The Agricultural Machinery Market & Industry in Europe:

An analysis of the most important structural trends & why EU regulation of the sector needs to change

Dr Gilles Dryancour, October 2016

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European Agricultural Machinery Industry Association [email protected] www.cema-agri.org

Executive Summary

This paper questions and challenges common concepts and assumptions used for regulating the agricultural machinery market and industry in Europe by looking at some of the most fundamental trends and drivers that have shaped the sector in recent years. In so doing, the paper examines in particular the very different dynamics applying to the automotive and farm machinery markets.

Based on this approach, the paper comes up with a number of forward-looking proposals on how EU regulation should develop so as to better take these structural drivers into account and provide a sound policy framework that effectively entices innovation, and supports the productivity of the agricultural machinery industry and thus the sustainability and competitiveness of European farming.

The paper concludes that, in order to enable European farm machinery manufacturers – whether big or small – to continue to be innovative, competitive and commercially successful in Europe and the world, we need a veritable U-turn in EU regulation and industrial policy. More specifically, EU regulation for farm machines’ needs: x to recognize and understand the structural specificities & drivers of the sector;

x to abandon the distorted and harmful logic of using an automotive-based regulatory approach for tractors and farm machines;

x to adopt a forward-looking regulatory approach that allows the European farm machinery industry to define its own technical standards and move towards more self-certification.

About the author: Gilles Dryancour is Honorary President of CEMA, having served as President of the Association from 2009 until 2014. He is also Chairman of CEMA’s Public Policy Group (PPG).

European Agricultural Machinery Industry Association [email protected] www.cema-agri.org

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Introduction

Standard analyses of the agricultural machinery market and industry in Europe typically fail to provide an in-depth analysis of the business, as they tend to ignore the principal underlying structural trends and drivers which have shaped the market and its industry during the past decades. However, developing such an in-depth analysis is indispensable to succeed in two important tasks: x to develop plausible forward-looking scenarios on how Europe’s agricultural machinery market and industry might evolve in the coming years; x to derive meaningful conclusions on how such future changes of the market and the industry should best be reflected in EU regulation.

In all of this, it is of utmost importance to bear in mind that farmers – as the final customers and ultimate users of agricultural equipment – are the most important factor determining the future of the agricultural machinery market and the industry servicing it.

1. The cyclical nature of the farm machinery business is not a structural trend

The most well-known economic theory about the farm machinery business is that it is cyclical like agriculture: when agricultural commodity prices go up, demand for farm equipment tends to rise accordingly. This correlation is commonly acknowledged and follows a well-known logic: since commodity prices determine farmers’ income, they – in turn – decide how much farmers can eventually spend on investments into new machinery.

Commodity prices can thus serve as a helpful indicator of the peaks and troughs in demand for agricultural equipment. However, being cyclical and volatile, they do not qualify as a fundamental underlying trend that is shaping the structure of the agricultural machinery industry.1 For instance, they cannot explain major structural changes within the industry such as, for instance, the fact that an entire range of famous tractor brands (such as Lanz, FAR, Ford, Citroën, Röhr, BMB, Steel hoof, Merlin, Latil, SFV, Energique, to name just a few) gradually disappeared in the 20th century from the industrial landscape.

“Trends in commodity prices cannot explain long-term structural changes within the farm machinery industry.”

1 Moreover, peaks in demand for agricultural machinery, as they can be observed for the years 1987-1989 and 2007- 2012, could seriously distort market analyses that focus merely on data from a short period of time.

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From a broader perspective, the European agricultural machinery industry today is a mature industry that has faced major challenges and changes since the post-World War II period. Since then, it has essential re-adjusted itself over and over to new economic, demographic, regulatory, societal, and technological realities. This paper will primarily examine the demographic and regulatory changes and analyse their impact on the size and structure of Europe’s agricultural machinery market.

2. Misleading analogies: tractors ≠ cars

When analysts try to examine the market structure of the agricultural machinery industry in Europe they usually do so by comparing it with the automotive industry. This is based on the – misleading – assumption that both industries are structurally similar. The view of these alleged similarities runs wide and deep, as can be seen from a recent French study which claimed that:

“The agricultural machinery sector bears similarities to its neighbour, the automobile industry: the chain from vehicle producer to the final consumer (farmer) via the dealer network involves similar actors. As in the automotive sector, a reduced number of upstream producers also seem to develop better control strategies of the downstream distribution network leading to a growing use of exclusive supply”.2

Most importantly, the view of the alleged similarities between the agricultural machinery industry and the automotive industry is also shared by the European Union (EU) – which, today, acts as the primary regulator of the industry in Europe. Historically, the European Commission has always compared tractors to cars, and both tractors and cars belong to the same administrative unit inside the Commission. As a result, most of the EU’s regulations on tractors have been derived from regulations that were originally designed for the automotive sector.

