| Samuel R. Allen ||Risks & Rewards of Serving a Growing Global Population |
AEM Annual Conference
Remarks by Samuel R. Allen
Chairman & Chief Executive Officer
Deere & Company
November 9, 2012
The world has a big challenge on its hands – one that will affect every one of us in this room. That challenge concerns how to feed, clothe and shelter a population that is growing fast and rapidly developing a consumer-minded middle class.
The way we respond – managing the risks, capitalizing on the opportunities, and balancing the prospects of tomorrow with the priorities of today could very well define the shape of society for generations to come.
Before exploring this very important topic in more detail, let me say what a pleasure it is to be at the AEM Annual Conference. Deere has a long and productive relationship with this organization, having been a founding member of a predecessor group, the National Association of Agricultural Implement and Vehicle Manufacturers, in 1894.
In fact, Charles Deere, who was John Deere's son and the second head of our company, was a member of the first executive committee. Over the years, 10 different Deere executives have led the AEM or one of its forerunners as president or chairman.
All in all, we have found AEM to be one of the manufacturing sector's most capable, effective and influential allies. We're pleased to be a long-time supporter. And I am honored to be with you today.
This afternoon, I will share my thoughts about ways that many companies, including John Deere, are managing the risks and seizing the opportunities associated with global growth.
We'll start by looking at the broad economic trends that we believe hold great promise for many manufacturers. Then we'll turn to ways to capitalize on this positive situation. Finally, we'll touch on the role of corporate social responsibility in expanding our markets and customer base.
While Deere will be the primary focus in my comments, the approaches we'll be discussing are hardly ours alone. They are, in fact, relevant to many other manufacturing concerns.
Many of you are aware of the favorable trends I mentioned – and their potential impact on your own businesses. But, given their importance, I think they bear a closer look.
Consider, for example, that as a result of a larger, richer global population, farmers may need to produce as much food in the first half of this century as in the previous 100 centuries combined.
As for size, the world's population is gaining many thousands of new mouths to feed by the day – enough people, in fact, to populate nearly all of Los Angeles County by Christmas.
At the same time, rising prosperity in developing economies is spurring a further need for food, feed and fuel.
According to Global Insight, per-capita meat consumption since 2000 has risen by approximately 75 percent in Russia, 40 percent in Brazil, and nearly 25 percent in China.
Based on what's happened to meat, it should come as no surprise that global consumption of corn – a primary feed grain -- has shot up as well. Corn usage has risen for 16 years in a row, growing by over 60 percent during the period.
All in all, experts believe agricultural output will need to double by 2050 to satisfy demand – and do so with no more land, even less water, and a smaller rural workforce.
At the same time, people in emerging markets are leaving the countryside, where farming is a way of life, and migrating to cities as never before. The world's urban population is expected to double in size over the first half of the century -- and be roughly 8 times higher in 2050 than in 1950.
An urban influx on this scale could well create a virtuous cycle for many manufacturers.
It will simultaneously lead to greater farm mechanization, a larger middle class, and higher demand for agricultural commodities, as well as an increased need for housing, roads, bridges, and other forms of infrastructure.
Just to give you some idea of the scale of these opportunities, Global Insight estimates that almost half of the worldwide construction growth and nearly three-fourths of the agricultural growth in the next several years will take place in emerging economies.
Now, I realize this optimistic view may seem at odds with present-day economic reality.
There's no question the global economy is struggling right now…and the short-term outlook holds a good deal of uncertainty. At the same time, protectionist policies such as tariffs and more stringent local-content rules seem to be making a comeback.
Meanwhile, global trade – a huge source of stimulus for many manufacturers -- is slowing.
Last month, the International Monetary Fund forecast that trade growth in 2012 would trail overall economic growth for only the third time in the last 30 years – and economic growth itself is expected to barely top 3 percent.
Today's global-economic travails are real and troubling. They might even cause the opportunities we foresee to take shape with less vigor or velocity.
But take shape, they almost surely will – a fact that will likely support demand for productive equipment, the currency of AEM companies, well into the future.
Powerful tailwinds are one thing; setting an aggressive course to capture them is quite another.
So how do we do that?
We start by fashioning a plan that is focused, ambitious and actionable.
With respect to focus, it's vital to place our priority on those businesses – and only those -- best-suited to meeting the challenges ahead. This may or may not, correspond with our existing portfolios.
Deere's own strategic plan, introduced two years ago, intensifies the focus on two specific growth platforms – agricultural and construction equipment solutions.
Ag equipment will remain our largest business sector and undoubtedly become more global in scale. However, we also are making major investments to give our construction operations a more international presence.
