Claas Tractors Harvesting Amid a Drought

The boss of one of the world's biggest makers of farm machinery is looking east to offset a global slump in the agricultural equipment industry.
The market for farming equipment is experiencing a bit of a drought.

Lothar Kriszun, the chief executive of Claas farm machinery, one of the world's largest makers of farm equipment, has seen it all.

The 63-year-old has worked for his family's firm since 1981, and has experienced many changes in the business, including the current trend toward farm digitalization.

But these difficult times are different for equipment makers, and a little scary: Demand has slumped markedly amid weakening global economies, trade sanctions and lower grain prices.

Mr. Kriszun spoke recently with Handelsblatt about the challenges at Claas headquarters in Harsewinkel, in northwestern Germany – a village known as a “combine harvester town” – where the century-old company employs about 4,000 people.

 

Handelsblatt: Agricultural machinery makers have had many good years since the 2008 financial crisis. The growing world population and better foods brought record sales. Now the tide is turning. What’s happening?

Lothar Kriszun: From 2010 to 2013, all large farm machinery makers reached growth rates between 30 and 35 percent. In 2013-14, there were the first signs of an easing market. For this year, the industry calculates sales declines of up to 20 percent.

So after seven years of feast, will seven of famine follow?

There are those cycles, but not more than seven years. Today, the swings are greater and the distances shorter. That has changed over the last decades. And the industry still earns reasonably well – returns of 6 to 8 percent are possible.

Are the big trends, such as demographic change, not enough for permanent growth?

The global trends are completely intact. In the long term, there’s no question that demand is rising. But there are new phenomena, such as in North America, where for four years farmers retreaded their machinery and invested more than normally. They anticipated investments. There, the market for large machinery has now declined up to 40 percent. It will not go up dramatically again.

What about the other core markets: South America, Europe and Asia?

It looks similar there, maybe somewhat more dampened. South America is clearly declining. For Europe, we are coming out of a minus 10 percent growth. Even the growth in Asia has limits: Although it is going upwards, it is slower.

Do you feel the current problems in China?

No. Last year, we bought the Chinese harvesting machine manufacturer Jinyee. Agricultural technology can only come from local producers in China. At best, premium products are imported. In any case, I am not expecting a break there.

Lothar Kriszun, the CEO of German farm equipment maker Claas, said his company has cut €60 million in costs.

 

Your rivals are already reacting and cutting jobs, and Claas wants to save €200 million ($231 million) by 2018. Will you lose staff?

We have already implemented a plan to save a good €60 million. It will continue like that until we have reached the €200 million. Our workforce is not affected. In the future, we are counting more on innovation. We want to maintain sales and our profitability in 2015.

But demand is falling?

Our products will help us to grow against the market trend. We see that with our tractors, where we are now a leader in the German registration statistics – even though we have only been in the business for 10 years. There is also potential in North America and Asia. The share of business outside of Europe will continue to increase.

Russia is a problematic market. Yet while other companies are retreating, you are investing in your factory in Krasnodar. Why?

We made that decision at the end of the 1990s. First we built a small factory in 2003, to assemble combine harvesters. Parallel to that, we tried to find suppliers to be able to produce the Claas quality locally. But that was only possible in a limited way. So in 2010-11, we decided to take things into our own hands. Don’t forget that Eastern Europe is at our front door. There have been decades of good relations between Russia and Germany. There will be better times again.

So the risk is worth it?

The technology that Russian farmers work with today is often very old. If you want to work at the world market level, you have to have modern technology. We have the technology, we can build factories. Russia has great potential. Whoever is not there passes over one of the largest agricultural markets in the world.

Is Claas, with €3.8 billion in sales, big enough to compete with companies such as John Deere, with $36 billion in sales? Or AGCO or CHN?

Definitively not – we should not be distracted by them. Our focus is clearly on the “European stronghold,” which is our priority. Then comes Eastern Europe, then North America, the largest agricultural market in the world. Asia follows. We have an eye on the South American markets, such as Brazil.

Your U.S. factory is in Omaha, of all places, also the home of a famous investor who likes to keep his eye on companies like Claas. Has Warren Buffett made a takeover bid?

No, he has not (laughing). Such offers have definitely quieted down. In the 1990s, there were offers almost every month. But now investors understand that the family is 100 percent behind the company: Claas is not for sale.

Do you have any interest in acquisitions?

We are not actively looking. There are also not many candidates that are a good fit. But naturally, we are analyzing the markets. Growth for growth’s sake does not interest us.

But the farm technology industry is heavily segmented. Don’t you need larger units in the long term, for economies of scale?

Outside the existing five or six global players, to which we belong, there will surely be consolidation. However, a strength of the industry is that there are many family companies, above all in Germany, which are very innovative. Grimme is a world market leader for potato harvesting technology. Lemken, for soil cultivation. Amazone and Horsch for plant cultivation. If there were no longer such companies – if they were sucked up by larger corporations – much innovative power would be lost.

Digitalization is among the most important innovations in your industry. What kind of efficiency gains do you hope it will bring?

We are only at the start of a new phase of digitalization, but 30 percent is conceivable – even though the machines are already working very efficiently today. In addition, the machines are already hitting their limits alone from their sizes. What matters now is their intelligence: It is more about processing technology and networking.

Do you have an example?

Take a harvester. A good driver can get the best performance from the machine for about four hours over a day. So there has to be a system – with appropriate sensors and intelligence – that tells the machine to optimize its performance.

Would autonomous driving be a solution?

That has already been an issue for a long time in agricultural technology. For more than 30 years, there have been machines in trials with remote control. But agricultural technology will not be able to change the laws. The car industry, however, can do that. If it manages to do so, we will also have the opportunities to let machines be autonomously driven.

So controlling the harvester from the sofa is no longer a futuristic vision?

Technically, it is already possible. But for security reasons, there will still be a person sitting in the machine for years to come.

Video: In a Claas of their own.

 

Regine Palm is an editor in Handelsblatt’s companies and markets section. Martin Wocher writes about industry for the paper. To contact the authors: [email protected], [email protected]