PERSPECTIVE NOVEMBER 2013

RACE TOWARDS
MECHANIZATION
OF THE FARMS
A SYNOPSIS OF
THE CHINESE AND
ASEAN AGRICUL
TURE MACHIN...
Race towards mechanization
of the farms: a synopsis of the chinese
and Asean agriculture machinery
market
Published by
Val...
CONTENTS

		

OVERVIEW 	

5

		 MARKET EVOLUTION AND OPPORTUNITIES 	
		 IN CHINA AND ASEAN

7

		 OPPORTUNITIES IN CHINA A...
China is the most promising
country for the agricultural
machinery industry, with an
increasing demand for largersized mac...
OVERVIEW

LAST YEAR, MORE AGRICULTURAL MACHINES WERE SOLD
IN CHINA THAN IN ANY OTHER NATION IN SOUTH-EAST ASIA,
WHEREAS TH...
IN THIS REPORT, WE FIRST ANALYZE THE AGRICULTURAL
MACHINERY INDUSTRY IN THE CURRENT CHINESE CONTEXT
AND THEN GO ON TO COMP...
MARKET EVOLUTION
AND OPPORTUNITIES IN
CHINA AND ASEAN
China and ASEAN, where more than half
of the land is dedicated to ag...
Exhibit 1
Twenty years of cultivated land increase and improved efficiency
in production yields in China and ASEAN
Cereal ...
Crop cultivation across ASEAN
and China

China vs. ASEAN
Elements of comparison

Despite partial shifts, particularly near...
According to our analysis, China is
the most promising country for the
agricultural machinery industry, with
an increasing...
OPPORTUNITIES IN CHINA
AND IMPLICATIONS
FOR INDUSTRY PLAYERS
Healthy industry growth
and increasing demand for
modern mach...
Exhibit 2
Agricultural Machinery – China, expected revenue
market size (USD billion, 2012-2017e)

Exhibit 3
Agricultural m...
Continued government support
to mechanize agriculture and boost
food security
Moreover, as part of China’s latest
five-yea...
Exhibit 5
Main Foreign Agricultural Machinery companies
First establishments in China

COMPANY

COUNTRY
OF ORIGIN

YEAR AN...
Since their initial entry and establishment, the majority of international firms
have enriched their product offerings’ va...
KEY CONSIDERATIONS FOR
INTERNATIONAL MACHINERY
MANUFACTURERS IN CHINA
1. Service contracting is the most
viable entry poin...
3. Direct ownership of distribution
channels is key to ensure capillarity
and reach

4. A carefully defined marketing
and ...
Exhibit 6
ASEAN – Analysis of the Countries’ main drivers in the Agricultural
Machinery Industry

Market Size
5

4

Purcha...
BRIEF OVERVIEW OF
OPPORTUNITIES IN ASEAN
AND IMPLICATIONS FOR
PLAYERS
Market size to continue steady growth
Having previou...
Exhibit 7
China vs. ASEAN – Level of Farm Mechanization
(Hp / hectare, 2012-2013)

4,10

1.30

ASEAN - Area of Analysis

2...
Political support to boost food
production
Local governments are trying to support the agricultural machinery industry
thr...
HIGLY
FRAGMENTED

FRAGMENTED

RELATIVELY
FRAGMENTED

RELATIVELY
CONCENTRATED

INDONESIA

VIETNAM

PHILIPPINES

LEVEL
OF CO...
Mildness of competition leaving space
for new entrants’ opportunities
Among ASEAN, the competitive landscape for the agric...
In Thailand, even though some steps are
being made towards increasing credit
access to individual growers, the major
lendi...
Which is the next country ready
to take off?
Even though China still offers better
conditions for immediate successful
ent...
Exhibit 9
Thailand offers better perspectives in the near future
as valid candidate for market entry/expansion

COUNTRIES
...
Countries perhaps better positioned
than the Philippines to be considered at
this stage are Indonesia, Vietnam and
Malaysi...
CONCLUSIONS

Given the current context, it is expected
that, for western companies, new establishments of manufacturing an...
The political support is
generating its most concrete
results within China, where it is
contributing to boost agricultural...
AUTHORS

TAO LIN
Partner, Shanghai Office
tao.lin@valuepartners.com

ROGELIO BAKELS
Consultant, Hong Kong Office
rogelio.b...
ABOUT
VALUE PARTNERS

Value Partners is a global management consulting firm that works
with multinational corporations
and...
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Mechanization of farms 112013-digiversion

