Interview with Martin Richenhagen, Chairman, President and CEO of AGCO Corporation

Martin Richenhagen, CEO of AGCO
African Agribusiness | 15 September 2014

Interview with Martin Richenhagen, Chairman, President and CEO of AGCO Corporation

By Dave Ramaswamy, Africa Agribusiness Magazine

Conducted during US-Africa Leaders’ Summit, Washington DC, 8/7/14

Dave: Martin, thanks for your time. Could you please describe AGCO’s lines of business? And, particularly, what lines of business you’re offering in Africa?

Martin: AGCO is a pure player in the area of agriculture. Our traditional product lines are farm equipment, so mainly we are a leader in tractors, in wheel tractors, but also in tractors on tracks, and we have everything, so to speak, a farmer needs: combine harvesters, self-propelled forage harvesters, balers, seeding equipment and so on. In our industry, we call this “full line of product.”

We’re in a way different from some of our competitors in that we are a multi-brand company. We own some of the finest brands in the industry, with long traditions, like 160 years for Massey Ferguson or more than 100 years for Fendt and so on.

Recently, about two years ago, we also acquired a company—GSI and that did broaden our product line. GSI specializes in grain logistics, which includes grain storage, grain drying, and grain transportation. They also do chicken and layer installation, and swine stables, called “swine houses.”

Dave:    What is your current market share in Africa, and what are your projections over the next decade?

Martin: We’ve been a market leader in Africa for many, many years. The leading brand in Africa is Massey Ferguson. If you add all the volume our licensee TAFE from India is bringing to the continent, it’s even more so. Our market share varies a little bit across each country, but is fairly stable.

We’re optimistic about growing our Africa market share because we have a good brand image, we have a long tradition, and we also have a good dealer and distribution network.

Dave:    At the recent US-Africa investment events in Washington [“Leading the Way in U.S.-Africa Investment” conference, which ended Aug. 8], we heard a lot of talk about food and nutrition security. With Africa having 60 percent of the world’s available land, it has the ability to feed itself. What does food security mean to AGCO? How do you intend to tackle it in Africa over the next two decades with your “full line of product”?

Martin: There are two completely different areas and two different businesses you can talk about. First, we have some big professional farmers in Africa who need the most modern, high-technology solutions, like we offer in South America, Europe or North America.

These are the state-of-the-art farmers. They’re huge. They are, let’s say, between 2,000 and 20,000 hectares. We have a customer who farms 30,000 hectares in Zambia. This is a business segment we’re used to serving. It’s not that difficult. We have the products these farmers need because this is our specialty: high-quality, high-tech solutions.

Then you have the smaller farmers, the subsistence farmers. What people outside Africa don’t understand so well is that their situation is not as romantic as one might think. The burden of work on this small farm, which may measure about one acre, falls mostly on the women. They don’t have a power source, they don’t have water, and they don’t have electrical grid connectivity.

The women farmers wake up early, usually at sunrise, they walk to get water. That takes quite a while since they have to walk two to five miles. They prepare breakfast for their kids, they make sure their kids go to school if there is one, and then they start to work on their farm. Between farm activities, they prepare lunch and dinner. Meanwhile, the men tend to gather at the marketplace and have a cup of tea and smoke.

It requires a groundbreaking change in thinking to help these women subsistence farmers become more professional. What does that mean? It means they need to produce more than they consume. This would put them into the position of selling some of their surplus product to generate income.

Individually, these farmers cannot invest in a tractor. Yet everybody knows that there are two major factors that improve productivity. The first is mechanization, and the second is using fertilizers.  We talk to governments and to private institutions and tell them that what they need to do is to group these smallholder farmers together and to create co-operatives (co-ops).

You see that in some countries; Algeria has them, Morocco has them, and Nigeria has them. The co-op is the right way for small farmers to share equipment. If, for example, a hundred of the small farmers would come together, they could afford to buy one tractor.

What happened in the past often was a farmer would get a tractor as a gift from an aid program. Then after a short period, he would have sold the seat and replaced it with a wooden structure, then sold the hood, and the tires. And after a year, the tractor had disappeared and the engine is somewhere used as a generator. We need to avoid that. There are solutions, but it’s not easy.

Recently we had a meeting with Guy Scott, the vice president of Zambia, where we were talking about this. In Zambia, you have 1.4 million subsistence farmers and the government would like them to — they have co-ops already —  mechanize, so this is a vast undertaking. There’s nothing much we can do as a company in this regard. It’s something that farmers have to do, and maybe they have to do it with the support of the national and local government.

