A new perspective devoted to the development of the agriculture machinery market in China and ASEA region

1. PERSPECTIVE NOVEMBER 2013
RACE TOWARDS
MECHANIZATION
OF THE FARMS
A SYNOPSIS OF
THE CHINESE AND
ASEAN AGRICUL
TURE MACHINERY
MARKET
Tao Lin, Rogelio Bakels, Luca Borroni

2. Race towards mechanization
of the farms: a synopsis of the chinese
and Asean agriculture machinery
market
Published by
Value Partners Management Consulting
Fortune Gate Office Building,
1701 Beijing (W) Rd,
200040 Shanghai, China
November 2013
Written and edited by:
Tao Lin, Rogelio Bakels, Luca Borroni
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or more information on the issues
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3. CONTENTS
OVERVIEW
5
MARKET EVOLUTION AND OPPORTUNITIES
IN CHINA AND ASEAN
7
OPPORTUNITIES IN CHINA AND IMPLICATIONS
FOR INDUSTRY PLAYERS
11
KEY CONSIDERATIONS FOR INTERNATIONAL MACHINERY
MANUFACTURERS IN CHINA
16
BRIEF OVERVIEW OF OPPORTUNITIES IN ASEAN
AND IMPLICATIONS FOR PLAYERS
19
CONCLUSIONS
28
AUTHORS
PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS
30

4. China is the most promising
country for the agricultural
machinery industry, with an
increasing demand for largersized machines (40+hp),
enhanced by the growing
trend of farm concentration,
the expansion of farms
cooperatives and the increase
in land rental practices.
4–5

5. OVERVIEW
LAST YEAR, MORE AGRICULTURAL MACHINES WERE SOLD
IN CHINA THAN IN ANY OTHER NATION IN SOUTH-EAST ASIA,
WHEREAS THE NUMBER OF CHINESE GROWERS WILLING TO
INVEST IN ADVANCED AND MORE POWERFUL AGRICULTURAL
EQUIPMENT GREW STEADILY TO AN UNPRECEDENT LEVEL.
TOTAL SPENDING ON AGRICULTURAL MACHINES IN CHINA
ALONE AMOUNTED TO USD4.3 BILLION IN 2012.
MEANWHILE, ACROSS THE LESS MECHANIZED ASSOCIATION
OF SOUTHEAST ASIAN NATIONS (ASEAN), WHICH IS MADE
UP OF BRUNEI, CAMBODIA, INDONESIA, LAOS, MALAYSIA,
MYANMAR, PHILIPPINES, SINGAPORE, THAILAND AND
VIETNAM, THE VALUE OF THE MARKET SIZE IS MUCH LOWER,
COMPARED TO CHINA, AT JUST UNDER USD1 BILLION.
HOWEVER, GROWTH IN THE DEMAND FOR AGRICULTURAL
MACHINERY WITHIN THE REGION IS EXPECTED TO
MAINTAIN ITSELF AT OVER 12% UNTIL AT LEAST 2016, THUS
DEMONSTRATING THE UNTAPPED POTENTIAL FOR THESE
COUNTRIES.
NEVERTHELESS, A NEW STUDY BY VALUE PARTNERS
SUGGESTS THAT CHINA PRESENTS BETTER OPPORTUNITIES
FOR WESTERN PLAYERS TO ENTER OR TO EXPAND THEIR
PRESENCE IN THE AGRICULTURAL MACHINERY INDUSTRY
AT THIS STAGE. WHILE ASEAN CURRENTLY PROVIDE MORE
CHALLENGING SCENARIOS, THEY ARE POSED TO BECOME
VALID SUPPLEMENTS OR ALTERNATIVES TO CHINA IN THE
NEAR FUTURE.
PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS

6. IN THIS REPORT, WE FIRST ANALYZE THE AGRICULTURAL
MACHINERY INDUSTRY IN THE CURRENT CHINESE CONTEXT
AND THEN GO ON TO COMPARE IT TO THE MARKET
SITUATION IN THE ASEAN REGION BY IDENTIFYING THE KEY
ENABLERS AND CONSTRAINTS AFFECTING THE OBSERVED
MARKET REALITIES.
DATA USED FOR OUR ANALYSIS WERE COLLECTED FROM
OFFICIAL AND INSTITUTIONAL SOURCES ACROSS CHINA AND
ASEAN.
6–7

