From plows to worldwide conglomerate
In 2012, Deere & Co., Moline, Ill., is in a celebratory mood. This year, the company marks the 175th anniversary of its founding, when the company’s namesake, John Deere, successfully manufactured and marketed the self-scouring plow in 1837.
Deere moved from his home in Vermont to start a small blacksmith shop in Grand Detour, Ill., and later moved the business to Moline, where the world headquarters is located today. The company incorporated as Deere & Co. in 1868.
The company has come a long way since then, having transformed into one of the world’s largest manufacturers of agricultural and forestry equipment as well as construction and turf care equipment, employing more than 60,000 people worldwide.
For 2011, the company reported record income of $2.8 billion on net sales and revenues of $32 billion and Deere aims to achieve the lofty goal set last year by Sam Allen, Deere’s chairman and CEO, of doubling its sales related to a base year of 2010 to reach $50 billion by 2018.
“As our recent performance shows, we’re making good progress,” Allen told shareholders at the company’s 2012 annual meeting in Moline on Feb. 29, 2012.
“In spite of recessionary pressures of recent years, we have achieved earnings records in six of the last eight years — and broke through the old mark by almost $1 billion in 2011,”
Allen’s growth expectations are founded on the world’s population gaining in size and affluence, impacting the need to increase farm production proportionally as well as require further advances in farming mechanization, technology and productivity.
At the same time, people in emerging markets are moving to cities, which means the need for more mechanization on farms and an increase in construction of infrastructure, such as roads, bridges and buildings.
“Make no mistake. These trends are big and bold and powerful. What’s more, we believe they are sustainable and thus should support healthy demand for innovative farm, construction, forestry and turf-care equipment well into the future,” Allen told shareholders.
As a result, in the last year, Deere has announced plans to establish seven factories to support growth in Brazil, Russia, China and India. However, Allen also made it clear that the United States plays a large role in the company’s global expansion.
“Our domestic manufacturing operations are efficient, profitable and growing — and we’re committed to keeping them that way. In 2011, we made further upgrades at our major production facilities in Davenport, Des Moines and Waterloo, Iowa,” Allen said.
Recognition of the company’s 175th anniversary began recently when the John Deere Foundation made a $175,000 grant to help fund Feeding America’s BackPack Program that provides children nutritious and easy-to-prepare food they need over the course of a weekend.
Various Deere business units around the world will recognize the anniversary for employees as the year progresses. In addition, as part of its booth at The Rental Show 2012 in New Orleans, Deere had a plow on display to help mark the company’s 175th anniversary and served birthday cake on Feb. 7, which was the birthday of the company’s founder in 1804.
Mack outlines company strategy for rental
Editor’s note: Mike Mack has been president of the Worldwide Construction & Forestry Division of Deere & Co., Moline, Ill., since June 2009. His family connections to Deere are many as his father was a tractor engineer for the company in Waterloo, Iowa, and his mother worked at Deere’s Dubuque, Iowa, factory. He has an uncle who worked for Deere and his brother and cousin still work for the company. “This multi-generational connection to the company is not that unusual at Deere. The company culture reflects very strong values and, as a result, we enjoy tremendous loyalty from our employees, dealers and customers,” Mack says. However, after he received his bachelor’s and master’s degree in mechanical engineering from Iowa State University, he went to work for Hewlett-Packard as a design engineer on desktop computers. He later earned his master’s in business administration from the University of Chicago and then sought out a position with Deere and was hired. He worked in a variety of divisions and locations, and was Deere’s chief financial officer from 2006 to 2009 before becoming president. Mack spends much of his time on the road and recently discussed his outlook for construction and the equipment rental industry with Rental Management. An edited transcript of the interview follows:
RM: The Construction & Forestry Division at Deere has rebounded. What do you attribute to the turnaround?
Mike Mack: There are a few factors driving this. Most importantly are the age and condition of the working populations of customer machines. Following the economic downturn in 2008, many customers stopped purchasing equipment altogether. Even with lower volumes of work for our customers, demand is being driven by some equipment replacement needs. In addition, some segments of the industry — like energy and agricultural applications — are quite active and experiencing significant growth and consequent machine requirements. Closer to home, the rental industry is experiencing resurgence. Not only are there replacement requirements, but we believe there is some growth as customers are renting more than in the past. We benefit from helping to fill this need through our sales to independent rental companies.
RM: How does the equipment rental industry factor into Deere’s strategy?
Mack: Serving the rental market is a key component of our strategy. We aspire to be the choice of equipment to the rental market via sales to the independent rental companies.
RM: Caterpillar has Cat Rental Stores. Volvo has a franchise-owned and now a company-owned network of stores. Why hasn’t Deere followed a similar path?