It’s less about financial support and more about the structural support. Someone has to organize this farmer network, and then organize appropriate farmer training. We’re interested in supporting these efforts.

Dave:    What you’re saying is smallholder rural farming is romanticized, but the reality is that it involves a huge daily struggle with little reward. Yet a lot of the donor agencies focus on promoting subsistence farming. So it may be the wrong focus. Smallholder farming is like candlelight dining, it’s only romantic if it’s by choice. Most African smallholders don’t have a choice.

Martin: Exactly. If you’re a journalist in Washington and have a small farm in Virginia, that’s fine. You go there over the weekend and enjoy it because you like to drive a tractor for two hours. Super, but if you have to subsist from it every day, it’s very tough.

Dave:    Martin, you talked about concept of cooperatives, of creating a farming network where “the network is the farm” for providing sales and support. This responsibility lies more with the governments and civil society rather than AGCO.

I’d like to dwell a little deeper on that point, which is purchasing equipment as a cooperative. What are some of the financing tools available through AGCO? This could be standalone through AGCO or working in partnership with banks or governments.

Martin: We do financing of programs, like leasing or rental programs, through a finance institution. It’s a joint venture between AGCO and Rabobank that we created 20 years ago. It’s called AGCO Finance. It’s a 50-50 joint venture. We offer financial solutions and do the necessary financial engineering.

Now, this works all over the world. Of course, there are certain countries with high risk where it’s more difficult to come up with a solution. With the small holders, the additional problem is they don’t have collateral. That means, to stay with the example, we can’t take the risk of selling them 5,000 tractors. That’s the number the government identified being needed because this has to be then orchestrated and organized.

Therefore, this is where aid programs or other institutions normally come in. What we see is, they do get some traction, but sometimes we have countries that have too much donor money. Ghana is an example. Ghana’s problem is to find projects in order to digest all the money available. Other countries don’t have donor money at all. The donors are into big investments like power stations or roads and bridges, airports, railways. They’re not so much geared for a smaller investment in farming.

I think what it needs is a “proof of concept,” and we try to work on that. There is a demand, but then it is split into so many hundreds of thousands of individuals. That means in farming, typically, you don’t have the big investment as you have in power.

What we do offer, of course—and this helps us also to get closer to governments—is grain logistics. A lot of African countries have a problem with infrastructure. With the grain logistics business through GSI, we can now help there. Many countries face a problem in post-harvest losses in grain due to poor storage, and with factors such as humidity and pests. Here we can come in with a solution that actually makes us even a better partner for local governments.

Dave:    That’s a great point. Post-harvest losses are as high as 40 percent to 50 percent in certain countries in Africa. Reducing that is an easy win. Before talking of fertilizers increasing yields, the easiest way to increase yield is by reducing crop waste.

Martin, that leads to the topic of sustainability and environmental sustainability. There’s debate now that the mainstream Western model of farming, industrial farming with intensive use of pesticides, chemicals, and fertilizers, leads to ecological death zones with agro-chemical runoff and pollution of groundwater systems. What’s your vision of sustainable agriculture for Africa and where do you see AGCO playing a role?

Martin: I think you can do sustainable farming much better in large-scale farming if you want to. Of course, you have to have the right ethical standards. I’ll give you some examples.

You can only achieve the reduction of soil pressure by using less cropland with modern technologies. You need the right tractors and you need to make sure you have the right equipment. The soil preparation with regard to minimal tillage can only be done through the right equipment.

When it comes to pesticides, certain solutions are, I think, kind of old-fashioned and antiquated, and therefore nobody invests much anymore in them. For example, the famous crop dusters: They might be efficient; but it’s a waste of pesticides because they’re not precise, it’s a waste of fuel because those planes use a lot of fuel, and, finally, you spray not only the farm, but also the village and farm surroundings.

It’s a problem that can be fixed easily, and this why we’ve developed very sophisticated self-propelled sprayers. With this equipment, you can really apply the amount of pesticides precisely to the area where you want to have it. Plus using our Fuse Technologies, which includes AGCO precision farming tools, you can track and measure the results.

Dave:    You mean the yield?

Martin: Not only the yield. You can start from harvest and then say, “This is what I harvested so far.” You have recorded the whole process, and you know exactly how you did your soil preparation, how much you fertilized and where, with what fertilizer. Additionally, you know what kind of pesticides you used and in what amount.

From the result, you can then readjust the process the following year and fine-tune it. This is another high-tech solution, which is creating a financial and environmental return immediately, because you’re avoiding the environmental harm and health issues of crop dusting. By reducing the amount of pesticides you’re using, or the amount of fertilizers you’re using, you get a fast payback. The payback for this self-propelled equipment is within less than two years.