7. MARKET EVOLUTION
AND OPPORTUNITIES IN
CHINA AND ASEAN
China and ASEAN, where more than half
of the land is dedicated to agriculture,
have historically been characterized
by highly fragmented farms across
their territories. Out of the world’s 500
million small farms (<2 hectares), China
currently claims roughly 193 million
(38.6%), followed by Indonesia with 17
million (3.4%) and Vietnam with 10 million (2%).
The small size of the farms, which
reflects low access to credit as well as
high vulnerability towards climate conditions, in addition to low investments
in infrastructure and mechanization, are
at present unfavorable conditions for
investment in ASEAN in the short term.
The current outlook for China is instead
more positive. The existing and improving level of infrastructure, together
with political support in favor of the
mechanization of the farms, as well as
alternative sales channels and ease of
access to different forms of credit from
growers, are all factors that contribute
to more stable and suitable conditions
for foreign companies to enter and
expand nowadays their investments in
the country.
PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS
Over the last decade, governments
within both ASEAN and China are responding in support of the agricultural
industry through incentives and new,
enhanced regulations in an effort to
facilitate the development and modernization of the agriculture industry. The
political support is generating its most
concrete results within China, where
it is contributing to boost agricultural
productivity from crop fields, therefore
creating more opportunities for manufacturers and suppliers of agricultural
equipment.
In the following sections, we provide a
detailed summary of the most relevant
key drivers of the industry and the level
of subsidies provided by the different
governments within both ASEAN and
China.

8. Exhibit 1
Twenty years of cultivated land increase and improved efficiency
in production yields in China and ASEAN
Cereal Cultivated Land (hectares) and Yield (kg/he), 1989-2011
180
5000
4800
170
4600
160
4400
4200
150
4000
140
3800
3600
130
3400
Source: The World Bank, 1989-2011
2011
2009
2007
2005
2003
Cereal Yield
2001
1999
1997
1993
Land under cereal production
1995
1991
3200
1989
120

9. Crop cultivation across ASEAN
and China
China vs. ASEAN
Elements of comparison
Despite partial shifts, particularly nearby
large metropolitan areas, from drycrop (cereals) to fresh-crop (fruit and
vegetable) cultivation, the vast majority
of crop fields in China and ASEAN are
still mainly focused on the production of
cereals, such as rice (mainly China, Indonesia, Vietnam, Thailand), wheat (China)
and corn (China, Indonesia, Philippines).
This geographical cultivation pattern is
then reflected in the types of equipment
demanded and utilized in agriculture
across the different regions.
The regions considered in this document (Vietnam, Thailand, Philippines,
Indonesia and, partially, Malaysia)
present differences in their respective levels of mechanization, valid key
indicators to directly understand the
production capacity trends of each individual country. Indirectly, the mechanization level measures the attention and
efforts from local governments in securing a solid base of food production to
satisfy the increasing local demand.
During the past 20 years, the land cultivated with cereals in China and ASEAN
achieved an overall increase from less
than 160M (1989) to almost 175M
hectares (2011), combined with an
increase in the yield of cereals produced
from around 3,400 kg/hectare (1989)
to almost 4,800 kg/hectare (2011).
The trend is clearly visible in the following chart which provides an overview
of cultivated land and production yields
over the last 20 years in the ASEAN and
China regions. (See Exhibit 1)
As of 2012, China presented a horsepower per hectare (hp/he) value of 4.1,
which is significantly higher than any
individual ASEAN country. The hp/he
indicator tells us that China is further
ahead, when compared with its neighboring countries, and suggests that
there may be more need of agriculture
equipment in less mechanized countries.
However, there are other relevant
factors which make us believe, on the
contrary, that China expects to further
increase its internal demand for agricultural machinery at a higher ratio than
that of less mechanized countries, such
as Philippines or Indonesia.
At this stage, what creates expectation
for the future of the agricultural machinery industry is better represented
by numerous additional variables,
including the future development of
each country’s demographics, industry
practices and consumption trends.
PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS

