John Deere In Russia Building a New Market

John Deere In Russia Building a New Market 1 Growth Amidst Uncertainty Russian Macro Economics • Inflation below 10% for the first time • Growth above 5% • Growth in non-fuel exports exceeds 10% Russian Economic Growth and Inflation 25 20 15 10 5 0 2000 2001 2002 GDP, % 2003 2004 2005 Inflation % (CPI) 2006 2 Growth Amidst Uncertainty Russian Ag Economics • High Grain Price Volatility – Over 30% decline in prices peak to valley – Low Fall 05 commodity pricing hurt preseason sales – Rebounding summer prices driving robust late season demand 4.50 Russian Grain Prices (Rubles per Kilo) 4.00 3.50 3.00 2.50 2.00 Jan-05 May-05 Sep-05 Jan-06 May-06 Wheat (Durum) Wheat (Soft) Rye (3rd class) Barley 3 Russian Agriculture 120M HA of Agricultural Land 24% More than the U.S. and Canada Combined 4 Agricultural Equipment Market 2 Stories Current Reality • Current Import Market – Strong Growth in past several years – Volumes on par with a strong regional export market • 1,100 Combines • 1,200 Tractors Future Potential • Total Market – Current sales of domestic manufactured units 10x import equipment market – Current annual sales 2/3 estimated replenishment requirements • Current Economically Viable Agricultural Base – Early emergence of large scale agribusiness concerns – 3-4 Years of ownership consolidation • Total Agricultural Base – Less than 10% of agricultural land collateralize-able – 40M HA Land Fallow – • Area The size of France 5 Russian Agricultural Land Reform • Land Privatized in 1992 – 1994 – State Farm Workers given share in land they worked • No Management Structure developed • Only the State could buy shares • No clear title – Banks would not accept land as collateral for operational loans • Ownership Laws liberalized in 2002 – Shares can be bought & sold or Leased – Land very gradually starting to be collateralized • Only 8 – 10% of agricultural land has clear title 6 Widening input / output price gaps driving consolidation & operational efficiency Wheat and major production factor costs index, 1998-2005 387 313 Diesel 315 Fertilizers – Price Gaps • The gap will continue to widen in the mid-term 254 152 142 98 69 52 62 88 122 112 184 154 211 227 Wages in agriculture 133 100 80 55 – This Will Drive • Industry consolidation • Increased operational efficiency 177 179 167 100 111 145 144 104 148 Wheat at prod. prices 1998 1999 2000 2001 2002 2003 2004 2005 1) OECD reference price, USA f.o.b. Gulf Ports of mid June/May; Goskomstat average price Source: OECD, Goskomstat, EIU 7 Difference between World wheat price and Russian on-farm price impedes short term investment Russian and World wheat price1) gap, 1998-2005, [USD/mt] Issue: 160 156 World price 129 119 108 116 152 157 ~90% • Monopolistic supply chain structure • Government Control 95 Russian price 53 60 89 77 77 56 79 Required Improvement: • Infrastructure development • Extensive farmer training 1998 1999 2000 2001 2002 2003 2004 2005 Decade long challenge 1) OECD reference price, USA f.o.b. Gulf Ports of mid June/May; Goskomstat average price Source: OECD, Goskomstat, EIU 8 Russian Rural Demographics Life Expectancy at Birth 64 62 60 58 56 54 52 50 1990 2000 2005 Urban Men Rural Men Rapidly declining population • Deteriorating health care • Youth flight • Declining birth rates • Short term – Diminishing labor will increase adoption rate of larger western sourced equipment • Long term – Sustainable agricultural labor in question 9 Deere’s Russian History Deere Tractor Exports to Russia 1927 – 1932 = 8,200 Units 1930 sales to Russia were $5.6M 9% of Deere’s total of $63M 10 On track to achieve 30% local content on carts for 2007 production year 5. Establish Manufacturin g Office opened in 2003, currently 50 employees 1. Establish Office Deere’s Five Point Strategy for Russia 2. Establish Independent Dealer Network 14 Dealers with 35 locations employing over 450 people 4. Establish Assembly Competency 3. Establish Equipment Financing Over $35M in 3 and 5 year customer and dealer financing in 2006 25 Employees in Orenburg assembled 150 carts and seeding tools in 2006 11 Branch Development Developing domestic competencies Department created – – – – – – Credit Sales Pricing Supply Base Management Systems Marketing Date Added Jan July July Aug Nov Feb 05 05 05 05 05 06 • Staff doubled in past 12 months (31 to 61) • Average seniority = 1.5 Years 12 14 Dealers 27 Oblasts Covered Dealer Coverage = Deere Dealer Coverage = High Potential Areas to Fill 13 Our Growth is Attracting Quality Capital • 3 large Deere dealers have invested in Russian facilities • Kuiken - Large Volvo construction dealer from NL and Germany recently invested in Russian Dealer • Dealer capital remains a major hurdle to 2012 sales 14 Finance Development • Joint development underway with JD Credit & Russian Partner Banks – Dealer floor plan financing – Expanding customer finance options • Recent accomplishments – Orenburg seeders on ROSAGRO Leasing and Rosselkhoz Bank subsidy lists – ECA Backed Customer and Dealer Financing 15 Expand Portfolio - Penetrate New Segments • 130 to 190 Horsepower = 5,000 units • 39% CAGR since 2002 • Import share 81 units – 1.6% market share Basic models to claim more of this large & growing segment 6930 Classic 16 7830 Classic Assembly Facility 3 Reasons • Politics – Agriculture Ministry subsidized financing of ‘Domestic’ Machines – Strong role of Ministry in key agricultural decisions • Economics – Freight to Total cost over 30% on some products – Local assembly offers opportunity to increase load density and lower total costs • Experience – Market potential – Lack of developed supplier base 17 What We Build • Assembly of seeders and planters – High Freight charges • Difficult to containerize • Shipping air – Bulky frames and carts relatively low complexity • Sheet metal and welding – Easily containerized technology added at assembly 18