We work together with some of the big companies in that area like Pioneer, Monsanto, and so on in order to develop solutions. There’s a certain problem in Africa, which is that some big farming operations and foreign investors who go there think about using lower standards in Africa than they might use in Europe or in America. We would like to prevent that.

Dave:    Martin, when it comes to buying equipment in Africa, we see a new class of investors who are not farmers, say, with backgrounds in real estate or hotels, who think agriculture is attractive, they’re entering the business.

Two things: A lot of these people (1) don’t really have an idea of what they want to buy, and (2) how different pieces of equipment work together. I know you have a demonstration farm in Zambia. Could you please speak to that?

Martin: Yes. The idea was that we need to train, or teach, or explain how modern mechanized farming is done, both for a small farmer and also for a big farmer. That’s why we bought 100 hectares of land in Zambia [in 2012] and started to farm there. We generated very good yields. The yields for corn in Africa are about 1.8 tons per hectare. We did 8 tons per hectare in the first year, so that means obviously we know how things work.

We invite dealers and customers, but we also invite politicians or those from the academic world in order to demonstrate what we call the “future farm.” We want to show them how that works, of course, with the idea in mind that they might also then buy product from us. We’re planning to have a second “future farm” in Nigeria because it’s also a very big market.

The problem is, there’s such a pull that we could come to Africa with thousands of those farms, but this morning the Prime Minister of Algeria said to me, “You are like a diesel engine. It’s difficult to start, but then once you get going, you never can stop.” Therefore, I think we want to do it in a way and in a speed that we can handle and manage.

Dave:    Based on your model farm, have you thought about the possibility of having AGCO run a summit with the different countries and stakeholders coming in, not just Zambia? Also inviting investors with purchasing budgets? The idea would be bringing everyone together in one location, and pitching jointly to them.

Martin: Not only have we had the idea, we started to do that three years ago. We call it the AGCO Africa Summit. We do it in Berlin in January.

The reason why we do it in Berlin is that they have a big farm show called “Green Week,” Grüne Woche, and a lot of the donor countries and agencies are there, as well as brands and farmers, and a lot of the producing countries and a lot of African decision-makers.

That’s why we decided to do the summit in Berlin, but we also joined forces for a similar event in Africa this year, but I wasn’t there.

Dave:    Martin, having advised on some commercial farms in East Africa, what I’ve seen is, the decision-makers, especially this new class of investors who are financial investors, hedge funds, private equity types, they’re sitting in London or Singapore, and …

Martin: They have no idea about farming.

Dave:    Yeah, they have no idea of farming, they’ve never set foot on a farm, and they’ve appointed some farm manager from South Africa or Zimbabwe to manage the farm. These people are purchasing farm equipment, and there’s a lot of turnover because this talent comes, and soon leaves. Every new farm project seems to be poaching and rotating through the same core group of people.

So one or two years after the start of a project, a “fruit salad” of equipment ends up on the farm from different manufacturers. Things don’t work together, and tractors are being stripped and cannibalized for parts. In three or four years, the farm is dysfunctional, at the verge of bankruptcy.

How do you see this situation improving? I give an example of the IT industry. IBM, from the 1960s to the early 1990s, used to make and sell its own hardware and software. Then in the mid -’90s, IBM decided to get into “system integration” – working with other hardware and software vendors.

Do you see a similar future in “farm systems integration?” I see a lot of disincentives on this front at the dealer level. Dealer incentives are to sell as much product, which is great for AGCO, but in terms of client success stories, it may or may not work.

I talked to the president of GSI, one of your five core brands, and he said, “Yes, we can do the client sales and service directly on some of these big-volume deals.”

Martin: Of course, we try to explain to the end user, to the farmer, that it’s very important to select the right product and the right hardware. It’s very important to have a dealer nearby who does support the product, and it’s very important to have a manufacturer who comes in with the right support for parts.

We not only think about selling product, we also make sure that the after-sales service is available. We do have parts in stock, and we also invest a lot in user/operator training.

That’s why we invested in a parts company called Sparex in South Africa. They’re doing non-original parts for all leading equipment brands. That means we can support this kind of multi-brand equipment. So we can offer all those guys with different equipment, a single source for parts. Our AGCO Massey Ferguson dealer can also help them to fix a Case, New Holland or John Deere product. That’s already a big advantage for us, and a key differentiator in our offering.

Now let’s talk about what you described as the future way of farming—connected intelligent and integrated systems. We call it Fuse, and we decided for a completely open architecture. We want our products, whether it’s a baler, tillage equipment or a combine harvester, to be in a position to communicate with every competitor’s product and the other way around.