The view of the alleged similarities between the agricultural machinery industry and the automotive industry is based on the (false) presumption that certain analogies in terms of industrial processes and distribution practices would also point towards the existence of similar – or at least, comparable – market structures. Yet nothing could be farther from the truth. As will be shown below, the fundamental customer-related demographic trends for both markets reveal that the tractor and automotive sectors are, in effect, not at all comparable. In fact, in terms of their structural realities, they follow opposite paths.

“The tractor and automotive sectors are not comparable. In terms of their structural set-ups and commercial realities, they follow entirely opposite trends.”

2 Effets des restrictions verticales et accès au réseau de distribution: Les pratiques d’exclusivité dans le secteur des machines agricoles

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3. Demography is destiny: urbanisation meant a shrinking customer base in the countryside

It is evident that Europe’s demographic evolution since World War II has structurally favoured the passenger car market, while it has structurally disadvantaged the agricultural machinery business. Looking at the three most populous countries of the EU, we can see that their population grew since 1950 by 58% (France), 36% (UK), and 16% (Germany) respectively (see also Figure 1 below).

Figure 1: Total population of France, UK & Germany, 1950-2016 (millions) France UK Germany 1950 41 49 68 1985 55 55 78 2016 65 65 81

As a general rule, it is safe to say that the more the population grows the more potential customers manufacturing industries can – in theory – cater for and win. However, the case is inherently different for the agricultural machinery industry whose number of potential customers has declined drastically after the First and Second World Wars. While farmers represented about 50% of the European population in 1900, their share declined to 30% in the 1950s. The below charts show the dramatic decline of farmers and farm-holdings in France, the UK, and Germany.

In the EU, the long-term decline in the number of agricultural holdings is still continuing. Between 2005 and 2013, the average rate of decline was 3.7% year-on-year. Accordingly, the total number of farm holdings fell by 1.2 million. This has led to further consolidation with the average farm-holding area rising from 14.4 to 16.1 hectares. During the same period, the overall area of agricultural land in the EU fell by 0.7% due to urbanization and growing forestry areas.

Figure 2: number of agricultural workers in France, 1955-1997 (in thousands)

Source: Sénat français, Projet de loi 1999, Avis 68 (98-99), Tome 1 – Commission des affaires économiques

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Figure 3: number of agricultural workers in the UK, 1925-2010 (in thousands)

Source: House of Commons, Briefing paper, Agriculture Historical Statistics, n° 03339, Jan. 2016

Figure 4: number of farm holdings in Germany, 1975-2014 (in thousands)

Source: Statista

The same phenomenon can be observed in all OECD countries, noticeably in the US, where farmers represented 1% of the total population in 2012 (3.18 million of 314 million).3 Notably, the U.S. total population increased by 4% between 2007 and 2012, whereas the farmers’ population decreased by 3%. These opposite trends prove that the rural flight is still continuing in OECD countries. In other words, the share of urban populations is still growing. In 2014, urban population represented 79% of the total population in France, 82% in Germany, 82% in the UK, with a maximum percentage in Netherlands at 90% and Belgium at 98%.

The above figures clearly demonstrate that the European agricultural machinery industry has had to deal for decades – and still has to deal – with the formidable challenge of a dramatically declining customer base. By contrast, the customer base for cars has followed the opposite trend and continues to grow until today.

3 USDA NASS Census (2012).

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“Europe’s farm machinery industry has faced a sharply declining customer base for decades. By contrast, the customer base for cars has grown dramatically.”

Figure 5: Active agricultural workforce in selected EU countries Country % age of Year workforce active in agriculture Austria 5% 2012 Belgium 1.3% 2013 Bulgaria 6.7% 2013 Croatia 1.9% 2013 France 3% 2013 Germany 1.6% 2011 Greece 12.9% 2013 Ireland 5% 2011 Netherlands 3% 2009 United Kingdom 1.3% 2014 Source: Statistiques Mondiales.com Population agricole active

4. Urban migration fuels the growth of the passenger cars’ market…

The graphs below show the correlation between rural flight, urbanization and the booming of the passenger car market. This global trend started in the early 1950s and was only temporarily slowed down by the financial crisis in 2008. The same steep curves can be found in the three European reference countries: France, UK, and Germany.

