By Bob Tita, Of DOW JONES NEWSWIRES
April 15, 2011 - Deere & Co. (DE) is slashing its prices on farm tractors in South America as part of a strategy to chip away at Agco Corp.'s (AGCO) leading market share in the region, Agco Chairman and Chief Executive Martin Richenhagen said.
Richenhagen said he's reluctant to engage in a price war with Deere, but added that Agco is determined to maintain its South American market share and would resort to retaliatory price cuts if Deere's discounting persists in South America.
"They're trying to buy market share," he said during remarks to reporters in Chicago late Thursday. "They're very aggressive on pricing. This is something we haven't done yet."
A Deere spokesman said Friday the company does not comment on its prices in specific markets. While a price war between equipment manufacturers would provide farmers with lower costs for tractors and harvesting combines, profit margins for machinery manufacturers would suffer and a price war could potentially destabilize the industry.
Deere, the world-leader in machinery sales, is targeting overseas markets for additional sales growth. The Moline, Ill., company is making a push to expand sales in South America, Russia and India.
Agco, whose brands include Massey Ferguson, Fendt and Challenger, is a distant third in the global farm machinery market behind Deere and CNH Global NV (CNH). But Georgia-based Agco maintains a strong presence in several key machinery markets, including Brazil and France, which is Europe's largest market for high-horsepower tractors. In Brazil, Agco's share of the tractor market reached as high as 60% at the peak of the last equipment cycle.
But demand in Brazil cooled in 2010 and Agco ended the year with 53.7% of the tractor market, according to equipment shipment data supplied by Brazil's Associacao Nacional dos Fabricantes de Veiculos Automotores. Analysts expect a 10% decline in industry-wide equipment sales in Brazil this year.
But Deere has been outperforming the Brazilan market lately, increasing its monthly tractor shipments from a year earlier, while overall industry shipments retreat. Agco and CNH Global have largely followed the industry trend with lower year-over-year monthly shipments. Agco's share of the tractor market was 52.7% in March, down from 53% in February, according to Associacao Nacional dos Fabricantes de Veiculos Automotores.
Richenhagen maintains that monthly market share data is typically volatile and not an accurate reflection of the results of Deere's discounting strategy. He said Agco continues to have advantages over Deere in South America that should help Agco combat Deere's price-cutting.
"John Deere has always been in South America. But we have a better brand image. We have better distribution," he said. "So far, we haven't had to do something special."
But Richenhagen said Agco could launch a counter attack on Deere in North America--where it dominates the market--if Deere doesn't back off its pricing strategy.
"I'm not in favor of these price battles," he said. "But we could reduce our tractor prices by 15% in America. It wouldn't kill us because we are comparably small there, but it would be a big problem for Deere."
Agco stock was recently up 0.56% at $51.71 a share.