  1. 1. PERSPECTIVE NOVEMBER 2013 RACE TOWARDS MECHANIZATION OF THE FARMS A SYNOPSIS OF THE CHINESE AND ASEAN AGRICUL TURE MACHINERY MARKET Tao Lin, Rogelio Bakels, Luca Borroni
  2. 2. Race towards mechanization of the farms: a synopsis of the chinese and Asean agriculture machinery market Published by Value Partners Management Consulting Fortune Gate Office Building, 1701 Beijing (W) Rd, 200040 Shanghai, China November 2013 Written and edited by: Tao Lin, Rogelio Bakels, Luca Borroni If you would like an electronic copy or more information on the issues raised in the report please contact: tao.lin@valuepartners.com If you would like to subscribe or to be removed from our mailing list please write to: subscription@valuepartners.com valuepartners.com Copyright © Value Partners Management Consulting All rights reserved
  3. 3. CONTENTS OVERVIEW 5 MARKET EVOLUTION AND OPPORTUNITIES IN CHINA AND ASEAN 7 OPPORTUNITIES IN CHINA AND IMPLICATIONS FOR INDUSTRY PLAYERS 11 KEY CONSIDERATIONS FOR INTERNATIONAL MACHINERY MANUFACTURERS IN CHINA 16 BRIEF OVERVIEW OF OPPORTUNITIES IN ASEAN AND IMPLICATIONS FOR PLAYERS 19 CONCLUSIONS 28 AUTHORS PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS 30
  4. 4. China is the most promising country for the agricultural machinery industry, with an increasing demand for largersized machines (40+hp), enhanced by the growing trend of farm concentration, the expansion of farms cooperatives and the increase in land rental practices. 4–5
  5. 5. OVERVIEW LAST YEAR, MORE AGRICULTURAL MACHINES WERE SOLD IN CHINA THAN IN ANY OTHER NATION IN SOUTH-EAST ASIA, WHEREAS THE NUMBER OF CHINESE GROWERS WILLING TO INVEST IN ADVANCED AND MORE POWERFUL AGRICULTURAL EQUIPMENT GREW STEADILY TO AN UNPRECEDENT LEVEL. TOTAL SPENDING ON AGRICULTURAL MACHINES IN CHINA ALONE AMOUNTED TO USD4.3 BILLION IN 2012. MEANWHILE, ACROSS THE LESS MECHANIZED ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN), WHICH IS MADE UP OF BRUNEI, CAMBODIA, INDONESIA, LAOS, MALAYSIA, MYANMAR, PHILIPPINES, SINGAPORE, THAILAND AND VIETNAM, THE VALUE OF THE MARKET SIZE IS MUCH LOWER, COMPARED TO CHINA, AT JUST UNDER USD1 BILLION. HOWEVER, GROWTH IN THE DEMAND FOR AGRICULTURAL MACHINERY WITHIN THE REGION IS EXPECTED TO MAINTAIN ITSELF AT OVER 12% UNTIL AT LEAST 2016, THUS DEMONSTRATING THE UNTAPPED POTENTIAL FOR THESE COUNTRIES. NEVERTHELESS, A NEW STUDY BY VALUE PARTNERS SUGGESTS THAT CHINA PRESENTS BETTER OPPORTUNITIES FOR WESTERN PLAYERS TO ENTER OR TO EXPAND THEIR PRESENCE IN THE AGRICULTURAL MACHINERY INDUSTRY AT THIS STAGE. WHILE ASEAN CURRENTLY PROVIDE MORE CHALLENGING SCENARIOS, THEY ARE POSED TO BECOME VALID SUPPLEMENTS OR ALTERNATIVES TO CHINA IN THE NEAR FUTURE. PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS
  6. 6. IN THIS REPORT, WE FIRST ANALYZE THE AGRICULTURAL MACHINERY INDUSTRY IN THE CURRENT CHINESE CONTEXT AND THEN GO ON TO COMPARE IT TO THE MARKET SITUATION IN THE ASEAN REGION BY IDENTIFYING THE KEY ENABLERS AND CONSTRAINTS AFFECTING THE OBSERVED MARKET REALITIES. DATA USED FOR OUR ANALYSIS WERE COLLECTED FROM OFFICIAL AND INSTITUTIONAL SOURCES ACROSS CHINA AND ASEAN. 6–7
  7. 7. MARKET EVOLUTION AND OPPORTUNITIES IN CHINA AND ASEAN China and ASEAN, where more than half of the land is dedicated to agriculture, have historically been characterized by highly fragmented farms across their territories. Out of the world’s 500 million small farms (<2 hectares), China currently claims roughly 193 million (38.6%), followed by Indonesia with 17 million (3.4%) and Vietnam with 10 million (2%). The small size of the farms, which reflects low access to credit as well as high vulnerability towards climate conditions, in addition to low investments in infrastructure and mechanization, are at present unfavorable conditions for investment in ASEAN in the short term. The current outlook for China is instead more positive. The existing and improving level of infrastructure, together with political support in favor of the mechanization of the farms, as well as alternative sales channels and ease of access to different forms of credit from growers, are all factors that contribute to more stable and suitable conditions for foreign companies to enter and expand nowadays their investments in the country. PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS Over the last decade, governments within both ASEAN and China are responding in support of the agricultural industry through incentives and new, enhanced regulations in an effort to facilitate the development and modernization of the agriculture industry. The political support is generating its most concrete results within China, where it is contributing to boost agricultural productivity from crop fields, therefore creating more opportunities for manufacturers and suppliers of agricultural equipment. In the following sections, we provide a detailed summary of the most relevant key drivers of the industry and the level of subsidies provided by the different governments within both ASEAN and China.
  8. 8. Exhibit 1 Twenty years of cultivated land increase and improved efficiency in production yields in China and ASEAN Cereal Cultivated Land (hectares) and Yield (kg/he), 1989-2011 180 5000 4800 170 4600 160 4400 4200 150 4000 140 3800 3600 130 3400 Source: The World Bank, 1989-2011 2011 2009 2007 2005 2003 Cereal Yield 2001 1999 1997 1993 Land under cereal production 1995 1991 3200 1989 120