Figure 6: World Passenger Car Fleet, 1950-2004

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Figure 7: number of cars in France, 1900-2010

Figure 8: number of cars in the UK, 1940-2010

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Figure 9: number of cars in Germany, 1950-2014

The example of Germany is particularly striking. The car fleet expanded from a couple of thousands units in 1950 to 47 million in 2008 – a factor of 40,000. Even if the market will not expand at the same pace in the next decades, it went through an exponential growth phase for well over six decades. The manufacturing capacities followed the same path and grew by a factor of 6.

Figure 10: Annual passenger car production in Germany (in units), 1957-2013

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5. …while tractor sales face a steady decline

By contrast, looking at the long-term trend (excluding cyclical peaks and troughs), tractors sales in Europe have been, by and large, in a constant decline. The market in Germany, for which available data goes back to 1951, shows that the annual sales of tractors declined from 100,000 to 34,000 in 2013.

Figure 11: Annual tractor sales in Germany, 1951-2014 120000

100000

80000

60000 Tractors in 2013: 34611 40000

20000

0

1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: VDMA statistics

The same trend can be observed in most of the other European countries. In Italy, for instance, tractors sales decreased by a factor of 2.3 during the last 30 years (42,000 tractors sold in 1987, 18,000 in 2015). The evolution of the Italian tractor market is even more striking than the German one, since it shows an acceleration of the downward trend during the last decade. Effectively, tractor sales dropped by 44% between 2004 and 2015 and still continue to fall in 2016.

Figure 12: Annual tractor sales in Italy, 2004-2016

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As outlined above, the continuous structural decline of the agricultural machinery’s customer base and market in Europe has been fuelled by the rural exodus. On the contrary, the European passenger car market has boomed thanks to urbanization. Defenders of the alleged analogy with the automotive market tend to argue that the loss in tractor units sold has been compensated by the correlating gain in engine power and price increases per tractor that came with it. However, this reasoning is incorrect and confuses cause and effect. If tractors became more powerful this was essentially due to the fact that farm consolidation did not leave any other option. In other words, bigger farms needed more powerful tractors. Otherwise, they could not be operated efficiently. This trend has thus been clearly triggered by the demand-side and not by the structure of the production.

Also, the assumption that the growth in horse power would have compensated for the overall decline in sales numbers cannot be verified by the statistics. In fact, if we take the German market as a reference and check how many kilowatts were sold in total from 1970 to 2001 (all tractor power categories taken together), we can find that this figure also declined: in 1970, 65,000 tractors were sold in Germany representing a total amount of 2.2 million kilowatts. In 2001, 24,000 tractors were sold representing a total amount of 1.8 million kilowatts.

In sum, during the last decades, the agricultural machinery industry had to deal with the challenge of a declining customer base and has faced lower sales (even in terms of the total engine power provided) which were supplied to an almost constant area of farm land.

“Europe’s farm machinery industry has had to deal with a dramatically declining customer base and has continuously faced lower sales,

even in terms of total engine power sold.”

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6. Customer density has a fundamental impact on the market structure

Though rarely analysed, the change in costumer density for a given territorial area has a fundamental impact on the structure of a market. If we compare the tractor market for the years 1950 and 2010, we can find that 7 new tractors were sold in 1950 in an area of 100 km² inhabited by 210 farmers. In 2010, these figures dropped to 3 new tractors being sold per 100 km² which were inhibited by merely 34 farmers.

Figure 13: Number of tractors sold per year and per farmer per 100km2

What does this mean? From a manufacturers’ perspective, it means that all logistical chains have become much longer and that all costs associated to distribution have increased dramatically. By definition, competition between brands and their dealers in such a scenario becomes far more intense. Only those able to invest into reaching ever more-distant customers and satisfy their needs can remain in the market.