10. According to our analysis, China is
the most promising country for the
agricultural machinery industry, with
an increasing demand for larger-sized
machines (40+hp), enhanced by the
growing trend of farm concentration,
the expansion of farms cooperatives
and the increase in land rental practices.
Moreover, the Chinese government is
paying more attention to improving
efficiency and increasing yield output
for the agricultural sector through new
policies focusing on:
• Pushing for agricultural R&D input,
encouraging innovation in agricultural
production technologies
• Boosting large-scale production,
standardization and modernization of
agricultural production processes
• Encouraging sustainable agricultural
resource utilization and environmental protection (energy saving and
emission reduction)
10 – 11
Finally, China is by far the country
which offers not only a high proportion
of its output in dry-crop (more favorable to accommodate the shift from
labor intensive to capital intensive),
but also a larger amount of available
arable land.
Moreover, as we will see in the next
section, the changing industry dynamics, more favorable to accommodate
a relative free and open market,
make China an easier target for foreign
players to compete for a larger proportion of the expanding national agricultural machinery industry.

11. OPPORTUNITIES IN CHINA
AND IMPLICATIONS
FOR INDUSTRY PLAYERS
Healthy industry growth
and increasing demand for
modern machinery
Driven by robust growth in recent years,
sales of agricultural machinery in China
reached ~USD 3.3 billion in 2012 (up
~19% from 2011). The sector grew at an
impressive rate of ~18% CAGR between
2008-12 as the amount of cultivated
land expanded and due to strong Government support to mechanize agricultural processes and boost food production. Going forward, the development
of the agricultural machinery industry
is expected to remain healthy (growing
at a rate of ~10% CAGR from 2012-17),
indicating scope for major foreign players to make long-term investments in
the country. (See Exhibit 2)
Since policies to support the purchasing
of agricultural machinery were introduced in 2004, the industry has made
great strides. Demand for more powerful machines has expanded and total
industry power has increased at a rate
of ~6% between 2004-12 to reach ~999
million kw in 2012. Total industry power
is expected to surpass ~1 billion kw this
year, and is anticipated to maintain its
healthy momentum in the coming years,
growing at a rate of ~7% CAGR from
2012-15. (See Exhibit 3)
PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS
Overall, modernization has been the
focal point of development in Chinese
agriculture, and demand for high
power and performance machinery has
maintained strong growth momentum.
Testament to this modernization is the
increasing proportion of high horsepower tractors in use (ratio of large to
small tractors changed from 1:4.1 in 2011
to 1:3.9 in 2012), which indicates strong
scope for established foreign players to
capitalize on these market opportunities.

12. Exhibit 2
Agricultural Machinery – China, expected revenue
market size (USD billion, 2012-2017e)
Exhibit 3
Agricultural machinery – China KW power
trend (million kw, 2011-2015e)
10%
6,4
1,223.0
2015e
2014e
1,117.6
2013e
999.0
2017e
2015e
2016e
977.0
1,056.0
* 2012
5,4
2011
5,9
2014e
4,8
2013e
2012
4,3
8%
7,0
CAGR
Exhibit 4
China Central Government subsidies budget for the purchase
of agricultural machinery
SUBSIDIES (RMB BILLION)
2007
2008
2009
2010
FULL YEAR
2
4
13
15.5
2012
2013
11
1ST STAGE
2011
13
20
17.5
21.5
2014
2015
~61
Total expected subsidies of RMB100 Billion (2011-15)
Source: Marketline, China Ministry of Agriculture, VP Analysis
Note: *Unofficial
12 – 12

13. Continued government support
to mechanize agriculture and boost
food security
Moreover, as part of China’s latest
five-year plan (2011-15), the Central
Government is committed to improve
agricultural mechanization in order to
boost food production and ensure food
security for its citizens.
Total agricultural subsidies are expected
to reach ~RMB 100 billion (~USD 16 billion) over a five-year period by the end
of 2015, and are focused on growing the
importance of high powered machines
and tools.
For example, the subsidies for tractors in
China are as follows (see also Exhibit 4):
• Small-Medium tractors (<100 hp):
– Base subsidy of 30%, with
exception of growers in areas
affected by earthquakes
(up to 50%)
– Maximum value of subsidy
of RMB 50,000 (<USD 8,000)
• Large tractors (>100 hp):
– Maximum value of subsidy
extended to RMB 120,000
(~USD 20,000)
Strong support from China’s Central
Government to modernize and mechanize the agricultural sector therefore
provides foreign companies with ample
scope to capitalize on these market opportunities.
PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS
Industry development and market
dynamics concerning strong
market potential, and proliferation
of international firms
China’s strong market fundamentals
have not gone unnoticed by major
international players. International
agricultural machinery corporations are
increasingly entering and expanding
their manufacturing facilities in China,
and contribute to the development of
a healthy market by bringing in great
improvements through innovative technologies and service capabilities.
The “long-tail” of inbound investments
commenced at the end of the ‘90s,
with Japan’s Yanmar (1997) and Kubota
(1998) and US-Italian player Case New
Holland (1999) leading the pack as firstmovers. Since then, 12 of the world’s
largest agricultural machinery companies have entered the Mainland, either
by establishing wholly-owned subsidiaries (e.g. ISKEKI, SAME Deutz-Fahr)
or through joint ventures with local
enterprises (e.g. Mahindra, TangYang).
(See Exhibit 5)