  9. 9. Crop cultivation across ASEAN and China China vs. ASEAN Elements of comparison Despite partial shifts, particularly nearby large metropolitan areas, from drycrop (cereals) to fresh-crop (fruit and vegetable) cultivation, the vast majority of crop fields in China and ASEAN are still mainly focused on the production of cereals, such as rice (mainly China, Indonesia, Vietnam, Thailand), wheat (China) and corn (China, Indonesia, Philippines). This geographical cultivation pattern is then reflected in the types of equipment demanded and utilized in agriculture across the different regions. The regions considered in this document (Vietnam, Thailand, Philippines, Indonesia and, partially, Malaysia) present differences in their respective levels of mechanization, valid key indicators to directly understand the production capacity trends of each individual country. Indirectly, the mechanization level measures the attention and efforts from local governments in securing a solid base of food production to satisfy the increasing local demand. During the past 20 years, the land cultivated with cereals in China and ASEAN achieved an overall increase from less than 160M (1989) to almost 175M hectares (2011), combined with an increase in the yield of cereals produced from around 3,400 kg/hectare (1989) to almost 4,800 kg/hectare (2011). The trend is clearly visible in the following chart which provides an overview of cultivated land and production yields over the last 20 years in the ASEAN and China regions. (See Exhibit 1) As of 2012, China presented a horsepower per hectare (hp/he) value of 4.1, which is significantly higher than any individual ASEAN country. The hp/he indicator tells us that China is further ahead, when compared with its neighboring countries, and suggests that there may be more need of agriculture equipment in less mechanized countries. However, there are other relevant factors which make us believe, on the contrary, that China expects to further increase its internal demand for agricultural machinery at a higher ratio than that of less mechanized countries, such as Philippines or Indonesia. At this stage, what creates expectation for the future of the agricultural machinery industry is better represented by numerous additional variables, including the future development of each country’s demographics, industry practices and consumption trends. PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS
  10. 10. According to our analysis, China is the most promising country for the agricultural machinery industry, with an increasing demand for larger-sized machines (40+hp), enhanced by the growing trend of farm concentration, the expansion of farms cooperatives and the increase in land rental practices. Moreover, the Chinese government is paying more attention to improving efficiency and increasing yield output for the agricultural sector through new policies focusing on: • Pushing for agricultural R&D input, encouraging innovation in agricultural production technologies • Boosting large-scale production, standardization and modernization of agricultural production processes • Encouraging sustainable agricultural resource utilization and environmental protection (energy saving and emission reduction) 10 – 11 Finally, China is by far the country which offers not only a high proportion of its output in dry-crop (more favorable to accommodate the shift from labor intensive to capital intensive), but also a larger amount of available arable land. Moreover, as we will see in the next section, the changing industry dynamics, more favorable to accommodate a relative free and open market, make China an easier target for foreign players to compete for a larger proportion of the expanding national agricultural machinery industry.
  11. 11. OPPORTUNITIES IN CHINA AND IMPLICATIONS FOR INDUSTRY PLAYERS Healthy industry growth and increasing demand for modern machinery Driven by robust growth in recent years, sales of agricultural machinery in China reached ~USD 3.3 billion in 2012 (up ~19% from 2011). The sector grew at an impressive rate of ~18% CAGR between 2008-12 as the amount of cultivated land expanded and due to strong Government support to mechanize agricultural processes and boost food production. Going forward, the development of the agricultural machinery industry is expected to remain healthy (growing at a rate of ~10% CAGR from 2012-17), indicating scope for major foreign players to make long-term investments in the country. (See Exhibit 2) Since policies to support the purchasing of agricultural machinery were introduced in 2004, the industry has made great strides. Demand for more powerful machines has expanded and total industry power has increased at a rate of ~6% between 2004-12 to reach ~999 million kw in 2012. Total industry power is expected to surpass ~1 billion kw this year, and is anticipated to maintain its healthy momentum in the coming years, growing at a rate of ~7% CAGR from 2012-15. (See Exhibit 3) PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS Overall, modernization has been the focal point of development in Chinese agriculture, and demand for high power and performance machinery has maintained strong growth momentum. Testament to this modernization is the increasing proportion of high horsepower tractors in use (ratio of large to small tractors changed from 1:4.1 in 2011 to 1:3.9 in 2012), which indicates strong scope for established foreign players to capitalize on these market opportunities.
  12. 12. Exhibit 2 Agricultural Machinery – China, expected revenue market size (USD billion, 2012-2017e) Exhibit 3 Agricultural machinery – China KW power trend (million kw, 2011-2015e) 10% 6,4 1,223.0 2015e 2014e 1,117.6 2013e 999.0 2017e 2015e 2016e 977.0 1,056.0 * 2012 5,4 2011 5,9 2014e 4,8 2013e 2012 4,3 8% 7,0 CAGR Exhibit 4 China Central Government subsidies budget for the purchase of agricultural machinery SUBSIDIES (RMB BILLION) 2007 2008 2009 2010 FULL YEAR 2 4 13 15.5 2012 2013 11 1ST STAGE 2011 13 20 17.5 21.5 2014 2015 ~61 Total expected subsidies of RMB100 Billion (2011-15) Source: Marketline, China Ministry of Agriculture, VP Analysis Note: *Unofficial 12 – 12