Our other businesses – such as power systems, turf care, forestry and financial services -- remain vitally important.
But their role is complementing or supporting the core-growth operations, rather than pursuing growth for its own sake. This is a significant departure from our previous practice, in which all our businesses were held to similar growth standards.
Today's emphasis on a more integrated enterprise has caused us to exit certain businesses…reorganize still others…and be more targeted in the allocation of capital.
It was this concept that caused Deere to get out of the wind-energy business a couple of years ago. We did so not because wind was a bad business, but because it consumed a lot of management attention and was far-removed from our core growth operations.
As well, a sound strategy should involve no small degree of stretch; it should be ambitious. To that end, we should keep in mind the words of the noted Chicago architect Daniel Burnham, who famously said, "Make no small plans."
Many are familiar with that statement. But less well-know is what he said next. After make no small plans," Burnham said, "They have no magic to stir men's hearts."
More than 100 years later, those words no doubt sound melodramatic, but the point remains enduringly valid. It's important to establish realistic plans. But much can be said for giving them an aspirational quality, which challenges and inspires all of us to take our games to a higher level and ultimately produces a better result.
Deere's own strategy lays out challenging aspirations or goals, aimed at achieving substantial sales growth as well as higher operating margins and asset turns. By hitting these marks, the company would double mid-cycle sales over an 8-year period ending in 2018 and deliver an even bigger increase in profit.
Such growth is significantly above what we have achieved historically and, if we're successful, it will bring many benefits to our customers and investors.
A sound corporate strategy must be actionable as well. That is, it must be grounded in reality and consistent with a company's core values, competencies and risk tolerance.
Along these lines, it is essential that companies be able to make — and sustain -- the investments necessary to drive growth over a several-year period.
My own company today is making more investments in more places than ever before. In just over a year's time, we have announced plans to establish seven factories in markets critical to our future growth – three in China, two in Brazil, and one each in India and Russia.
In Deere's case, as in many of yours, it is important to manufacture close to the customer, not only to ensure we create products specific to localized markets, but also to blunt the impact of tariffs and local-content rules.
Investing outside the United States brings many of the same challenges as investing here at home.
Common issues range from finding and retaining a qualified workforce, to locating in areas that have a supportive infrastructure, meeting often-ambitious construction schedules, and cutting through a thicket of red tape and government regulation.
While the issues are similar everywhere, the experience outside the U.S. tends to be much more variable and less predictable.
Two years ago, Deere was able to start up its Russian factory near Moscow in a short nine months, largely because of a very positive relationship with the national and local governments. Government entities there are extremely interested in modernizing agriculture and supporting the related economic opportunities.
Similarly, just last week, I was in northeastern China to celebrate the opening of our newest factory there – our eighth. It was built in a mere 15 months, again because of supportive policies and positive government relations.
Such cooperation is not always the case. We've spent as much as two years in other places just securing the necessary permits…to purchase the land…to start the construction. It can be a lengthy and painstaking process.
Another potential stumbling block is managing differing, and sometimes-conflicting, cultural practices.
At Deere, we make every effort to be mindful, and respectful, of local customs. However, we play by the same rules everywhere.
We do not modify our values depending on the situation. That means rigorously avoiding unethical practices such as making under-the-table payments to secure deals or expedite approvals.
Sometimes, this slows down projects or results in lost business. But in the long run, it earns a lot of goodwill and, in our case, has established John Deere as a business partner to be trusted. We believe it is vitally important for companies to establish a common set of bedrock values and apply them everywhere -- without exception or reservation.
Even as we talk about expanding and reaching out to new customer groups, it is essential we keep our eye on the ball. We must continue to run all our operations safely and reliably and make sure our core customers get the attention they deserve.
At Deere, that means defending our position with production farmers in the United States – and investing accordingly.
Of the dozen or so major capital projects under way in our company today, almost half are in the United States. For the most part, these are factories that make some of our highest value products, such as large tractors.
I should point out that successful investments, wherever made, should follow proven processes and fit with a company's personality and competencies. Some companies are more cautious, or more aggressive, than others, and this is reflected in the nature of their growth plans.
To this point, Deere subscribes to what business author Jim Collins calls, "bullets before cannonballs."
That means starting out with small, highly targeted investments, or "bullets." On most occasions, we partner with established indigenous companies when entering new geographic markets, or ease into new market segments either through partnerships or selective acquisitions.
Assuming these initial steps are successful, we move ahead with a more substantial commitment and high-impact investments.
For Deere, this approach has proved to be a prudent way to balance risks and rewards. And it has helped us gain successful footholds in Brazil, China and India, among other places.