14. Exhibit 5
Main Foreign Agricultural Machinery companies
First establishments in China
COMPANY
COUNTRY
OF ORIGIN
YEAR AND PLACE
ESTABLISHMENT
IN CHINA
MAIN FOCUS
1997 (JIANGSU)
Rice combine harvesters,
high-speed rice transplanters
1998 (SUZHOU)
1999 (HARBIN)
100-200 Hp tractors product line
2000 (TIANJIN)
20-120 Hp tractors product line
2001 (JIANGSU)
High performance rice transplanters,
and harvesters
2005 (JIANGLING)
15-80 Hp tractors product line
2006 (CHANGZHOU)
Combine harvesters, rice transplanters
2006 (URUMQI)
High-powered tractors
2007 (DALIAN)
80 Hp tractors
2007 (NANJING)
Semi-feeding combine harvester,
high-speed rice transplanters
2009 (CHANGZHOU)
Small-Medium Hp tractors
2009 (QINGDAO)
14 – 14
Combine harvesters,
rice transplanter
51-100 Hp tractors

15. Since their initial entry and establishment, the majority of international firms
have enriched their product offerings’ value proposition to differentiate
themselves, in order to face the growing
competition. International agricultural
equipment manufacturers have diversified their product offerings away from
solely tractors to also include combine
harvesters and transplanters.
This trend is expected to continue
going forward, and coupled with supportive policies from China’s Central
Government, there are great opportunities for new entrants and for further
expansion of existing players. In fact,
some of the major international players have recently expanded both their
manufacturing facilities and dealer
channels in China.
Firms are also increasingly augmenting
their value propositions to customers,
by providing them with a holistic range
of ancillary services, including training
and financial aid, amongst others.
American company John Deere for
instance opened a new plant for the
production of large agricultural equipment near Harbin in 2012. US-Italian
manufacturer CNH followed suit, as
it began construction of a ~USD 90
million manufacturing plant in Harbin
earlier this year. Upon completion, the
400,000 sqm facility will produce high
horsepower tractors, sprayers, combine
harvesters and other machinery featuring advanced technology.
Moreover, in order to better address the
market modernization drive and growing demand for powerful and efficient
machinery, both foreign and local
manufacturers have started to introduce
technologically advanced agricultural
machinery to their basic offering (e.g.
YTO introduced a 380 Hp tractor to its
product line in 2009).
PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS
Overall, future market potential for
agricultural machinery in China is
sound, and provides manufacturers with
ample scope to capitalize on emerging
opportunities.

16. KEY CONSIDERATIONS FOR
INTERNATIONAL MACHINERY
MANUFACTURERS IN CHINA
1. Service contracting is the most
viable entry point for Western
manufacturers
2. Chinese customers are highly
price sensitive
The three main market segments for
agricultural machinery in China are
state farms, large land contractors, and
private service contractors. Westerns
companies, such as John Deere, have
most of their customers in the private
service contractor segment, since most
of the Chinese growers do not possess
farmlands large enough to justify direct
investment in machinery. Instead, they
are more willing to pay a small fee to
service contractors in exchange of services including plowing, planting, tilling,
and harvesting for their small farming
acres.
When targeting potential Chinese customers for agricultural machinery it is
key to understand what their trade-off
between quality and price is, and take
into consideration their high price sensitivity. According to L.L., Senior manager
of a USD multi-billion heavy machinery
international firm (June, 2013): “several
manufacturers of heavy machinery
(both local and foreigners) across different industries, realized that Chinese
customers are very price sensitive as a
result of their short-term business orientation, and reacted accordingly”.
In China, the government’s support
efforts to boost grain production and
promote land concentrations, are keeping the demand for agricultural machinery very high, particularly for larger
horsepower tractors. However, this
government support risks to falsify the
normal seasonality of the industry sales,
affecting the reliability of the forecasts
thus creating risks of overcapacity for
the market players. As a consequence,
major manufacturers of agricultural
machinery are forced to draw from
seasonal part-time hiring as strategy to
lower their risk of labor overcapacity.
16 – 17
In fact, during the procurement activity,
particularly for non-critical components, the preference of manufacturers goes in favor of cheaper supply
and lower quality components. As an
example, a tube-shaped connector that
traditionally is manufactured by using
steel or other metals, would be substituted by a similar one made with plastic,
as far as it doesn’t affect the functionality and safety of the whole equipment.
This “downgrading” process takes place
as much in construction machinery as it
does in agricultural machinery.