  13. 13. Continued government support to mechanize agriculture and boost food security Moreover, as part of China’s latest five-year plan (2011-15), the Central Government is committed to improve agricultural mechanization in order to boost food production and ensure food security for its citizens. Total agricultural subsidies are expected to reach ~RMB 100 billion (~USD 16 billion) over a five-year period by the end of 2015, and are focused on growing the importance of high powered machines and tools. For example, the subsidies for tractors in China are as follows (see also Exhibit 4): • Small-Medium tractors (<100 hp): – Base subsidy of 30%, with exception of growers in areas affected by earthquakes (up to 50%) – Maximum value of subsidy of RMB 50,000 (<USD 8,000) • Large tractors (>100 hp): – Maximum value of subsidy extended to RMB 120,000 (~USD 20,000) Strong support from China’s Central Government to modernize and mechanize the agricultural sector therefore provides foreign companies with ample scope to capitalize on these market opportunities. PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS Industry development and market dynamics concerning strong market potential, and proliferation of international firms China’s strong market fundamentals have not gone unnoticed by major international players. International agricultural machinery corporations are increasingly entering and expanding their manufacturing facilities in China, and contribute to the development of a healthy market by bringing in great improvements through innovative technologies and service capabilities. The “long-tail” of inbound investments commenced at the end of the ‘90s, with Japan’s Yanmar (1997) and Kubota (1998) and US-Italian player Case New Holland (1999) leading the pack as firstmovers. Since then, 12 of the world’s largest agricultural machinery companies have entered the Mainland, either by establishing wholly-owned subsidiaries (e.g. ISKEKI, SAME Deutz-Fahr) or through joint ventures with local enterprises (e.g. Mahindra, TangYang). (See Exhibit 5)
  14. 14. Exhibit 5 Main Foreign Agricultural Machinery companies First establishments in China COMPANY COUNTRY OF ORIGIN YEAR AND PLACE ESTABLISHMENT IN CHINA MAIN FOCUS 1997 (JIANGSU) Rice combine harvesters, high-speed rice transplanters 1998 (SUZHOU) 1999 (HARBIN) 100-200 Hp tractors product line 2000 (TIANJIN) 20-120 Hp tractors product line 2001 (JIANGSU) High performance rice transplanters, and harvesters 2005 (JIANGLING) 15-80 Hp tractors product line 2006 (CHANGZHOU) Combine harvesters, rice transplanters 2006 (URUMQI) High-powered tractors 2007 (DALIAN) 80 Hp tractors 2007 (NANJING) Semi-feeding combine harvester, high-speed rice transplanters 2009 (CHANGZHOU) Small-Medium Hp tractors 2009 (QINGDAO) 14 – 14 Combine harvesters, rice transplanter 51-100 Hp tractors
  15. 15. Since their initial entry and establishment, the majority of international firms have enriched their product offerings’ value proposition to differentiate themselves, in order to face the growing competition. International agricultural equipment manufacturers have diversified their product offerings away from solely tractors to also include combine harvesters and transplanters. This trend is expected to continue going forward, and coupled with supportive policies from China’s Central Government, there are great opportunities for new entrants and for further expansion of existing players. In fact, some of the major international players have recently expanded both their manufacturing facilities and dealer channels in China. Firms are also increasingly augmenting their value propositions to customers, by providing them with a holistic range of ancillary services, including training and financial aid, amongst others. American company John Deere for instance opened a new plant for the production of large agricultural equipment near Harbin in 2012. US-Italian manufacturer CNH followed suit, as it began construction of a ~USD 90 million manufacturing plant in Harbin earlier this year. Upon completion, the 400,000 sqm facility will produce high horsepower tractors, sprayers, combine harvesters and other machinery featuring advanced technology. Moreover, in order to better address the market modernization drive and growing demand for powerful and efficient machinery, both foreign and local manufacturers have started to introduce technologically advanced agricultural machinery to their basic offering (e.g. YTO introduced a 380 Hp tractor to its product line in 2009). PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS Overall, future market potential for agricultural machinery in China is sound, and provides manufacturers with ample scope to capitalize on emerging opportunities.
