Dennis J. Heinecke, vice president - sales operations at AGCO Corp., is a 36-year ag equipment veteran who started at a shortline manufacturer, joined Deutz in 1984 and has been part of the AGCO story since it was put together in 1990. In his Duluth, Ga., office in November, it's clear that he places great emphasis on planning to set one's course in times like these.
"The type of unforeseen changes in commodities in recent years was unbelievable - never seen anything like it in my career," he says. "It seems like that's what we're dealing with nowadays, whether it's commodity prices or the financial markets going up 200 points in one day, down 400 the next, up 300 the next. The changes that are occurring can be overwhelming."
To hear Heinecke speak about the ag equipment business and its impact on the dealers, he emphasizes having a plan that serves as a "North Star" for your business. When you have a plan that accounts for different options and variables, you can manage the change. The days of a dealer deciding what to do that day on his drive in to the dealership are over, says Heinecke.
Still Coming of Age
Formed just 18 years ago, any review of the last 3 years represents one-sixth of the company's history. The growth in AGCO (consisting of worldwide Challenger, Fendt, Massey Ferguson and Valtra brands and AGCO tractors, Gleaner, Hesston, Sunflower and White brands in North America) has been remarkable, growing from $200 million sales in 1990 (to put into perspective, this is a smaller revenue base than some dealer organizations today) to an expected $8 billion in 2008. "It was started with very little equity," says Heinecke. "Now we're taking that strong growth through the years and pouring that money back into the business to make the next leap for AGCO."
When asked what's different about AGCO today than when Farm Equipment last updated readers on the Major-Line Executive Interviews 3 years ago, Heinecke referenced the tenure of President/CEO Martin Richenhagen, who in 2006 was beginning only his second full year with the company.
"The key difference today is that Martin has put together a strong strategic plan to achieve specific sales and profit levels. We're all working toward specific initiatives and he's supporting those initiatives with the necessary funding. We're spending record amounts in R&D and capital budgets. This increased R&D investment is the foundation of our current strategy to grow organically with new and improved products rather than growth through acquisition that characterized the first 15 years of AGCO's history.
"This is a different culture than we had prior to Martin coming on board."
According to Heinecke, the strategic initiatives, which feed a vision statement of "high-tech solutions for professional farmers feeding the world," are being executed in a way that the company is confident of success as it lays out different product and distribution programs.
It was also exactly 3 years ago this month that Bob Crain left New Holland (his philosophies for New Holland were profiled in the last Major-Line Executive Interview article) and joined the firm as senior vice president and general manager of North America. According to Heinecke, "Bob has had a lot of influence on our strategic direction in North America and has two directives that he has the entire team closely managing and monitoring: market share targets of our strategic plan and bottom-line profitability. Bob is very knowledgeable about the North American market from his background and brings a confidence to the dealers, distribution group and certainly to the employees."
American Ag Trends
When asked of key trends affecting AGCO and its dealers, Heinecke shares two observations.
First is the consolidation of farms. "The producers are getting larger and the demands become greater on us and our dealers to provide greater machinery uptime," he says. "That's a considerable trend on the professional producer side that will continue to demand the attention of our dealers and us."
Second is GPS technologies. "GPS is going to be a leading feature for all manufacturers, whether it's auto-steer or the telemetry that allows in-the-tractor maintenance alerts. This becomes even more important as farmers become larger and need to become more efficient. American producers are in global competition with farmers in places like Brazil, Russia and Uzbekistan. We need to make sure American farmers are the most efficient so that they can competitively export their products."
Last August, AGCO announced an agreement with Topcon and its TSD joint venture to provide the next-generation satellite-guided steering assist system, Auto-Guide 2. Using an advanced sensor technology and multi-constellation satellite positioning, the new system is being billed as an industry-leading auto-steering system that will increase productivity and reduce input costs.
"Topcon is a leading-edge technology, with R&D worldwide," says Heinecke. "We think that the way we're going at the business will provide huge benefits both for our dealers and for the end users. For the dealer, it should be seamless because we're going to provide the training and support to the dealer." The reception to the launch to dealers last August was very favorable, he says.
Beyond the consolidation trend and the vast opportunities in GPS technology, Farm Equipment asked Heinecke to share what he sees as the greatest opportunity - and greatest vulnerability - for North American ag producers. "They're both the same thing - the opportunity to export grains and other ag products. America is the most efficient producer of agricultural products worldwide. We cannot consume all of the agricultural products in North America, so we must rely on the export side of the business.
"If the exports remain very strong, the agricultural market in North America will be very strong. If exports weaken - remember the 1980s when we had an embargo and a very strong dollar that shot prices higher - we can become non-competitive in the world market. So we need an open market for our exports of food and that's why it's both a strength and a weakness of our market."