17. 3. Direct ownership of distribution
channels is key to ensure capillarity
and reach
4. A carefully defined marketing
and branding strategy is essential
to influence customers
To compete in the dynamic and fast
growing Chinese market, quick access
to a developed local distribution channel is a key component for success for
Western manufacturers. Since building
access to the market from scratch is
very difficult, finding a local partner
is one option; but since most partners
usually work with a number of domestic
suppliers, this weakens the bargaining
power of the Western manufacturer
and may result in lower profit margins
with no guarantee of long term orders.
For Western manufacturers who have
already gained scale and market position, direct ownership of local sales and
distribution channels, possibly through
acquisition, may be a better option.
Generally, companies in the after-market
are easier acquisition candidates than
those in the OEM market.
Finally, as in most countries, advertising
needs to be adapted and tailored to local conditions, considering the different
type of segmentation and customer
targets. In China, those targets include
dealers and government officials as
well as “traditional” final end-users
(landowners and local cooperatives).
To enhance awareness of its brand in
China, it is particularly recommended
for foreign agricultural machinery companies to provide potential clients with
technical demonstrations during exhibitions and country fairs. This should help
customers to have more confidence
with the new equipment and learn how
to efficiently use it.
Branding is also exceptionally important in China due to its fierce internal
competition, relatively inexperienced
buyers and generally untrustworthy
quality standards. A famous brand
name lifts buying impulse, makes purchasing decisions easier and is sometimes considered a status symbol, even
for B2B products such as agricultural
machinery.
A sound brand name helps companies
to establish and better communicate its
values. The name ought to be unique,
bombastic and pertinent to either the
product category and/or the customer
benefits. Brands with Chinese names
are well recognized, more commonly
searched on the Internet and offer more
protection from potential imitators.
PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS

18. Exhibit 6
ASEAN – Analysis of the Countries’ main drivers in the Agricultural
Machinery Industry
Market Size
5
4
Purchasing Propensity
for new machineries
3
Mechanization Level
2
1
0
Access to Credit
and Infrastructure
Midness of Competition
Political Support
Indonesia
Philippines
Thailand
Vietnam
Malaysia
18 – 15

19. BRIEF OVERVIEW OF
OPPORTUNITIES IN ASEAN
AND IMPLICATIONS FOR
PLAYERS
Market size to continue steady growth
Having previously stated that China
represents the best opportunity at
present, there are some key ASEAN
nations which can provide good opportunities for market entry and/or for
growth within the agricultural machinery industry in the long run. All of them
show different characteristics and key
drivers for success, therefore deserving
special attention and consideration on a
country-by-country analysis.
In our analysis, we broke down each
category/driver to identify the current
status for each of the ASEAN nations
we observed. (See Exhibit 6)
While the agricultural machinery market
value for China in 2012 was set at
USD4.34 billion, more than one third of
the total Asia-Pacific value (USD12.2 billion), the combined value for the other
observed ASEAN markets (Thailand, Vietnam, Malaysia, Indonesia, Philippines)
was USD0.97 billion (7.95% of the total
Asia-Pacific value). More specifically,
the market size was USD470 million for
Indonesia, USD210 million for Thailand,
USD110million for Vietnam, USD100million for Philippines and USD80million
for Malaysia.
Official sources estimate overall growth
for the agricultural machinery market in
China and ASEAN for the period 20122016 to have a CAGR of 12.1%.
Level of mechanization in Thailand
and Vietnam setting a benchmark
Official sources estimate
overall growth for the
agricultural machinery
market in China and ASEAN
for the period 2012-2016
to have a CAGR of 12.1%.
PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS
In terms of farm mechanization levels,
the situation of the agricultural machinery industry among ASEAN countries is
progressing, but the gap with the “Giant
China” is still significant. In contrast with
China, which enjoys a farm mechanization rate of 4.1 hp/ha, ASEAN countries
have a range mechanization rates from
1.56 hp/ha (Thailand, Vietnam)to 1.23
hp/ha (Philippines), with Malaysia and
Indonesia lying in between at a rate of
1.3 hp/ha. (See Exhibit 7)