  16. 16. KEY CONSIDERATIONS FOR INTERNATIONAL MACHINERY MANUFACTURERS IN CHINA 1. Service contracting is the most viable entry point for Western manufacturers 2. Chinese customers are highly price sensitive The three main market segments for agricultural machinery in China are state farms, large land contractors, and private service contractors. Westerns companies, such as John Deere, have most of their customers in the private service contractor segment, since most of the Chinese growers do not possess farmlands large enough to justify direct investment in machinery. Instead, they are more willing to pay a small fee to service contractors in exchange of services including plowing, planting, tilling, and harvesting for their small farming acres. When targeting potential Chinese customers for agricultural machinery it is key to understand what their trade-off between quality and price is, and take into consideration their high price sensitivity. According to L.L., Senior manager of a USD multi-billion heavy machinery international firm (June, 2013): “several manufacturers of heavy machinery (both local and foreigners) across different industries, realized that Chinese customers are very price sensitive as a result of their short-term business orientation, and reacted accordingly”. In China, the government’s support efforts to boost grain production and promote land concentrations, are keeping the demand for agricultural machinery very high, particularly for larger horsepower tractors. However, this government support risks to falsify the normal seasonality of the industry sales, affecting the reliability of the forecasts thus creating risks of overcapacity for the market players. As a consequence, major manufacturers of agricultural machinery are forced to draw from seasonal part-time hiring as strategy to lower their risk of labor overcapacity. 16 – 17 In fact, during the procurement activity, particularly for non-critical components, the preference of manufacturers goes in favor of cheaper supply and lower quality components. As an example, a tube-shaped connector that traditionally is manufactured by using steel or other metals, would be substituted by a similar one made with plastic, as far as it doesn’t affect the functionality and safety of the whole equipment. This “downgrading” process takes place as much in construction machinery as it does in agricultural machinery.
  17. 17. 3. Direct ownership of distribution channels is key to ensure capillarity and reach 4. A carefully defined marketing and branding strategy is essential to influence customers To compete in the dynamic and fast growing Chinese market, quick access to a developed local distribution channel is a key component for success for Western manufacturers. Since building access to the market from scratch is very difficult, finding a local partner is one option; but since most partners usually work with a number of domestic suppliers, this weakens the bargaining power of the Western manufacturer and may result in lower profit margins with no guarantee of long term orders. For Western manufacturers who have already gained scale and market position, direct ownership of local sales and distribution channels, possibly through acquisition, may be a better option. Generally, companies in the after-market are easier acquisition candidates than those in the OEM market. Finally, as in most countries, advertising needs to be adapted and tailored to local conditions, considering the different type of segmentation and customer targets. In China, those targets include dealers and government officials as well as “traditional” final end-users (landowners and local cooperatives). To enhance awareness of its brand in China, it is particularly recommended for foreign agricultural machinery companies to provide potential clients with technical demonstrations during exhibitions and country fairs. This should help customers to have more confidence with the new equipment and learn how to efficiently use it. Branding is also exceptionally important in China due to its fierce internal competition, relatively inexperienced buyers and generally untrustworthy quality standards. A famous brand name lifts buying impulse, makes purchasing decisions easier and is sometimes considered a status symbol, even for B2B products such as agricultural machinery. A sound brand name helps companies to establish and better communicate its values. The name ought to be unique, bombastic and pertinent to either the product category and/or the customer benefits. Brands with Chinese names are well recognized, more commonly searched on the Internet and offer more protection from potential imitators. PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS
  18. 18. Exhibit 6 ASEAN – Analysis of the Countries’ main drivers in the Agricultural Machinery Industry Market Size 5 4 Purchasing Propensity for new machineries 3 Mechanization Level 2 1 0 Access to Credit and Infrastructure Midness of Competition Political Support Indonesia Philippines Thailand Vietnam Malaysia 18 – 15
  19. 19. BRIEF OVERVIEW OF OPPORTUNITIES IN ASEAN AND IMPLICATIONS FOR PLAYERS Market size to continue steady growth Having previously stated that China represents the best opportunity at present, there are some key ASEAN nations which can provide good opportunities for market entry and/or for growth within the agricultural machinery industry in the long run. All of them show different characteristics and key drivers for success, therefore deserving special attention and consideration on a country-by-country analysis. In our analysis, we broke down each category/driver to identify the current status for each of the ASEAN nations we observed. (See Exhibit 6) While the agricultural machinery market value for China in 2012 was set at USD4.34 billion, more than one third of the total Asia-Pacific value (USD12.2 billion), the combined value for the other observed ASEAN markets (Thailand, Vietnam, Malaysia, Indonesia, Philippines) was USD0.97 billion (7.95% of the total Asia-Pacific value). More specifically, the market size was USD470 million for Indonesia, USD210 million for Thailand, USD110million for Vietnam, USD100million for Philippines and USD80million for Malaysia. Official sources estimate overall growth for the agricultural machinery market in China and ASEAN for the period 20122016 to have a CAGR of 12.1%. Level of mechanization in Thailand and Vietnam setting a benchmark Official sources estimate overall growth for the agricultural machinery market in China and ASEAN for the period 2012-2016 to have a CAGR of 12.1%. PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS In terms of farm mechanization levels, the situation of the agricultural machinery industry among ASEAN countries is progressing, but the gap with the “Giant China” is still significant. In contrast with China, which enjoys a farm mechanization rate of 4.1 hp/ha, ASEAN countries have a range mechanization rates from 1.56 hp/ha (Thailand, Vietnam)to 1.23 hp/ha (Philippines), with Malaysia and Indonesia lying in between at a rate of 1.3 hp/ha. (See Exhibit 7)
