Farm Equipment Maker Plows Up Opportunity
- By Herbert Mosmuller
- Jun. 07 2011 00:00
France's Kuhn Group wants to replenish russia's outdated fleet with its agricultural machines. the task isn't easy: Kuhn faces protectionist state policies, falling production and competition from other foreign brands.
In the nation with the fourth-largest amount of farmable land, Russia's market for agricultural equipment is a fertile place for foreign companies.
If a brand-new tractor or combine is rolling over a Russian field, there is a good chance that it has a foreign logo. Last year, foreign brands made up almost 70 percent of the market for equipment that cultivates soil and close to 70 percent of the market for devices that sow crops. Overall, in 2009, brands from outside Russia supplied just under 40 percent of its new farming equipment and, despite Russian government intervention, foreign brands comprised about 50 percent of the market in 2010.
France's Kuhn Group is one of those brands. Its Russian subsidiary, Kuhn Vostok, includes a Moscow office and Kaluga warehouse. Kuhn imports its machines for Russian farmers — but it isn't alone. It faces stiff competition from German, Belarussian and U.S. manufacturers. Both German and U.S. companies have opened factories in Russia, ratcheting up the competition. In fact, if Kuhn's leadership sees the right conditions in the market, it could open a factory here, too, director Nicolas Raimbault said in an interview.
This isn't an easy sell. Last summer's savage drought walloped the agricultural sector and devastated farms. Government policies are pushing farmers to buy domestically made equipment, customs procedures are making it difficult to obtain spare parts, and many farmers are opting to repair rather than buy. Rosagromash, a farm equipment industry association, estimates that 70 percent of Russia's equipment is worn-out and 90 percent is outdated.
Making the market even more challenging, many international corporations are competing for the same customers. German companies such as Claas hold a 28 percent share of the market for imported equipment. Belarussian companies hold 16 percent, and U.S. companies such as Deere & Company and AGCO have 11 percent, Rosagromash said. Italy, Ukraine, China and France also are top market players, according to the association.
Kuhn wants to make inroads, however. In the years leading up to 2008, the Russian market for farm machines was about $5.5 billion, and about 60 percent of all purchases were of non-Russian brands, according to data from Rosagromash. Given those types of figures, Kuhn jumped in with both feet.
Opening a subsidiary was "a milestone for Kuhn Group in order to enhance our understanding of the local market needs and to improve our service offering toward our customers," Raimbault said.
But the subsidiary opened in July 2008 — on the eve of the global financial crisis.
"On the one side, the crisis situation has given us some opportunities, but it is also difficult to build a team and develop a dealer network when the market has decreased significantly," Raimbault said in an e-mail interview.
'In 2011 we are expecting our sales to double. For the next two to three years, we are expecting strong growth,' said Nicolas Raimbault of Kuhn Vostok.
It was a rough period. In 2009, agricultural enterprises found themselves forced to slash their expenses, with the farm machine market plummeting 40 percent that year. That led to a spectacular drop in imports of farming equipment, from 3.16 billion euros ($4.49 billion) in 2008 to 1.1 billion euros ($1.56 billion) in 2009, a drop of 65 percent, according to IndexBox, a market researcher.
The equipment market decline continued into 2010, as low purchasing power and curbed lending from banks combined to hamper the market.
For foreign producers, the crisis was exacerbated by protectionist government policies aimed at boosting the domestic industry and at forcing foreign producers to put production facilities in Russia.
Foreign suppliers had a 62 percent share of the domestic agricultural market in 2009, and "the Russian market is by far the most open to foreign producers of machinery and agricultural equipment," Rosagromash said in a report this year.
By 2010, the government's interventions, and perhaps the financial crisis, had undercut the foreign market share. Its policies, such as increasing import duties on certain types of equipment, restricting purchases of foreign equipment to government-connected programs and giving loan subsidies for Russian machines, set the foreigners' share at 51 percent last year.
Some international companies have set up shop here, a fact that allows them to avoid restrictions on the import of assembled equipment. Claas has been operating a factory in Krasnodar since 2005, where it makes combines. Deere & Company, also known as John Deere, launched a factory outside Moscow last year. The plant assembles skidders, tractors, combines, backhoe loaders and motor graders for Russia and other countries, according to John Deere's 2010 annual report.
Kuhn has no short-term plans to open production facilities in Russia, but if the market develops as expected, it would be common sense to open production, Raimbault said.
He explained that Russian farmers are eligible to receive certain subsidies and loans from the state-owned agricultural banks, Rosselkhozbank and Rosagrolizing, only if they buy equipment that is made in Russia.
Slow customs procedures are another challenge, especially when it comes to the import of spare parts, which can be needed urgently by farmers with idled machines.
"All companies importing spare parts on the Russian market will testify that a great deal of work had to be done, but the procedure is now fully under control and our company can 'custom clear' a full truck of parts within 24 hours," Raimbault said. In fact, Kuhn recently has opened a warehouse for spare parts in Kaluga and has increased its stocks of spare parts.
'Modernizing Russia's aged fleet could generate upwards of $60 billion in sales,' a Morningstar market analysis said.
Maxim Firsov, an expert from Moscow's Research Academy for Agricultural Engineering, said guaranteeing the delivery of spare parts is indeed a major problem. Firsov added that there is also a lack of technical expertise on foreign equipment. Those factors contribute to farmers holding on to Russian or Belarussian machines, he said. In terms of the overall stock of equipment owned by farmers here, Russian and Belarussian products probably make up more than half, though exact figures could not be confirmed.
Firsov painted a bleak picture for the future of the Russian industry. Production numbers are decreasing, since the domestic producers are struggling to keep up with the international competition.
According to Rosagromash, revenues of the world's largest agricultural equipment makers far exceed those of Russian manufacturers. Sales volumes for even the biggest Russian producers are just one-tenth of foreign competitors' volumes, while research and development investment lags even more.
Market researcher Morningstar concluded in a 2010 analysis of the country's agricultural equipment market that "modernizing Russia's aged fleet could generate upwards of $60 billion in sales. As such, we think all major manufacturers could enjoy growth without viciously competing for market share."
Kuhn Vostok acknowledges, however, that competition has been tough.
"Bigger competition required us to increase support for our dealer network and to be more attentive to final customers' needs. This means we had to review some internal procedures in order to be able to react quicker to customers' needs," Raimbault said.
Also, "customers are buying machines they know. Therefore we are putting a high focus on presenting and exhibiting our machines at different shows and field events," the Kuhn Vostok executive said.
IndexBox has predicted that the market will recover in the short term because the farming sector is recovering from both the crisis and the drought, while credit policies are liberalizing and pent-up demand is emerging. It estimated that pre-crisis figures can be reached by 2014 or 2015.
Now that the darkest days for the agricultural equipment market seem to be behind Kuhn Vostok and the foreign producer market, Raimbault is looking at the future optimistically. He believes that Russia will soon return to its pre-crisis annual growth.
"Three years later [following the start of the crisis], it seems to me that we have faced this challenge quite well," he said.
"We managed to extend our dealer network and are present in the most important agricultural regions of the Russian Federation, which allows us to increase our sales and benefit from the 'after crisis' growth," he added. "In 2011 we are expecting our sales to double. For the next two to three years we are expecting strong growth."
Kuhn has a significant presence in central and southern Russia — in Kazan and Krasnodar — which are agricultural strongholds. Kuhn is also eyeing the Volga region, the area near the Urals and parts of Siberia as potential markets.
"Sales in the Commonwealth of Independent States are expected to see notably stronger gains from the previous year's depressed level," John Deere said in an earnings statement in May. "Farm conditions are strengthening in the European and CIS markets."