20. Exhibit 7
China vs. ASEAN – Level of Farm Mechanization
(Hp / hectare, 2012-2013)
4,10
1.30
ASEAN - Area of Analysis
20 – 20
1.23
PHILIPPINES
VIETNAM
THAILAND
CHINA
1.30
INDONESIA
1.56
MALAYSIA
1.56

21. Political support to boost food
production
Local governments are trying to support the agricultural machinery industry
through several different forms of subsidies and incentives in order to accelerate the modernization rate of the farms
within their respective countries.
In the Philippines, the Department of
Agriculture is targeting to reach a farm
mechanization rate at par with neighboring countries within five years. In
order to achieve its goal, the government set a generous farm modernization program, providing subsidies up to
85 percent of the acquisition costs of
farm machinery. However this program
is targeting only qualified farming
organizations.
In Thailand, the “Thailand Board of
Investment” offers a wide range of fiscal
and non-tax incentives for investments
based on location. Tax-based incentives include exemption or reduction
of import duties on machinery and raw
materials, and corporate income tax
exemption and reduction.
In Indonesia, the subsidies provided by
the government are not very high. Some
of them include USD3 million in support
in 2010 to improve the development
of agricultural infrastructure for six of
the major sugar producing companies.
The subsidy covered up to 10% of the
companies’ expenditure in renewing
outdated machinery equipment.
PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS
In Vietnam, since 2008 the government has introduced policies in favor
of loans concessions (up to 80% of the
total investment) at very low rates and
with at least three years to maturity.
Moreover, since 2010, the taxation on
imported agricultural machinery has
been reduced to less than 5%.
In Malaysia, the goal of the government
is to focus exclusively on efficiency
by increasing the yield outcome and
promoting large production based
cultivations. There is no direct financial
support in favor of growers as the efforts made in favor of providing higher
education to create more specialized
and skilled human resources.

22. HIGLY
FRAGMENTED
FRAGMENTED
RELATIVELY
FRAGMENTED
RELATIVELY
CONCENTRATED
INDONESIA
VIETNAM
PHILIPPINES
LEVEL
OF COMPETITION
MALAYSIA
Exhibit 8
ASEAN – Competitive Landscape – Major foreign players
RELATIVELY
CONCENTRATED
Source: Value Partners analysis
22 – 22
THAILAND
KEY FOREIGN
PLAYERS

23. Mildness of competition leaving space
for new entrants’ opportunities
Among ASEAN, the competitive landscape for the agricultural machinery
market offers different levels of intensity
(See Figure 8). In Indonesia the market
is very fragmented with several major
foreign companies including Yanmar, Errepi, Landini, Kinta, Iseki, MTZ, Mahindra
and Kubota.
A contrary situation is present in Thailand, where Kubota is a primary foreign
company well-established in the country (more than 50% market share), with
Yanmar and Mitsubishi recently entering
the market.
In the Philippines, Kubota, Landini and
New Holland are equally competing
each other while in Vietnam, Kubota and
New Holland are mainly competing with
Yanmar and MTZ. In Malaysia, the foreign players contending one another are
Caterpillar, Yanmar, Errepi, Landini, Massey Ferguson and Kinta. (See Exhibit 8)
PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS
Low access to credit and poor
infrastructure keeping the potential
untapped
In Indonesia, only 25% of growers possess a formal ownership certificate, a
necessary element to access forms of
credit in order to afford investments in
improved technology and machinery.
Moreover, the country has suffered
from a high deterioration of rural infrastructure facilities (only 19% of the road
network is considered in good condition), and an underdeveloped microfinance system, making it hard to access
credit and invest in modern machinery
technology.
In the Philippines the scenario is very
similar, where environmental degradation and a lack of infrastructure have
resulted in a weak agricultural manufacturing industry. Despite an improving
microfinance system, access to credit is
still very low, if not just limited to larger
growers.
In Vietnam, the local authority has used
the increased availability of credit as
a powerful tool for poverty reduction
and to promote agricultural production.
There exist three major formal lenders providing credit to the rural area,
namely Vietnam Bank for Agricultural
Development, Vietnam Bank for Social
Policies and People Credit Funds. In
the period 2005-2010, average growth
rates of outstanding loans of VBARD,
VBSP and PCFs were 24.5%, 33% and
30%, respectively (HDSB, 2010).