This is completely different from the approach John Deere is using. The idea of John Deere is pretty much to create a closed environment, a little bit like Apple or Microsoft, which forces you into only using their equipment.

This is what farmers hate. They want to be in a position to make their own decision, so our solution does get a lot of traction, and we’re just at the beginning of the development. I think in the future we’ll be much better off than some of our competitors.

Dave:    What you’re saying is, your competitors are forcing this equipment lock-in for farmers, and they don’t like that. AGCO’s approach is more plug and play.

Martin: Imagine you want buy a car for yourself and then you are forced by your cellphone carrier to buy a BMW, not only for you but for your wife and your kids. I’m not sure you’d like that so much. I think it’s the wrong approach, and I think we took the right decision there.

Dave:    Are you moving from a “tractor-centric” to an “implement-centric,” plug- and- play model?

Martin: Yes. That’s also a very important point to make here because, in history, the tractor was dominant. What we say is, in the future, the implement will control the tractor, and not the other way around. For example, in seeding, the speed requirement and the power requirements of the tractor are defined by the seed air drill.

Dave:    Absolutely. Different implements are attached and the tractor adjusts, based on the implement spec.

Martin: The tractor has to be adjusted, not the other way around.

Dave:    As you know, there’s a lot of specialty implement manufacturers whom buyers like to pick from, sort of and mix and match. Your approach seems it would make it easier.

Martin: Yes, and [the specialty implement manufacturers] are actually very, very good. They have certain skills that big companies normally are not very good at. I happen to know some of the guys very well.

They’re in niches. It’s either a regional niche, where you have very specific requirements—like rice farming in the north of Italy—or they have a product niche, perhaps a self-propelled grape harvester, which is only used in South Africa, California and France. Those products, normally, the big companies are not very good at.

We serve large volume and more global applications, than those specific niche manufacturers. Therefore, it’s very important that we can work with those guys. We have alliances with those smaller players, like car manufacturers in Germany or France or England and so on.

Dave:    Speaking of implements, and especially tractor import, there’s a lot of used tractors being purchased, and also used implements from both Europe and the U.S. into Africa.

As a manufacturer, you only sell parts into this after-market, and you’d ideally want to upgrade the farmers to your new equipment. What is your take on these brokers or traders selling used equipment, and how does it affect your business, or how you partner with them?

Martin: We’re not in the business to regulate markets. That means this is a free market. What you can typically see in Europe is that the smaller equipment goes to Africa, the bigger equipment goes east, to Ukraine and Russia. In the Americas, used farm equipment is going from Canada and the U.S. into Mexico and further, into South America.

There’s nothing wrong with this. The farmer, the buyer, of course needs to make the right decision. There’s some very good used equipment available, and there’s a lot of very bad equipment out there as well. Used tractors are not the big problem, but used implements typically are. A customer might buy a big piece of used equipment that is not suited to a used tractor. Therefore, it doesn’t hurt for a customer to know a little bit about equipment.

The problem also for used, is that instead of buying it from a broker, you should buy it from a dealer close to you, who knows about your other equipment and who is also in a position to service it.

Dave:    As you know, in most of Africa, 50 percent of the population is under 25, and there aren’t enough office jobs to go around. Given Africa’s arable land, many of these young people could become farmers or agribusiness entrepreneurs.

How do you see AGCO involved in training thousands of young people, using an apprenticeship system like that in Germany? This youth training could start in high school, teaching young people to work with tractors and farm equipment besides classroom study. Eventually young people could be set up so that they can be farming for themselves and self-sufficient when it comes to income generation.

Martin: Today we have apprentices or trainees on our farm. We have them also in our factory in Algeria but of course not enough to cover the continent. That’s something that has to be developed over time.

Schools can also be important here. When you think about the development of the farming sector in Africa, this is something which nobody really takes into consideration enough. For example, in Ghana or Nigeria, it would be ideal to start with a school program where young people learn proper farming.

Then these young people would be hired, let’s say, from farms, and then they would be making the right decisions because they’d know already that they shouldn’t buy this random pieces of equipment from China or whatsoever. They would make better decisions.

This is not our job. We already train more people than we hire later on. We train more than we hire because we know that they’re consumed by the labor market.

Dave:    Where do you see potential partnerships with AGCO and some of the development agencies like USAID, GIZ [the German Society for International Cooperation] or banks? How do you see the stakeholder partnership working out?

Martin: We developed our Africa strategies six years ago, so when we talked about Africa at that time, everybody thought, “They’re crazy.”