As shown above, owing to the rural exodus and the resulting demographic change in the countryside and the world of farming, a certain structural concentration of the market occurs naturally and automatically. When it comes to the structure of the agricultural machinery market in Europe, the underlying demographic trend thus is, in effect, the principal driver, not an alleged ‘’concentrative’’ strategy of the tractor manufacturers. Again here, the French study quoted above claims wrongly that:

“From the production side, the agricultural machinery sector is led by a concentrative dynamic reflecting the strategies implemented by the tractor manufacturers. The global reconfiguration of production feeds a similar dynamic at the national level, linked to the globalization of strategy of key-players”.4

4 Effets des restrictions verticales et accès au réseau de distribution: Les pratiques d’exclusivité dans le secteur des machines agricoles

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Once again, this kind of reasoning is based on a falsely presumed analogy with the automotive industry. Quite simply, it is impossible to compare two industries which show inherently different dynamics and have vastly different volumes. The concentration of manufacturers and dealers in a growing market is far more questionable than in a declining market such as agricultural machinery.

Some figures can help to understand the differences between the two sectors. While the automotive market grew by 9% in 2015 and could be growing again by 8.5% in 2016, the agricultural market declined by 4% in 2015 (vs 2014) and is likely to decline by 3% in 2016. In 2016, about 16 million passenger cars are likely to be sold in Europe (another record- year after 2007),5 whereas the agricultural machinery industry might be able to sell 160,000-170,000 tractors in total.

In terms of overall size, the tractor market is approximatively 1% of the size of the automotive market. As a matter of comparison, the agricultural machinery industry sells almost four times less tractors in the whole EU 28 than the automotive industry sells cars in Belgium - 602,867 in 2015 –, a country with a total area of 30,528 km².

These figures give us the density of sales for both industries in the EU (4,493,712 km²). The automotive industry sells annually an amount of 3.5 new passenger cars for each km² of the EU territory. By contrast, the agricultural equipment industry sales represent merely about 0.03 tractors per km² EU territory.

“Europe’s farm machinery industry sells four times less tractors in the entire EU than

the automotive industry sells cars in just one single European country alone (Belgium).”

A more in-depth research would show that the automotive sales are much denser if we take into account the territory where cars are mostly sold (=urban areas). By contrast, customers of agricultural equipment (i.e. farmers and contractors) are more and more difficult to reach since the most profitable farm holdings are more and more dispersed. The table on next page supports this analysis.

5 http://www.francesoir.fr/tendances-eco-monde/union-europeenne-les-ventes-de-voitures-neuves-continuent- de-progresser

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Figure 14: Distribution of agricultural holdings by area (2013) Area of holding Number of % of total Utilised % of Utilised holdings2 holdings Agricultural area Agricultural (ha) Area <2 ha 4 706 370 44.1% 3 578 030 2.0% 2 – 4.9 ha 2 307 300 21.6% 7 313 240 4.2% 5 – 9.9 ha 1 277 230 12.0% 8 940 870 5.1% 10 – 19.9 ha 888 540 8.3% 12 442 190 7.1% Sub-total <20 ha 9 179 440 86% 32 274 330 18% 20 – 29.9 ha 374 870 3.5% 9 134 540 5.2% 30 – 49.9 ha 387 730 3.6% 14 974 730 8.6% 50 – 99.9 ha 388 680 3.6% 27 264 410 15.6% >100 ha 366 740 3.2% 90 965 810 52.1% Sub-totalÆ 20 ha 1 488 020 14% 142 339 490 82% Total 10 667 460 100.0% 174 613 820 100.0% Source: Eurostat [ef_kvaareg]

7. Tractor and automotive markets are structurally different & follow opposing trends

Despite the fundamental trends and developments analysed above, a number of academics and the EU regulator (in form of the European Commission) still uphold their – arguably distorted – view that the tractor market is structurally comparable and essentially identical to the automotive market. This assumption is based on the single structural commonality that both industries share: a supply chain and a distribution network with a reduced number of upstream producers. Yet such an abstract commonality is hardly a reliable basis for a serious comparison. Following such a logic, many markets would fall into the same structural category as the automotive market, such as the markets for smartphone shops, fast-food chains or even coffee-shops.

Production realities show that the passenger car market is characterized by high volumes, and low diversity of different types/models. The typical annual production of one single passenger car model is above 200,000 units. By contrast, for tractors, total annual EU-28 sales are currently around 170,000 units – that is less than sales of one single model of one passenger car!

“The typical annual production of one single car model in Europe is around

200,000 units – that is more than the total annual European sales of tractors combined (170,000)!”