24. In Thailand, even though some steps are
being made towards increasing credit
access to individual growers, the major
lending institution, Bank of Agricultural
Association and Cooperatives, is still
specifically mandated to lend mainly to
grower cooperatives and organizations
at relatively high interest rates.
In Malaysia, rural households have been
introduced to debt through loans and
credit cards as a means to acquire
goods and services to increase their
standard of living, creating a debt trap.
This burden is partly to be blamed on
the lack of micro-SME development, due
to the inability to pursue opportunities
because of the lack of capital.
Purchasing propensity for machineries
mostly focusing on rice cultivations
In Indonesia, agricultural output is
mainly composed of rice (36.5 mmt)
and corn (8.85 mmt), which is produced
almost exclusively by small farms, the
majority of which do not exceed 1.5
hectare. The main forms of agricultural
machinery used within the country are
tractors, combine harvesters and rice
transplanters.
In the Philippines, agricultural output
is mainly focused on sugarcane, rice,
coconut and corn. Most of the farms are
smaller than 2 hectares. Among cereal
agricultural cultivations, rice and corn
are the most mechanized.
24 – 25
In Vietnam, rice is by far the most
relevant product (27.15 mmt), followed
by corn (4.65 mmt). It is estimated
that Vietnam is provided with 0.5 million tractors, averaging 10hp/tractor.
The average small size of tractors in
Vietnam is justified by the extremely
extensive presence of small farms and
the country’s constraints against landsconcentration.
In Thailand, 50% of the land is allocated
to rice cultivation. During the harvesting
period, the use of threshing machines
is very intense, as well is the use of mechanical dryers and transplanters. The
average size of farmlands is extremely
small due to high land rental and the
limited size of farms plots.
In Malaysia, the agriculture industry’s
main output products are rubber,
palm oil and rice. The country has
300,000 rice growers (2009) cultivating a 672,000 hectare land, averaging
3.66mt/ha. The government’s efforts
in promoting large production based
cultivations aren’t yet having concrete
results. Buyers’ focus is more set on
increasing yields rather than increasing
the size of farmlands.

25. Which is the next country ready
to take off?
Even though China still offers better
conditions for immediate successful
entry into the agricultural machinery
industry, ASEAN countries can be also
valid candidates for enter of expansion in the near future. Despite their
geographical proximity, they are very
diverse and characterized by different
positive and negative aspects that make
it necessary to consider them on a oneby-one basis.
In fact, importing machineries from outside is relatively expensive due to high
import taxes, but producing internally
and investing strongly in marketing activities will offer undoubted benefits to
compete in a largely rice-driven market
with only one foreign player (Kubota)
currently well established in the market,
with two more (Yanmar and Mitsubishi)
in the process of challenging its future
leadership.
As summarized in the following table,
each ASEAN country shows good potential for future success.
However, each country has a certain
constraints posing as threats to the
immediate profitability of new large
investments in the industry while also
limiting the current potential from being
fully exploited. (See Exhibit 9)
It will take some time to create the right
awareness among buyers and to position as a valid alternative to the existing
and the newly entered competitors but
the outcome can be rewarding in the
long run.
The next country that is likely to takeoff is Thailand, whose main constraints
are related to the competitive landscape. Entering the market will require
high fixed costs, particularly regarding
manufacturing facilities, marketing and
promotion.
PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS
The opposite situation is currently
present in the Philippines. The country
is relatively large and the government’s
main focus is to align the internal
mechanization level of the industry to
that of neighboring countries. However, the current level of environmental
degradation and lack of infrastructure
are posing serious risks on the sustainability of the agriculture industry and
therefore on the agricultural machinery
sector. Moreover, in order to improve
growth in the level of mechanization,
the government needs to make more
effort to push for consolidation of the
farms and extend the current subsidies
more in the direction of individual growers, rather than just focusing on farming
organizations.