  20. 20. Exhibit 7 China vs. ASEAN – Level of Farm Mechanization (Hp / hectare, 2012-2013) 4,10 1.30 ASEAN - Area of Analysis 20 – 20 1.23 PHILIPPINES VIETNAM THAILAND CHINA 1.30 INDONESIA 1.56 MALAYSIA 1.56
  21. 21. Political support to boost food production Local governments are trying to support the agricultural machinery industry through several different forms of subsidies and incentives in order to accelerate the modernization rate of the farms within their respective countries. In the Philippines, the Department of Agriculture is targeting to reach a farm mechanization rate at par with neighboring countries within five years. In order to achieve its goal, the government set a generous farm modernization program, providing subsidies up to 85 percent of the acquisition costs of farm machinery. However this program is targeting only qualified farming organizations. In Thailand, the “Thailand Board of Investment” offers a wide range of fiscal and non-tax incentives for investments based on location. Tax-based incentives include exemption or reduction of import duties on machinery and raw materials, and corporate income tax exemption and reduction. In Indonesia, the subsidies provided by the government are not very high. Some of them include USD3 million in support in 2010 to improve the development of agricultural infrastructure for six of the major sugar producing companies. The subsidy covered up to 10% of the companies’ expenditure in renewing outdated machinery equipment. PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS In Vietnam, since 2008 the government has introduced policies in favor of loans concessions (up to 80% of the total investment) at very low rates and with at least three years to maturity. Moreover, since 2010, the taxation on imported agricultural machinery has been reduced to less than 5%. In Malaysia, the goal of the government is to focus exclusively on efficiency by increasing the yield outcome and promoting large production based cultivations. There is no direct financial support in favor of growers as the efforts made in favor of providing higher education to create more specialized and skilled human resources.
  22. 22. HIGLY FRAGMENTED FRAGMENTED RELATIVELY FRAGMENTED RELATIVELY CONCENTRATED INDONESIA VIETNAM PHILIPPINES LEVEL OF COMPETITION MALAYSIA Exhibit 8 ASEAN – Competitive Landscape – Major foreign players RELATIVELY CONCENTRATED Source: Value Partners analysis 22 – 22 THAILAND KEY FOREIGN PLAYERS
  23. 23. Mildness of competition leaving space for new entrants’ opportunities Among ASEAN, the competitive landscape for the agricultural machinery market offers different levels of intensity (See Figure 8). In Indonesia the market is very fragmented with several major foreign companies including Yanmar, Errepi, Landini, Kinta, Iseki, MTZ, Mahindra and Kubota. A contrary situation is present in Thailand, where Kubota is a primary foreign company well-established in the country (more than 50% market share), with Yanmar and Mitsubishi recently entering the market. In the Philippines, Kubota, Landini and New Holland are equally competing each other while in Vietnam, Kubota and New Holland are mainly competing with Yanmar and MTZ. In Malaysia, the foreign players contending one another are Caterpillar, Yanmar, Errepi, Landini, Massey Ferguson and Kinta. (See Exhibit 8) PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS Low access to credit and poor infrastructure keeping the potential untapped In Indonesia, only 25% of growers possess a formal ownership certificate, a necessary element to access forms of credit in order to afford investments in improved technology and machinery. Moreover, the country has suffered from a high deterioration of rural infrastructure facilities (only 19% of the road network is considered in good condition), and an underdeveloped microfinance system, making it hard to access credit and invest in modern machinery technology. In the Philippines the scenario is very similar, where environmental degradation and a lack of infrastructure have resulted in a weak agricultural manufacturing industry. Despite an improving microfinance system, access to credit is still very low, if not just limited to larger growers. In Vietnam, the local authority has used the increased availability of credit as a powerful tool for poverty reduction and to promote agricultural production. There exist three major formal lenders providing credit to the rural area, namely Vietnam Bank for Agricultural Development, Vietnam Bank for Social Policies and People Credit Funds. In the period 2005-2010, average growth rates of outstanding loans of VBARD, VBSP and PCFs were 24.5%, 33% and 30%, respectively (HDSB, 2010).
