One of the world’s largest farm equipment manufacturers is predicting a bright future in China, and it is putting its money behind that belief. AGCO, parent company of well-known brands Massey Ferguson, Fendt, Valtra, GSI, and Challenger, has opened a new state-of-the-art manufacturing facility in Changzhou to serve both its international needs and what it sees as growing opportunities in China.

It also signed a Memorandum of Understanding with Chinese e-commerce giant Alibaba to expand its distribution network across the country right to the village level.

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Those investments come at a time when farm machinery sales are falling in almost every global farm equipment market, and have been for at least the last couple of years.

The tractor sales market, for example, sank around the world in the first nine months of 2016, according to data from the Agrievolution Alliance, including declines of six per cent in Europe, 29 per cent in China, 17 per cent in Brazil, 19 per cent in Russia and 24 per cent in Japan.

The decrease is driven by a global fall in farm incomes, Agrievolution says in a report it released in November at the International Agricultural and Gardening Machinery Exhibition held in Bologna, Italy.

However, even in that context, the Asia Pacific region is leading the global agricultural machinery market, says a market analysis released earlier this year by research firm Technavio. In fact, it predicts annual sales will hit US$74 billion in the region by 2020, due largely to subsidies and increasing demand for mechanization.

That’s certainly the case in China, where generous government payments and land reform policies are driving mechanization, technology adoption, and the creation of larger farms.

“Agriculture is probably the most important sector in China, given the size of the country,” AGCO vice-president and managing director of China Fred Yang told a meeting with international ag journalists in Changzhou in September.

The country’s five-year economic plans switched their primary focus from industrial development to agriculture in 2004, sparking significant change in the sector. Large agricultural machinery co-operatives started forming to consolidate land into larger parcels more suitable for farm equipment use.

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A central government incentive program for agricultural machinery purchases provides a 30 per cent subsidy for each machine, with some local governments topping that up with additional funds of up to 20 per cent in some areas.

Of China’s three largest crops, wheat production is now 90 per cent mechanized, corn harvest mechanization has risen from 40 to 60 per cent in the last three years, and rice paddy planting is approaching a mechanization rate of 40 per cent.

AGCO has a relatively new footprint in China, establishing AGCO China in 2008, but its Valtra brand entered the market in 2001. The almost 200,000 square metre facility in Changzhou opened in August 2015, and is the manufacturing base for the new Global Series Massey Ferguson tractors for both China and AGCO’s international markets.

The Asia Pacific region represents five per cent of AGCO’s global business, compared to its largest market of Europe and the Middle East at 56 per cent, and North America at 25.6 per cent.

But that doesn’t mean AGCO can just walk in and do business the way it does in other regions.

“It’s a completely different type of farming here than in Europe. We manufacture different products for each region and distribute them differently. In China, our focus is on Massey Ferguson,” Gary Collar, AGCO senior vice-president and general manager of Asia Pacific, told the same meeting.

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“China is a diverse market, and it’s a mistake if you treat it all as one — you need to take a tailored approach to be successful in China,” Collar said.

A lot of that diversity stems from China’s size and geographic differences. The country covers five time zones, six climatic zones — from deserts to rainforests — and up to 18 different types of soil conditions. Large, modern farms dominate the northern regions, whereas small farms looking to increase yields and productivity are still common in the south.

“China has 22 per cent of the world’s population and nine per cent of the arable land, so mechanization and global-leading farm yields are absolutely critical to a stable farm economy,” Collar said.

Overall, the central government’s continued emphasis on larger farms and more scale means future growth in the 70+ HP tractor category and in new combine harvester technology, representing a tremendous opportunity for AGCO, according to Collar.

“The government’s current five-year plan has a focus on locally made machinery, which means that if we want to compete in China, we will make our product in China,” Collar said.

Currently, the Changzhou factory’s production represents about 10 per cent of the Chinese market, but AGCO hopes to increase that to 25 to 30 per cent as the market continues to grow.

The Global Series tractors are expected to start qualifying for the government subsidy in early 2017, which will open new opportunities for AGCO in China, predicted Sun Lei, AGCO’s director of business process, China.

Meanwhile, AGCO has been busy preparing itself for that milestone, developing its distribution channels throughout the country.

In addition to Changzhou, the company boasts three other manufacturing sites in China, alongside three parts warehouses, three engineering centres and six sales offices. These are supported by an extensive regional network of dealers that can help meet growing demand from Chinese farmers for quality, reliability and service.

“We’ve built a branded ‘experience store’ so customers can come in and try the tractors,” said Yingfu Xu, vice-president of Suxin Yuanwei AM Co., Ltd, an agricultural machinery company in Jiangsu Province that has built a strategic distribution alliance with AGCO.

Jiangsu Province is located north of Shanghai, and with a population of 80 million people, it’s one of China’s leading agricultural areas with approximately 2.5 million arable acres.

“Chinese farmers have high requirements for farm equipment, and brand is crucial,” Yingfu said, adding that in addition to sales, his company also offers agronomy seminars for big AGCO clients in the region as a way of helping boost efficiency and production volumes.

Outside of the larger centres, AGCO has launched a unique partnership with Chinese e-commerce firm Alibaba to reach customers in rural markets.

AGCO products are being marketed through cun.taobao.com, an Alibaba platform that offers products and services to rural villagers.

Alibaba’s network of operation centres in 100 counties across China provide after-sales service and technology support for Chinese users of AGCO products, helping the company do a better job of reaching customers across the entire country.

“Distribution is an important part of our vision, and this new partnership with Alibaba is a very innovative approach to rural markets,” Yang said. “We’ve put people in 10,000 cities who can reach customers we wouldn’t be able to reach otherwise.”

According to Alibaba Group, approximately 600 million Chinese live in rural regions. They represent a largely untapped opportunity for e-commerce, with China Internet Network Information Centre data showing fewer than one in three rural residents use the Internet.

In October 2014, as part of the Rural Taobao initiative, Alibaba announced it would invest C$1.7 billion over the next three to five years to build 1,000 county-level Taobao rural operations centres and 100,000 village-level rural service centres to boost rural e-commerce development.

Such moves make Collar confident of AGCO’s future in China, pointing to the country’s relentless drive to adopt technology and modernize its agricultural sector, and a GDP growth that, although slowing compared to previous years, was still achieving 6.6 per cent year growth in 2016.

“Even though China’s economy is slowing, other economies would be jealous of those numbers,” Collar said. “We have to keep the economy in perspective. China is diverse and challenging, but also quite a fun market to be in.”