Then last year President [Obama] came in and talked about Africa, but there was no action. Now all of a sudden, at the investment summit it does get increased traction. Therefore, I could imagine that we’ll see more of those strategic alliances in the area of education. What I also think is that in this very fragmented and dispersed rural environment, training via the Internet could be a solution.

For me, it’s amazing how slow the educational system all over the world, in schools and universities, adopts modern technologies. You don’t need schoolbooks anymore because the very same day you print it, it’s already dated. If kids want to know something, they go to the Internet.

Why don’t we have, instead of the schoolbook, content that you can access through the Internet? I think that’s what we’re doing already with our dealers. We do a lot of training through our website.

Dave:    I have a question on water management. In Africa a lot of agriculture is still rain-fed. What’s your strategy or any moves to acquire a company in the irrigation space?

Martin: We looked into that, and we were always of the opinion that this doesn’t fit with our organization. There are very good companies that are specialized, like Valley Irrigation, or companies like that in this field. It’s a different distribution channel. It’s more like project management.

That was reconfirmed to me in a way after John Deere decided to sell its irrigation business. Therefore we don’t look into that. If some very interesting target would become available, we would of course analyze that again.

Dave:    Finally, what’s your takeaway message for a government or a public policy official, either in a ministry of agriculture or, say, the president of any African country? What would be your message to nonprofits who have led the discussion on agriculture development in Africa?

Martin: I think the message is pretty much the same for both. They need to step down from the “jumbo-jet pilot’s point of view,” come down to earth where the farmers are. They need to come up with a pragmatic strategy that fits the requirement of their country, and then they need to think about a roadmap for implementation in steps.

Very often, projects fail because they’re completely theoretical. Not because they don’t have enough money or they’re not funded, but they’re completely theoretical, and nobody knows exactly how to implement that. Like we talked about, if you now say, “I have 1.5 million small holders and I want them to mechanize.” It doesn’t help if the government loudly says, “OK, let’s buy 5,000 tractors.”

You need a very precise plan for implementation, and what I learned in Africa is that you need to do it in steps. This is why we started with one demonstration farm, and not with 10. Then you also learn by doing, and can improve the process with each implementation.

We also said, “Let’s start with the tractor business in Algeria.” We didn’t start with 10,000 units. Last year we built 1,000, this year 2,000, and maybe next year 5,000. I’m not against being fast, but you have to also be reasonable.

When it comes to the question of localization, like in Eastern Europe, every president you meet makes the proposal that you should invest in a factory in his country. What they don’t understand is we don’t have steel supply in Africa because Africa doesn’t produce steel. We don’t have the supply chain for components like transmissions, exhausts, engines, hydraulics—everything you need to assemble tractors.

That means if you started now to manufacture on the Ivory Coast—4 million people, a small country—there would be no cost-savings. It would be more expensive than bringing a ready-made tractor in from Brazil or China. Therefore, they very often are not very realistic, and Africa needs to think more in broader structure.

That means African countries have to cooperate better. If the best of the African countries would come and say, “Actually, we have in this economic grouping, like ECOWAS or COMESA, 400 million people, and this market needs 20,000 tractors a year from you [AGCO],” then of course you can talk about a factory in one of the countries, but not in all of the member countries.

Currently each country comes individually to us. Even Ghana, which has 27 million people, doesn’t have enough volume to justify production. Therefore, they need to be reasonable. Just like in Europe, you don’t have car manufacturing in Portugal or Greece. Some of the countries need to allow imports because they don’t have that kind of domestic business.

There could be other reasons why it’s interesting to invest in a country. It can be wages, it can be infrastructure, it can be security, a legal environment and things like that, or taxes. Let’s say, in Europe, people go to Switzerland not because they’re so productive there, or wages are low, but because you pay only 3.5 percent or 4 percent of taxes. That’s the reason why some companies have decided to go there.

Dave:    How do you share those success stories from the demo farm in Zambia with your network, meaning all over Africa? Do you use video distribution of farming techniques?

Martin: We do videos. We have also a lot of people visiting our factory in Bavaria, Germany. Typically we have about 20,000 people coming to the factory every year. Every two years we have what is called the Fendt Field Days. We do pretty much similar things like we want to do in Zambia in a different scale. We show them, demonstrate the latest equipment and explain to them what our new products look like.

Dave:    Do you produce videos in the local African languages as well?

Martin: Yes.

Dave:    All right, Martin. Vielen Dank for your time.

Martin: You’re welcome. Thank you very much.
Original source: African Agribusiness

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