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By contrast, the farm machinery industry is a low-volume industry, characterized by a great variety of different vehicle types and models. Also, tractors have a much higher complexity than cars. They incorporate 1.5 up to 3 times more parts than a car. A European mid-spec tractor has up 9,000 thousands different parts, versus 3,000 parts on a typical passenger car, while the agricultural equipment industry is significantly smaller. These are some of the main structural dissimilarities with the automotive industry.

This is a critical fact which influences competition in the farm machinery industry. For instance, it explains how small manufacturers (brand names) can successfully compete with major players on some segments, i.e. in terms of power categories or specialty- tractors.

In this respect, the tractor industry is arguably far less concentrated in Europe than the automotive industry is. Six major brands (John Deere, CNHi, AGCO, CLAAS, SDF, ARGO) compete with many smaller, well-established manufacturers and new entrants (Kubota and China Farm) for a small-volume market. For the car industry, 4-5 major players lead a market on which a new car is sold every two seconds.6 In other words, the automotive industry in Europe sells about as much cars in 3 days and a half, as our industry sales tractors in a full calendar year.

In line with this, the agricultural machinery industry needs far more time to adapt the internal vehicle architecture to new standards and protocols than the car industry. It takes about 10 years for a partial change-over of a tractor. For a car, it takes less than 4 years for a total change-over of the entire vehicle including all subsystems.

8. The EU’s shift towards an (automotive-based) approach for farm machinery has been harmful for the industry & farmers

Regarding regulation, the structure of the agricultural machinery market in Europe has been shaped by two major pieces of EU legislation:

1) The competition framework known as the EU Block Exemption Regulation (amended by Regulation 330/2010). This Regulation gives the farm machinery industry, amongst others, the freedom to sell via exclusive single-brand dealers (“authorized dealers”). Since its origin, this Regulation provided the manufacturers with legal certainty for investing considerable capital assets into their respective dealership networks.

6 http://www.statista.com/statistics/198524/15-leading-passenger-car-manufacturers-worldwide/

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2) The regulatory framework known as Directive 74/150/EEC.

Until 2003, this Directive conveyed considerable benefits to the farm machinery industry and farmers in Europe. For the first time, it created the European internal market for tractors, by establishing a single harmonized type-approval scheme. Notwithstanding the fact that, between 1974 and 2003, growing product-related EU regulation resulted in a gradual, steady increase in compliance and thus production costs, the agricultural machinery industry was able to off-set such additional costs thanks to the benefits created by the gradual unification of the European tractor market.

Throughout this period, tractors were recognized for what they are: capital goods for agricultural work. And EU work focused primarily on technical harmonization. This was the rationale behind the EU’s Working Group on Agricultural Tractors (WGAT). In addition, the possibility of type-approving tractors nationally was maintained, which was a safeguard mechanism to keep legislation focused on the specificities of tractors.

In 2005, a sudden paradigm shift in the EU’s regulatory approach towards the agricultural machinery industry occurred: a switch to treat tractors as automobiles. Thus the idea was born that EU automobile regulations should, by and large, also apply to tractors – notwithstanding the fact that the use of the machines and the economies of scale in both industries are entirely different.

“In 2005, a sudden paradigm shift in the EU’s

regulatory approach towards the agricultural machinery industry occurred: a switch to treat tractors as automobiles.”

The consequences of this new approach were unexpected and severe. As a result, production costs have exploded in recent years. In light of strong concerns from the industry, the European Commission proposed a “simplification” and offered to revise the brand-new EU framework Directive for tractors (2003/37/EC), claiming that industry would be the prime beneficiaries of such a reform. However, it quickly became apparent that not only would all the obligations of Directive 2003/37/EC be retained in the new framework Regulation (now Regulation 167/2013/EC), but new constraints would be added above and beyond this.

“In recent years, EU regulatory compliance costs have by far exceeded the benefits, while the European market for tractors has shrunk dramatically.”

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As a result, in recent years, EU regulatory compliance costs have by far exceeded the benefits (the % regulatory costs increase exceeded the productivity gains) and the European market for tractors has shrunk dramatically. The failure to recognize the specificities of tractors in the EU’s regulatory approach and the presumed similarities between tractors and cars is putting Europe’s agricultural machinery industry at risk in the wake of fiercer global competition (US, Brazil, China). By contrast, elsewhere in the world, noticeably in the US, a specific regulatory approach for tractors with self-certification has been maintained. “The EU’s failure to recognize the

specificities of tractors in its regulatory approach is putting Europe’s agricultural machinery industry at risk

in the wake of global competition.”

