Deere & Co.'s goal of nearly doubling its sales over the next eight years hinges on penetrating Russia's farm equipment market and expanding its construction equipment business beyond North America.
Samuel Allen signaled last month that the dominant theme of his tenure as chairman and chief executive of the 174-year-old company will be reaching $50 billion a year in sales by 2018. To get there, Mr. Allen figures Deere needs to accelerate its compounded annual sales growth rate to 9.2% from the historical rate of about 7%.
"While it's a stretch goal, it's a realistic goal," Mr. Allen said in an interview Wednesday.
For the company's fiscal year that ended Oct. 31, Deere's sales and revenue totaled $26 billion. It earned $1.87 billion, or $4.35 a share. For 2011, the company forecast equipment sales growth of 18% to 20%.
Mr. Allen, who became CEO in 2009, believes Deere's dual businesses in construction and agriculture place the company at the crossroads of two major global economic trends: the growth of cities in the developing world and the need for more food production.
But capturing the maximum benefits from these trends will require Deere to reach beyond its traditional markets in North America and Western Europe to establish a bigger presence in developing countries where business conditions are unpredictable and customer needs challenging.
The Moline, Ill., company is the world's largest maker of farm equipment by sales. Its best long-term growth potential is in Russia, which has 9% of the world's arable land and is one of the world's top producers of wheat. Russia aims to double its exports of wheat in the coming years to take advantage of the increasing demand for grain from other countries, especially China. But Russia's farmland use has been falling steadily in the past 20 years in part because of inadequate machinery.
"If you want to export wheat, farmers have to be very productive," Mr. Allen said. "That's why we're putting so much emphasis on Russia, even though it's a risky environment."
Deere and other foreign equipment makers in Russia operate under the threat that a change in government policies could effectively force them out of the country. In 2008, the government excluded machinery built outside of Russia from financing for farmers purchasing new machinery.
"That became a tremendous impediment" to doing business in Russia, Mr. Allen said. "Overnight, our market went down by over 80%. It's not that farmers didn't want our equipment, they had no way to buy it."
Deere has redoubled its efforts in Russia in recent years by opening a plant in Domodedovo, south of Moscow. The company said earlier this month that it will double the manufacturing space at the plant, allowing Deere to increase volumes of equipment already in production at the plant, as well as permit the introduction of more Deere equipment lines to the Russian market, particularly timber harvesting machinery. The company also launched an equipment leasing program.
Even though the Russian government has agreed to extend financing for machinery built in Russia, foreign equipment manufacturers and Russian leaders continue to haggle over the percentage of parts that can imported from elsewhere.
"The question we continue to ask ourselves is how do we do everything possible to mitigate risk," said Mr. Allen, who pressed his case for Deere's expansion in Russia during meetings last fall with Russian Prime Minister Vladimir Putin.
While Deere's green and yellow farm tractors are known throughout the world, its construction equipment business has largely been grounded in North America. Years of unsatisfactory returns from the construction business kept it from the same global expansion pursued by Deere's farm machinery operations.
Mr. Allen, a 36-year veteran of the company who headed the construction business before becoming CEO, said the operational problems that once held down construction's returns have been eliminated. The decentralized management system that Deere used for its business units also has been dropped at the corporate level, but most Deere farm equipment dealers overseas still do not sell the company's construction equipment.
Adding construction machinery to Deere's overseas dealers is a key component Mr. Allen's expansion strategy, particularly in China and India. Rapid expansion of public infrastructure and urbanization there are driving demand for bulldozers, excavators and other earthmoving equipment. For first time in history more than 50% of the world's population now lives in an urban area.
"China from a construction equipment standpoint has exploded," he said. "A lot of that is the government's focus on creating urban cities."
Since becoming chief executive, Mr. Allen has sold off or downgraded side lines that Deere had pursued as an offset to sluggish sales in its core businesses. Among the businesses jettisoned was its wind energy business.
"We have so much opportunity in (farm and construction machinery) we really need to be focused on it as opposed to taking management bandwidth to go into other areas that don't have as much growth."
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