Assessing the Network
The personal relationship with the customer is where AGCO dealers most shine, says Heinecke. "The AGCO dealer network has established very good customer relationships with producers," he says, pointing out that as a whole, AGCO's dealer-principals tend to be hands-on and smaller operations. "We get very strong ratings in this area at every customer-focused session."
Despite the strong customer foundation, Heinecke adds that the high demands of the professional producer will continue to challenge all dealers for industry-leading technology and uptime requirements. "We're spending record dollars internally in our training functions for AGCO Academy, supporting our product reliability group, and bringing out the tools and the curriculum that our dealers need."
Benchmarking has identified significant improvement opportunities as well. "We need to bring our dealers up to the same level of our competition. In 2008, we replaced our previous dealer standards program with our new 5-star program, which continually measures dealers on sales, service, aftermarket support and general business standards. Dealers know the measurements and can strive to reach the performance levels, and rewards, that each wants."
The ability of its dealers to access the capital to provide the services that professional producers demand is a concern for all manufacturers "We have several programs in place that are part of our strategic initiatives. When a dealer raises his hand and says 'I want to partner with you and be part of your future' but needs some assistance capital-wise, we have programs to help fund facilities improvements and sales, parts and service personnel."
For example, when a dealer identifies a need for additional parts and service personnel, AGCO shares targets for increased parts purchases, increased customer satisfaction, sales and market share goals, etc. "We'll monitor improvement and will co-op the cost of that person during the period," he says. "We launched it about
2 years ago as a formal program within the strategic growth plan."
AGCO provides ongoing service to dealers through dealer management consultants like Spader Management and Dr. Jim Weber who can help dealers better manage their situation, namely improving profitability and increasing their net worth. "But I'm completely convinced if you're undercapitalized going in, it is extremely hard in today's environment to become viable in a short-term," says Heinecke.
"Now I'm contradicting myself because the AGCO story is one where we were undercapitalized when we started. And if you look at our balance sheet 18 years later we're probably the healthiest agricultural manufacturer in the industry. So it can be done, but it's not an easy path - and you can't do it without a plan. Dealers need to have a plan and must execute the plan. You can't do it from a 'well this is what's in my head today' approach to your business. You'd better have measurements, you'd better be watching your inventories, and relentlessly adhere to the plan. It's the only way an undercapitalized dealer can become better."
On the dealer purity issue, AGCO, as an accumulator of shortline companies itself, has traditionally been more relaxed on its pressures on dealers to carry only AGCO brands. "We've expected equal representation from a dealer that has a competing product," says Heinecke.
But that isn't to say that AGCO isn't bothered the same way that all manufacturers are when it comes to dealers who spend time and resources on competing brands. "When you're constrained on product availability, wouldn't you be smarter to move it toward the full-line guys than to support somebody who is selling your competitor's product?"
Dealer Numbers: Still the Largest
Because AGCO's rapid acquisition of companies also brought significant levels of dealers, AGCO has had the greatest number of dealers in the industry for some time, which totaled 1,900 in 2006. Today, that number is down to 1,400 sites.
In discussing the 26% reduction, Heinecke says most of it was natural attrition and the fact that larger farms mean fewer customers to go around. "The technology requirements for dealers have increased so rapidly that some of the dealers fell by the wayside," he says.
He expects more attrition and consolidation in AGCO's network, which was slowed by recent boom years. "It was easy for everybody to make money over the past 18 months so attrition didn't continue at the pace most of us anticipated. But there are many, many demands on the small business operator today and some of these dealers that aren't truly viable will disappear quicker in today's environment. Capital won't be easily available to every operation."
While other groups are demanding certain volume levels that require acquisition, Heinecke says AGCO looks at it only from a profitability and sustainability standpoint. "If operating multiple stores in a trade area is the way to get there, we support that. But we don't have a strategy for 'X' number of dealers to have 'Y' number of locations. We want to make sure that each dealer can be profitable and have a return on their investment."
He adds that a good single-store operation can sustain itself - in the right market. "If the dealer is in a trade area that has a large industry potential and he's achieving good market share and he runs an efficient operation, a single store can remain a viable option."
While attrition reduced AGCO's dealer numbers, more right-sizing of the dealer network is necessary, says Heinecke. "Because of the history of AGCO, we ended up with many dealers covering many brands in a limited geography. So our strategy is to make sure that the dealers can be profitable and have a large enough trade area to meet their market share goals and business plans."
When asked how involved the corporate office gets in right-sizing the dealer network, Heinecke describes the process as one of facilitation based on dealers approaching them after reviewing the business plans with their AGCO sales managers. Our field sales organization works through business plans with dealers to show dealers where they need to be from a profitability standpoint. Not every dealer is seeing the return on investment he wants and when they don't have succession plan, we can help them move things forward."