Many of the EU’s recent regulatory requirements for agricultural machinery industry which are coming from the automotive industry (often in the form of copy-paste) cannot be economically amortized in the agricultural machinery sector. Growing evidence is showing that EU legislation has exerted adverse effects on the industry in many respects: x The transposition of EU rules applicable to the automotive sector without adaptation to the agricultural machinery sector naturally produces most severe effects (1/100 amortization capacity than the car sector).

x Tractor business in Europe is very cyclical. During a downturn phase, like the present one, the regulatory costs become unbearable.

x In parallel to type approval regulation, related regulation on e.g. diesel engine emissions has forced the industry to devote up to 80% of R&D investments during the last 5 years to the reduction of PM and NOx emissions. This has shown to have had a negative effect on new purchases, slowing down replacement rates and triggering demand for second-hand equipment. The below graph clearly shows the tremendous price impact of this Directive on tractors.

The most prominent example in the recent wave of EU regulation is Regulation 167/2013/EC and its Delegated Act 1322/2014 which contains an obligation to provide non-discriminatory and standardized access to vehicle Repair and Maintenance Information (RMI) to independent operators. This measure adopted through a technical regulation – dedicated to type approval – will deeply alter the market’s structure. It will impact the farm machinery’s dealership viability and the manufacturers’ spare parts business.

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Figure 15: Regulatory cost & price increase for tractors in Spain, 2000-2014

Source: ANSEMAT

Such a major disruption of the legal environment ruling the farm machinery market runs directly against the spirit of the Block Exemption Regulation No 330/2010 which entitles the industry, under European antitrust law, to deny supplying components and spare parts with the respective vehicle repair and maintenance information to non-authorized dealers or independent operators who do not have to meet qualitative criteria, like trained sales staff, carrying a full product range, maintaining sufficient inventories and guaranteeing high quality after-sales.

The RMI delegated act 1322-2014 replicates the regulatory competition framework which applies to the automotive industry. Again, it is based on the – distorted – assumption that the tractor dealership network is identical to the car dealership network. Some basic facts can easily demonstrate the falsehood of this hypothesis: x If we take a look at the inventory turnover of an agricultural equipment dealership, one will find that the EU average is about 2.5, while it’s somewhere between 5 and 6 for the automotive dealership meaning, in accounting and inventory terms, that an agricultural machinery dealership is at least two times more expensive to operate than a car dealership.

x As already pointed out, the logistical chain to distribute spare parts and supply them to farmers is much more complex and burdensome than the logistics chain for the car industry. Considerably higher investments are needed to make it function properly. For instance, in the spraying and harvesting seasons, farmers expect a 24 hours a day maintenance support. Any delay in these operations could compromise their harvest. Car users do not expect such a service and can easily find alternative solutions if their vehicles need to be repaired.

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x State-of-the-art tractors contain far more different technologies than cars (Precision Agriculture features such as sensors, auto-steering...). As a result, farm machinery dealers need to invest significant amount of money for training their workforce and their customers.

Any EU regulation disrupting the dealers’ business model will necessarily lead to more of them closing shop and will likely entail considerable quality losses of the services supplied to farmers. This is one of the most concerning trends which could shape the future of the farm machinery industry and which regulators need to take into account for future initiatives that will impact the industry in the upcoming decade.

Conclusion & outlook: how Europe’s farm machinery market could evolve and what EU regulation needs to do to create a supportive, pro-competitive framework

Structural trends are difficult to change. They tend to last until the exhaustion of the model they transform. As shown above, the dramatic fall in the number of farmers in Europe, their rising average age and the structural changes in farm holdings have had a huge impact on the farm machinery business. According to the European Commission,

“Barely 6 % of EU-27 holdings are owned by farmers under 35 (around 5 % in the EU-15 and 7 % in the EU-12). Despite the limitations of the statistical information, the number of young farmers seems to have declined steadily in all countries. Moreover, the prospects for the future may be even bleaker’ (DGIP, 2012). Young people have become distanced form the way that our food is produced and with more and more of our populations living in urban centres finding new ways to attract young people into the agricultural sector is becoming increasingly difficult”.7

Assuming that this trend will continue the farm machinery industry will have to supply to a persistently shrinking market. In the next decade the active agricultural population will significantly diminish in many European countries, especially in the Eastern part of the EU. Is there any bottom line that the farmers’ population could reach? At this stage, it is difficult to predict. But examples from the US, Germany and the UK show that it could hit or fall below the 1% share of the total population. The one question we should ask ourselves then is how many million farmers the EU will lose in the next decade? And what will be the impact on the farm machinery market? In all of this, one thing is clear: more advanced high-tech machines (some of them probably robotic) will be needed to keep the younger generation in the business and help them to operate ever larger farms in ever more sustainable and profitable ways.