In order to invest and grow, of course, companies have to be in strong financial condition and focus on supportive practices, typically those stressing cash generation.
For this reason, some time ago Deere adopted economic profit – a close cousin of cash flow -- as a guiding business metric. We did so because even though Deere had a good record designing and building products, our record managing assets, notably inventories, was a mediocre one.
Our economic-profit model set out to change that.
Its goal was to encourage a cost and asset structure that would allow our businesses to cover their cost of capital even when times are tough.
It does so by assessing an internal charge against pretax profits based on asset levels. Lower assets mean a lower charge – and more economic profit, or what is known inside the company as SVA (Shareholder Value Added).
The results have been impactful – though they were far from immediate. In the first three years our model was in place, there was no economic profit at all – only economic losses, to the tune of about $2 billion.
I should point out Deere remained profitable on a reported basis in all but one of those years, but we clearly had more work to do on the asset-management side.
Things started to turn around in 2004 and, with the exception of the financial-crisis year of 2008, our performance has been strongly positive ever since.
As you might imagine, focusing on a measure such as economic profit often requires operational changes to improve profitability and asset management.
Among the most significant at Deere, we worked closely with our dealers and suppliers – possibly including some of you in the audience -- to move factory production from a "push" to a "pull," or build-to-order, system.
This was a far cry from our traditional way of operating, in which we had limited real-time visibility to the retail market and often produced more equipment than was required. Among other things, this tended to exaggerate industry downturns since they started out with so much extra inventory. And it certainly had a chilling effect on pricing.
The build-to-order transition took several years to put in place. However, Deere now produces a high percentage of its large equipment such as tractors, combines, and loaders in response to individual-customer orders.
As a result of steps like these, Deere has lowered its asset intensity by about half. That means future growth can be achieved with less capital at stake.
Further, these changes have benefited our customers, who can buy machines equipped with exactly the features and attributes they want -- and are willing to pay for.
Finally, investors have done well, too. Deere's stock price has outpaced the broad market by a significant margin over the last decade.
All in all, then, economic profit has made Deere leaner, stronger and better-positioned to capitalize on the opportunities that lie ahead.
As a final point, let's touch on the strategic value of responsible corporate citizenship.
Wherever we do business, John Deere strives to be a progressive employer and a good neighbor. We believe in the principle of "shared value," which calls on business to create profits in a manner that benefits society as a whole.
Thus we place a high priority on running safe, environmentally responsible operations that make a positive impact on neighboring communities.
Our company's enterprise-wide volunteerism policy – which many executives are involved with -- encourages employees to get involved and share their time and talent for the benefit of others.
To that end, as John Deere expands globally, we put great importance on expanding our citizenship activities.
As an example, Deere has been working with small tribal farmers in the Indian state of Gujarat to help them be more successful in their operations, which typically involve less than an acre of land.
In this project, we are helping open small resource centers across Gujarat, with the eventual goal of making more than 500 tractors and several-hundred implements available for use by local farmers.
We also are helping farmers there learn how to operate the equipment and training service technicians to provide maintenance support.
The results we're seeing so far are pretty dramatic: In some cases, farmers being assisted have increased their incomes as much as five-fold.
All told, we believe that some 50,000 subsistence farmers will benefit from this program over the next few years.
In another instance, we are working with community leaders in the city of Pune – where Deere has a significant presence -- to improve access to education, increase employment skills, and upgrade sanitation and health conditions.
Individually, these are relatively small projects. But collectively they are making quite an impact – an impact we're hoping to bring to other areas as we grow.
John Deere is known for carrying a sharp pencil and running successful businesses.
But by the same token, we take pride that our operations help people live richer, more fulfilling lives. And we're finding that a commitment to shared value can be an important tool in establishing one's brand and enabling growth.
In closing, I'm optimistic about the manufacturing sector's ability to help meet the world's nutritional and infrastructure requirements and thus ensure a better way of life for future generations.
This won't be an easy task and success cannot be guaranteed. But it can be done – and we have every reason, and every incentive, to do so.
After all, in one way or another, this is what our companies have been doing for a long time -- 175 years in Deere's case.
In the early days of our nation, it was John Deere's steel plow – along with Cyrus McCormick's reaper and Jerome Case's thresher – that paved the way for the settlement and eventual development of the American prairie.
Today, modern versions of farm and construction equipment are arming another economic revolution – helping feed, fuel, clothe and shelter a growing population -- while creating the means for countless people in developing nations to climb out of poverty and secure their place in the middle class.
For many years, AEM members have made a difference by promoting a better way of life.
Now we have an opportunity -- and, I might add, an obligation -- to help the world grow in sustainable ways and assist in overcoming our most pressing challenges.