  24. 24. In Thailand, even though some steps are being made towards increasing credit access to individual growers, the major lending institution, Bank of Agricultural Association and Cooperatives, is still specifically mandated to lend mainly to grower cooperatives and organizations at relatively high interest rates. In Malaysia, rural households have been introduced to debt through loans and credit cards as a means to acquire goods and services to increase their standard of living, creating a debt trap. This burden is partly to be blamed on the lack of micro-SME development, due to the inability to pursue opportunities because of the lack of capital. Purchasing propensity for machineries mostly focusing on rice cultivations In Indonesia, agricultural output is mainly composed of rice (36.5 mmt) and corn (8.85 mmt), which is produced almost exclusively by small farms, the majority of which do not exceed 1.5 hectare. The main forms of agricultural machinery used within the country are tractors, combine harvesters and rice transplanters. In the Philippines, agricultural output is mainly focused on sugarcane, rice, coconut and corn. Most of the farms are smaller than 2 hectares. Among cereal agricultural cultivations, rice and corn are the most mechanized. 24 – 25 In Vietnam, rice is by far the most relevant product (27.15 mmt), followed by corn (4.65 mmt). It is estimated that Vietnam is provided with 0.5 million tractors, averaging 10hp/tractor. The average small size of tractors in Vietnam is justified by the extremely extensive presence of small farms and the country’s constraints against landsconcentration. In Thailand, 50% of the land is allocated to rice cultivation. During the harvesting period, the use of threshing machines is very intense, as well is the use of mechanical dryers and transplanters. The average size of farmlands is extremely small due to high land rental and the limited size of farms plots. In Malaysia, the agriculture industry’s main output products are rubber, palm oil and rice. The country has 300,000 rice growers (2009) cultivating a 672,000 hectare land, averaging 3.66mt/ha. The government’s efforts in promoting large production based cultivations aren’t yet having concrete results. Buyers’ focus is more set on increasing yields rather than increasing the size of farmlands.
  25. 25. Which is the next country ready to take off? Even though China still offers better conditions for immediate successful entry into the agricultural machinery industry, ASEAN countries can be also valid candidates for enter of expansion in the near future. Despite their geographical proximity, they are very diverse and characterized by different positive and negative aspects that make it necessary to consider them on a oneby-one basis. In fact, importing machineries from outside is relatively expensive due to high import taxes, but producing internally and investing strongly in marketing activities will offer undoubted benefits to compete in a largely rice-driven market with only one foreign player (Kubota) currently well established in the market, with two more (Yanmar and Mitsubishi) in the process of challenging its future leadership. As summarized in the following table, each ASEAN country shows good potential for future success. However, each country has a certain constraints posing as threats to the immediate profitability of new large investments in the industry while also limiting the current potential from being fully exploited. (See Exhibit 9) It will take some time to create the right awareness among buyers and to position as a valid alternative to the existing and the newly entered competitors but the outcome can be rewarding in the long run. The next country that is likely to takeoff is Thailand, whose main constraints are related to the competitive landscape. Entering the market will require high fixed costs, particularly regarding manufacturing facilities, marketing and promotion. PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS The opposite situation is currently present in the Philippines. The country is relatively large and the government’s main focus is to align the internal mechanization level of the industry to that of neighboring countries. However, the current level of environmental degradation and lack of infrastructure are posing serious risks on the sustainability of the agriculture industry and therefore on the agricultural machinery sector. Moreover, in order to improve growth in the level of mechanization, the government needs to make more effort to push for consolidation of the farms and extend the current subsidies more in the direction of individual growers, rather than just focusing on farming organizations.
  26. 26. Exhibit 9 Thailand offers better perspectives in the near future as valid candidate for market entry/expansion COUNTRIES PROXIMITY TO TAKE-OFF ENABLERS • Current market size above ASEAN average • High level of mechanization • Lending institutions making steps towards individual farmers • High use of rice-driven machinery • Largest market size • Relative high use of tractors and combine harvesters • Very fragmented competition with space for integration INHIBITORS • Currently high barriers from competitive landscape with established Kubota almost monopolizing the market as key keader foreign player • High land rental costs • Not yet mature from mechanization level perspective • Required ownership certificate to access credit • High level of mechanization • Extensive use of small-sized tractors • Political support in favor of access to credit and low taxation on imported machinery • High constraints against land concentration • Fragmented competition without strong leadership • Government push for large production not concretized (yields focus) • Advanced technology very welcomed among farmholders • Relative small market size among ASEAN • Rice and corn are the most mechanized cultivations in the counrty • Very immature market from mechanization level perspective • Farmers trapped into debts due to lack of micro-finance system • Subsidies targeting mainly farming organizations • Lack of infrastructure and environmental degradation 26 – 26