Mack: Our strategy is to be the brand of choice in the rental industry through our relationships with the independent rental companies. While our dealers do participate in rental it is usually more long-term rental-purchase and they support the independent rental companies for the rent-to-rent business.
RM: What are your key concerns today?
Mack: Many of the indicators from the general economy indicate softness and uncertainty. The list is well known: reduced expectations for GDP [gross domestic product] growth, downgrading of the U.S. debt rating, a dysfunctional U.S. legislature and government, a lack of confidence and a European debt crisis. More directly related to our industry, the housing sector weakness is the most notable concern. On the other side of it, we also should note that many of the channel signals are pretty positive, albeit with somewhat easy comparisons to a year ago. Retail sales are up sharply, industry inventory levels are still pretty lean, used equipment pricing is firming and, significantly, rental utilization, an important leading indicator, is headed in the right direction. The independent rental companies are purchasing equipment and that is a very good sign. Longer-term, another positive for our industry is growing recognition of the need to upgrade and invest in infrastructure. The challenge will be gaining alignment in this political and budget environment.
RM: How have Tier 4 regulations changed the industry and your division?
Mack: Meeting the Tier 4 engine emission regulations involves a lot of costs for manufacturers and for customers. Engineering and capital investments for the manufacturers are very significant and these programs create a large workload on every aspect of the business operations, including engineering, manufacturing and product support. We have focused on ensuring the customers have a good experience with the products. From a customer perspective, the additional after-treatment components add product costs for all of the industry competitors. Deere has worked hard to communicate the Tier 4 issues with customers and to train dealer service personnel for the new technology. Deere is fortunate to have its own engine design and manufacturing capability to provide a more integrated solution for engines in our vehicles. This helps us provide better solutions for packaging components, managing technical issues and delivering the vehicle performance customers demand. The Construction & Forestry Division, as part of the larger Deere enterprise, leverages the larger investments and test hours to deliver a quality solution with high reliability.
RM: Deere also has an extensive sustainability program. Why and what are the benefits?
Mack: For a sustainability program to be viable, it must be both good for the environment and make economic sense for business and for customers. At Deere factories, we carefully monitor waste, water consumption, energy usage and air quality, and we set aggressive goals to improve in these areas over time. Executed properly, many of these initiatives also will yield savings.
On the product side, complying with engine emission regulations is the most obvious example, but in this case, it is a matter of meeting legal requirements. Deere also is developing products that will feature electrification in our drive systems. These products will provide substantial fuel efficiency improvements with the resulting environmental benefits as well as economic benefits for customers. Yet another example of supporting sustainability is Deere’s growing remanufacturing business. Reusing component cores allows high quality products to be produced with much lower raw material and energy inputs, with benefits to the environment. For customers and dealers, this provides lower-cost, high-quality components to extend the lives of vehicles.
RM: What is your current short-term and long-term outlook for Deere and for the equipment rental industry?
Mack: The short-term prospects for the industry are very good because of the need to replenish an aging fleet of customer machines. On top of this demand, because of the stressed balance sheets of some customers coming through the downturn and an overall climate of uncertainty, renting is an intelligent way for some customers to manage the risk of ownership. Longer-term, many of these benefits of renting will persist for managing risks. It is a way to transform fixed expenses into variable expenses. The degree to which customers choose to do this will still depend on the demand they see in their business, their financial condition and where we are in the business cycle.
RM: What is your sales pitch? Why should equipment rental stores carry John Deere equipment?
Mack: We have a dedicated rental marketing group that understands the rental store business. We have a product line that is a great fit for the rental needs. Our trusted brand contributes to high rentability. We have a dealer network trained and ready to support the rental stores and our strategy is just that — to participate in equipment rental demand by serving the needs of the independent rental companies.
RM: What do you see as the division’s greatest achievement or innovation over the last five years?
Mack: Two achievements stand out. First, Deere has developed a world-class order fulfillment system that has led to being a more nimble provider of products to dealers and customers. It has helped us achieve financial success with better asset turnover by being more responsive, and ensures customers and dealers get the right product, where they want it. Secondly, I would mention the strengthening of our dealer distribution channel. Dealer consolidation and channel management has led to larger, more professional and more technically capable dealers. Their balance sheets are much stronger, which was extremely helpful in Deere coming through the last industry downturn
in much better shape than most of the industry.
RM: What do you want to see as the division’s greatest achievement over the next five years?
Mack: Deere’s traditional market for construction equipment has been in North America and we have been getting stronger in the past few years with a broader product line and larger dealers, which consequently allowed us to gain market share. In the next five years, we expect these trends to continue, but also to see Deere advance in entering more global markets. In addition, Deere has been investing significantly in research and development, and the pipeline of new products is full. We will utilize innovation to serve customers better.