Georgia-based tractor maker to 'localize' products for China, exec says

Changzhou, China

This story is part of GlobalAtlanta's exclusive China special issue, which looks at Georgia companies doing business in China, potential Chinese investment in the state, educational exchange and more. Click here to read more.

On a recent day in Changzhou, ChinaHubertus Muhlhauser took two different podiums to share the same speech. Each time, his audience included thousands of Chinese businesspeople, and he was one of very few speakers to use English.

The AGCO Corp. executive's translated announcement was a formality, a public acknowledgment of a deal already finalized behind closed doors, but that in no way mitigated its significance for AGCO itself or for a local government eager to draw more foreign investors.

The DuluthGa.-based tractor and agricultural equipment manufacturer will invest up to $100 million in a high-tech industrial zone in Wujin, a district in the southern part of Changzhou, said Mr. Muhlhauser, AGCO's senior vice president for strategy and integration and general manager of Eastern Europe and Asia.

An initial $50 million will go toward a new factory that will produce mostly low-horsepower tractors, engines and other equipment for the Chinese market. The starting capacity will be 5,000 units.

“Within the next five years, we plan to invest more than $100 million in our Changzhou site to support a new greenfield operation, absorbing more than 500 employees and reaching the capacity of 20,000 units per year,” he said in prepared remarks.

As large American companies complain that China's government is increasingly favoring domestic industry, AGCO's experience shows that its posture toward foreign firms often depends on the sector. And when the government, in its uniquely Chinese way, makes a decision and begins rushing toward its goal, it sometimes needs foreign companies' expertise or products.

That's the sweet spot where AGCO is banking its future in China. As Mr. Muhlhauser explained to his audiences, China has 20 percent of the world's population but only 10 percent of its arable land. At the same time, its agricultural methods in some areas are antiquated. As a result, the country imports much of its food supply, to the chagrin of leaders worried about the nation's security and stability.

“It's pure survival, basically, so the government has no other choice but to invest in mechanization because China is already very dependent in terms of grain imports and wants to become less dependent … and more self-sustaining,” Mr. Muhlhauser told GlobalAtlanta in an interview after his first speech.

That means hefty subsidies for farmers purchasing equipment like AGCO's, which can boost output on Chinese plots still plowed with animals or simpler tractors. Government rebates are available toward the purchase of tractors on an approved subsidy list.

“(The central government has) tripled the subsidies in 2009, will double them in 2010, and this trend is going to continue,” Mr. Muhlhauser said. Of course, for its products to be eligible, AGCO must invest in China.

“In order to get on the subsidy list you need to produce here, and in order to produce here you need to also sell here, so that is basically why it is so important if you want to participate in the relevant market segments that you have manufacturing presence here,” Mr. Muhlhauser said. “Once you have your presence, there's not a huge distinction that's being made between an international company having a site here in China and a local company having a site here in China.”

In the northern province of Heilongjiang, which borders Russia and is known as China's coldest region, AGCO is employing a different business model than the traditional dealer-distributor system. There, the company is selling directly to the government. State-owned farms, which occupy large swaths of land, need big commercial tractors like those used in the U.S. and other developed countries. Since the technology isn't available in China, the government is buying them from foreign companies in lots of 800-1,500, Mr. Muhlhauser said.

AGCO, which markets the brands Massey Ferguson, Fendt, Challenger and Valtra, has already made significant sales in northern China and has established training programs to help farmers learn to use the equipment. The company plans to invest $50 million to set up an assembly operation in Heilongjiang, Mr. Muhlhauser added.

China is an obvious fit for AGCO's efforts to boost its exposure in large emerging markets, but China is more than just a place to sell. AGCO plans to make China, particularly its Changzhou operation, a hub that will impact its factories all over the world, Mr. Muhlhauser said.

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