  27. 27. Countries perhaps better positioned than the Philippines to be considered at this stage are Indonesia, Vietnam and Malaysia. Indonesia is not only the largest market, but it is also the one in which the competition is the most fragmented. This scenario offers additional opportunities, either through integration or direct entrance through acquisition. What is currently limiting the expansion of the agricultural machinery industry in Indonesia is the current need of a land ownership certificate in order to gain access to credit. Only then growers are able to afford new tools and improved equipment to work the land. This constraint is limiting the expansion of individual growers’ output since they are not able to fully benefit from “landrental leverage” strategies. Vietnam, similarly to Indonesia, is facing constraints against land concentration. However, the access to credit is easier and the taxation on various types of imported agricultural machinery is very low (5%) making it convenient for foreign players to import from overseas rather than establishing production facilities (along with high fixed costs) in the country. PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS The current situation in Malaysia is very unusual. Competition is fragmented and high technology and modern machineries are welcomed. On the other side, the market is very small and the future of the agriculture is at risk due to the high industrialization level which the country is set on. Moreover, many growers are trapped into debt issues and thus cannot afford new investments on machineries and farming equipment.
  28. 28. CONCLUSIONS Given the current context, it is expected that, for western companies, new establishments of manufacturing and selling activities for agricultural machineries will be challenging within ASEAN. The main problems are generally related to the small average size of the farms, poor existing infrastructure and low access to credit. There are signs of improving opportunities in the industry, supported by increased spending by local governments to accelerate the mechanization of the farms. However, building a sustainable strategy for ASEAN markets will require time, necessary for the local governments to solve and remove some of the constraints which are preventing the different local agricultural machinery industries to fully take-off. Considering China, although several foreign players have already established themselves in the Mainland market, either through direct entities or through JVs with local manufacturers, the expected continuous growth of the agricultural machinery industry leaves space for many new opportunities. 28 – 29 For example, the growth of the highpower tractor segment, which is higher than the growth rate of small-sized tractors, is driven by changes in the ways the agriculture sector is developing nowadays. The more extensive use by growers of agricultural service companies is changing the shape of the traditional agriculture context in China, where investment in mechanization was once mainly dependent on growers’ income and access to credit.
  29. 29. The political support is generating its most concrete results within China, where it is contributing to boost agricultural productivity from crop fields, therefore creating more opportunities for manufacturers and suppliers of agricultural equipment. PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS
  30. 30. AUTHORS TAO LIN Partner, Shanghai Office tao.lin@valuepartners.com ROGELIO BAKELS Consultant, Hong Kong Office rogelio.bakels@valuepartners.com LUCA BORRONI Consultant, Shanghai Office luca.borroni@valuepartners.com 30 – 31
  31. 31. ABOUT VALUE PARTNERS Value Partners is a global management consulting firm that works with multinational corporations and high-potential entrepreneurial businesses to identify and pursue value enhancement initiatives across In 2007 Value Partners acquired Spectrum Strategy Consultants – a leading UK company specialized in publishing, broadcasting, entertainment, IPTV and mobile – thus further strengthening its international pres- innovation, international expansion, and operational effectiveness. ence. Today Value Partners is a leading advisor in the telecom, media and technology sectors worldwide. Founded in Milan in 1993, Value Partners’ rapid growth testifies to the value it has created for clients over time. Today it draws on 25 partners and 280 professionals from 23 nations, working out of offices in Milan, London, Istanbul, São Paulo, Buenos Aires, Beijing, Shanghai, Hong Kong and Singapore. For more information on the issues raised in this note please contact the authors. Find all the contact details on valuepartners.com Milan London Istanbul São Paulo Buenos Aires Beijing Shanghai Hong Kong Singapore Value Partners has built a portfolio of more than 350 international clients from the original 10 in 1993 with a worldwide revenue mix. Value Partners combines methodological approaches and analytical frameworks with hands-on attitude and practical industry experience developed in an executive capacity within each sector: telecommunications, new media, financial services, energy, manufacturing and hi-tech. Copyright © Value Partners Management Consulting Limited All rights reserved

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