Those dialogs can present options, which may include initiating conversations with other dealers about the possibility of joining together.
Building Field Support
Among the 140 field people supporting AGCO dealers, 64 are sales managers commissioned with the task of maximizing "profitable sales" for their assigned dealerships, planning with that dealer on how to approach the market, how to train his people and how to execute the business plans. With the changes in the market, AGCO has emphasized product specialists and utilized them as a higher percentage of the total field support group. "We've taken the position that as you have fewer dealers, you can redeploy your resources, and adding product specialists is another key initiative over the past 2 years.
"With the technology that's out there today, we're convinced of the need to utilize experts and product specialists to support the sales manager in satisfying our dealers' and farmers' needs. Today's professional producer in a lot of cases has done a lot of homework, been to the conferences and symposiums, uses the Internet, and he knows the technology as well or better than the dealer because he's specific to that piece of equipment. We're using our specialists to work with these types of customers."
Responding to Equipment Availability
"We are spending record dollars in capital expenditures to expand our plants to meet this demand. In North America, we've spent millions of dollars to expand capacity at all three of our production facilities; Jackson, Minn., and Beloit and Hesston, Kan., and we are starting to see the benefits of those investments. We've invested heavily in our tractor manufacturing facilities globally, which will allow us the capacity to meet the demand both at our transmission and engine facilities.
In early December, AGCO announced the construction and opening of three new U.S. tractor assembly centers in Maryland, Texas and Washington, which are already taking tractor and parts inventory from facilities around the world for the AGCO, Challenger, Fendt, Massey Ferguson and Valtra brands. These centers are located near major ports and close to markets with high demand for tractors, streamlining logistics and allowing factory-grade quality checks on configuration changes prior to delivery to the dealer.
Importance of Rural Lifestyle Market
AGCO categorizes its business in two segments: professional producer and rural lifestyle. "When you look at total industry numbers, the rural lifestyle market has grown significantly the past 15 years and we see sustainable numbers because we have so many people fit that customer profile. It's very important to us as we go forward," says Dennis Heinecke, vice president — sales operations, AGCO Corp.
The key to succeeding in rural lifestyle equipment, he says, is all about fostering an environment for somebody that isn't necessarily familiar with farm equipment. "We're dealing with professionals that have decided to own their 10, 15, 20, 30 acres, and we and the dealers need to make them comfortable with the product and the buying experience."
Heinecke says that the rural lifestyle dealer tends to have a small sales dollar volume, in part because it won't have the parts and service opportunities that farm equipment dealers see.
As AGCO examined its dealer network in recent years, a separate contract for Massey Ferguson compact utility equipment was created that allowed some dealers whose ag market changed around them (or were no longer economically viable to meet the professional producer's demands) to remain a dealer, yet be exclusively concentrated on the rural lifestyle market.
The Caterpillar Model
The Caterpillar-Challenger dealer model is a 6-year-old arrangement in which AGCO provides a full line of private-branded products for sale through Cat construction dealers who wanted to diversify into the ag market. Today, there are about 55 ownership groups nationally, down from 64 in 2002.
Heinecke says that the Challenger dealer model is working well where the dealer has put the infrastructure in to support the ag business. He says this includes attention on sales and service operations, new buildings and/or acquisitions of other dealers when necessary, and most important, "putting the necessary boots on the ground in sales, service, parts and support that are focused on the ag side of the business." Those Challenger dealers that have added the resources have seen outstanding growth, he says.
When asked what the Caterpillar-Challenger model has taught ACGO about its core dealership model, Heinecke has two observations. First is the amount of capital that these dealers possess, and second is the fierce competitive spirit they bring - they hate to lose, he says.
Beyond that, he says that "CAT distribution is the strongest distribution network in the world and they're strong because they're very focused on putting plans together and executing those plans. That's the thing that we've learned the most from their success.
"And then they support that plan with training, training and more training, for sales, parts and service personnel. This has pushed us to make sure that internally provide support to our entire dealer network."
AGCO's New Product Introductions
In 2008 and 2009, the number of new product introductions at AGCO increased by nearly one-third over 2007 levels.
According to Dennis Heinecke, vice president - sales operations, AGCO Corp., the company has stretched its product line to fill some voids that existed 3 years ago, citing the successful launch of the highest horsepower articulated tractor, a class 8 combine, large square balers, and larger planters. "We plan to launch high-horsepower row-crop tractors in February of '09, which we feel will leapfrog ahead of others on engine technology and EPA requirements," he says, also noting that there are other big developments in the works that won't be available for North America just yet.
With AGCO's announced plans for an entry in the forage harvester business and the above-mentioned introductions, AGCO feels it has a full line to offer dealers and their professional producers, with some regional exceptions like cotton equipment.
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