7 The European Union Explained, 2014.

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“In the future, smart farm machines will be needed to keep young farmers in the business and help them operate farms in ever more sustainable

ways.”

However, in the future, the agricultural machinery manufacturers and their dealers will most likely be put under even greater economic pressures. Further consolidation is thus likely to occur. The regulatory idea behind the European Commission’s Delegated Act on RMI to help new ‘’independent’’ operators (dealers) to enter the market will thus not be sustained by the highly adverse demographic and general dynamic in the industry. It is a well-known fact the farm machinery business is a capital-intensive industry with low margins (in the range 4-5%). In this context, the new RMI rules will at best support free- riders to corner the most profitable segments of the farm machinery dealer business threatening their economic equilibrium and accelerate their consolidation.

RMI will likely hit the SME manufacturers of the sector hardest. In their specific case, they will have to set-up complex and costly IT systems for giving access to their Repair and Maintenance Information to non-existing independent operators (some of these SMEs manufacture sell merely a dozen of equipment per year). Those SMEs short of liquidities will be an easy prey for Asian manufacturers who look for such opportunities to conquer the EU market.

The acquisition in January 2016 of the Italian manufacturer Goldoni tractors by China Farm tractors could be seen as a precedent of this new trend driven by the excessive costs of EU regulatory compliance. In their home-markets, Asian manufacturers do not have to comply with such strict regulations and are often protected by technical trade barriers. They can also supply to a vast number of customers. A company like the Indian tractor manufacturer Mahindra alone produces more tractors (226,000 in 2014) than tractors being sold on the European market (170,000). Such kinds of companies are therefore able to hold a great deal of cash but also to amortize the compliance costs of the market they want to penetrate. In this sense, it will be no surprise if in one or two decades from now, the EU market will be partly driven by Asian manufacturers who acquired failed European companies.

“We need a veritable U-turn in terms of EU regulation to ensure European manufacturers of farm machinery – both big and small – can remain

successful in Europe and beyond.”

To prevent free-riding spare part producers from undermining the delicate economic equilibrium in the farm machinery dealership networks, to avoid excessive costs being put on SME manufacturers by the new RMI rules, and to enable European farm machinery manufacturers – whether small or big – to be commercially successful in Europe and the world, we need a veritable U-turn in EU regulation and industrial policy.

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More specifically, we need EU regulation for farm machines: x to recognize and understand the structural specificities & drivers of the sector;

x to abandon the distorted and harmful logic of using an automotive-based regulatory approach for tractors and farm machines;

x to adopt a forward-looking regulatory approach that allows the European farm machinery industry to define its own technical standards and move towards more self-certification.

As shown above, the time has come for a major change in the way the farm machinery industry is being regulated by the EU. Perhaps the recent political events can help to raise the level of awareness of the profound challenges the industry has to face in Europe. The agronomic, environmental and societal case for more innovative advanced farm machines is clearly there: farmers will need them to work their land in more productive, sustainable and profitable ways and feed a growing world population. EU regulation should do its best to support this transformative journey in farming and farm machinery in the years ahead and turn it into a success story for Europe. The industry stands ready to help in the process.

***

European Agricultural Machinery Industry Association [email protected] www.cema-agri.org

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NOTES

European Agricultural Machinery Industry Association [email protected] www.cema-agri.org

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NOTES

European Agricultural Machinery Industry Association [email protected] www.cema-agri.org

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CEMA - the voice of the European Agricultural Machinery Industry

CEMA - www.cema-agri.org - is the European association representing the agricultural machinery industry. The industry represented by CEMA includes 4,500 manufacturers of agricultural equipment employing directly 135,000 persons and indirectly in the distribution and service network another 125,000 persons. The companies are mainly small and medium-sized manufacturers according to the EU definition and in 2014 had a total turnover of 26 billion euro.

European Agricultural Machinery Industry Association

Boulevard Auguste Reyers, 80 1030 – Brussels BELGIUM [email protected] Tel. +32 2 706 81 73 www.cema-agri.org