serletis. Supra note 10. p. 16. 10. Miller Agrivertical Unit, 1980 Toe Agricultural Producers Study. 1980. pp. 52, 62, 90.
11. leibenluft, Robert F. ~om_E~tition in Fa_r!l! Inputs: An Examination of Four Industries. Policy ~1anning Issues Paper. Federar-- Trade Commission~·February 1981.
12. Rudnitsky, Howard. 11 P1owing a Strait Furrow, 11 Forbes, 12 April 1982, p. 52.
13. Argus Research Corpora ti on. 11 The Farm Equipment Industry. 11 March 1979, p. 2. 14. Holman. Supra note 6. p. 69260. 15. Leibenluft. Supra note 15. p. 135.
16. Farm Equipment Manufacturers' Association. 11 Shortliner. 11 St. Louis, Missouri. August 1, 1983, and September 15, 1983. 17. Phillips. Supra note 2. p. 337. 18. Leibenluft. Supra note 15. p. 124. 19. Argus Research Corporation. Supra note 17. p. 2. .. 27
20.
21. U.S. Department • 11 1984 U.S .. I stria'! Outlooks for over 300 Industries. 11 Bureau Indu al Econonri cs. p. 23-1.
22. Several 1983 MO.QS~.§~.~L~ pub 1i . i ems ea.ch manufacturer 1 s merger activ1ties. Most 'hi the .Indu_:;trial__Manu~],, VoL 1 and 2~ and the Internationaf"'Manual.
rectory of Affiliations Owns ~~hom? Nationa 1 Reg·! ster Publ-ishing Co., P. 917. 24. Royal Commission Report. Supra note pp. 153.
25. The price of tracto~s in in the ited States were roughly the seune. Royal Commission on Farm Machi • .?.E~c!.?l_:.~ort .SJ~ Tractors and Combines in Cana.da and Other Countries (1966}9 pp. 91-98. 1Jn Le·i 6enrurr:;-·-·-·-· ..---·---- .. ------26. Morris, Betsy. and Sue Hi on Recovery in 1983 ~ p. 8.
iJaterloo, Cl l"ier 1 s and 1982~ p. 56.
28. Byrne, rlan S. to bi-; Delayed Another 7,
30. uft. 15. p. 1 31. Rudnits Supra note 16. p. 53.
32. Vo 1 • 1, p. • Leibenluft. Supra p. 34. Holman. Supra note 6. p. 69,
35. J. S. in.· Supra note 8 •. p. lL 36. Growth Average in October 1982. p. . .
WAITE MEMORIAL BOOK COLLECTION DEPT. OF AG. AND APPLIED ECONOMICS 1994 BUFORD AVE. ·· 232. COB UN!VERSffV OF !VHNNESOTA