26. Exhibit 9
Thailand offers better perspectives in the near future
as valid candidate for market entry/expansion
COUNTRIES
PROXIMITY
TO TAKE-OFF
ENABLERS
• Current market size above ASEAN average
• High level of mechanization
• Lending institutions making steps towards
individual farmers
• High use of rice-driven machinery
• Largest market size
• Relative high use of tractors
and combine harvesters
• Very fragmented competition with space
for integration
INHIBITORS
•
Currently high barriers from competitive
landscape with established Kubota almost
monopolizing the market as key keader
foreign player
• High land rental costs
• Not yet mature from mechanization
level perspective
• Required ownership certificate to access
credit
• High level of mechanization
• Extensive use of small-sized tractors
• Political support in favor of access
to credit and low taxation on imported
machinery
• High constraints against land
concentration
• Fragmented competition without
strong leadership
• Government push for large production
not concretized (yields focus)
• Advanced technology very welcomed
among farmholders
• Relative small market size among ASEAN
• Rice and corn are the most mechanized
cultivations in the counrty
• Very immature market from mechanization
level perspective
• Farmers trapped into debts due to lack
of micro-finance system
• Subsidies targeting mainly farming
organizations
• Lack of infrastructure and environmental
degradation
26 – 26

27. Countries perhaps better positioned
than the Philippines to be considered at
this stage are Indonesia, Vietnam and
Malaysia.
Indonesia is not only the largest market, but it is also the one in which the
competition is the most fragmented.
This scenario offers additional opportunities, either through integration or
direct entrance through acquisition.
What is currently limiting the expansion
of the agricultural machinery industry
in Indonesia is the current need of a
land ownership certificate in order to
gain access to credit. Only then growers are able to afford new tools and
improved equipment to work the land.
This constraint is limiting the expansion
of individual growers’ output since they
are not able to fully benefit from “landrental leverage” strategies.
Vietnam, similarly to Indonesia, is facing
constraints against land concentration.
However, the access to credit is easier
and the taxation on various types of
imported agricultural machinery is
very low (5%) making it convenient for
foreign players to import from overseas
rather than establishing production
facilities (along with high fixed costs) in
the country.
PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS
The current situation in Malaysia is very
unusual. Competition is fragmented and
high technology and modern machineries are welcomed. On the other side, the
market is very small and the future of
the agriculture is at risk due to the high
industrialization level which the country
is set on. Moreover, many growers are
trapped into debt issues and thus cannot afford new investments on machineries and farming equipment.

28. CONCLUSIONS
Given the current context, it is expected
that, for western companies, new establishments of manufacturing and selling
activities for agricultural machineries
will be challenging within ASEAN.
The main problems are generally
related to the small average size of the
farms, poor existing infrastructure and
low access to credit.
There are signs of improving opportunities in the industry, supported by increased spending by local governments
to accelerate the mechanization of the
farms. However, building a sustainable
strategy for ASEAN markets will require
time, necessary for the local governments to solve and remove some of the
constraints which are preventing the
different local agricultural machinery
industries to fully take-off.
Considering China, although several
foreign players have already established themselves in the Mainland
market, either through direct entities or
through JVs with local manufacturers,
the expected continuous growth of the
agricultural machinery industry leaves
space for many new opportunities.
28 – 29
For example, the growth of the highpower tractor segment, which is higher
than the growth rate of small-sized tractors, is driven by changes in the ways
the agriculture sector is developing
nowadays.
The more extensive use by growers
of agricultural service companies is
changing the shape of the traditional
agriculture context in China, where
investment in mechanization was once
mainly dependent on growers’ income
and access to credit.

29. The political support is
generating its most concrete
results within China, where it is
contributing to boost agricultural
productivity from crop fields,
therefore creating more
opportunities for manufacturers
and suppliers of agricultural
equipment.
PERSPECTIVE RACE TOWARDS MECHANIZATION OF THE FARMS

30. AUTHORS
TAO LIN
Partner, Shanghai Office
tao.lin@valuepartners.com
ROGELIO BAKELS
Consultant, Hong Kong Office
rogelio.bakels@valuepartners.com
LUCA BORRONI
Consultant, Shanghai Office
luca.borroni@valuepartners.com
30 – 31

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