The Agricultural Machinery Market & Industry in Europe: An analysis of the most important structural trends & why EU regulation of the sector needs to change Dr Gilles Dryancour, October 2016 –

European Agricultural Machinery Industry Association [email protected] www.cema-agri.org

Executive Summary This paper questions and challenges common concepts and assumptions used for regulating the agricultural machinery market and industry in Europe by looking at some of the most fundamental trends and drivers that have shaped the sector in recent years. In so doing, the paper examines in particular the very different dynamics applying to the automotive and farm machinery markets. Based on this approach, the paper comes up with a number of forward-looking proposals on how EU regulation should develop so as to better take these structural drivers into account and provide a sound policy framework that effectively entices innovation, and supports the productivity of the agricultural machinery industry and thus the sustainability and competitiveness of European farming. The paper concludes that, in order to enable European farm machinery manufacturers – whether big or small – to continue to be innovative, competitive and commercially successful in Europe and the world, we need a veritable U-turn in EU regulation and industrial policy. More specifically, EU regulation for farm machines’ needs:  to recognize and understand the structural specificities & drivers of the sector; 

to abandon the distorted and harmful logic of using an automotive-based regulatory approach for tractors and farm machines;

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to adopt a forward-looking regulatory approach that allows the European farm machinery industry to define its own technical standards and move towards more self-certification.

About the author: Gilles Dryancour is Honorary President of CEMA, having served as President of the Association from 2009 until 2014. He is also Chairman of CEMA’s Public Policy Group (PPG).

European Agricultural Machinery Industry Association [email protected] www.cema-agri.org

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Introduction Standard analyses of the agricultural machinery market and industry in Europe typically fail to provide an in-depth analysis of the business, as they tend to ignore the principal underlying structural trends and drivers which have shaped the market and its industry during the past decades. However, developing such an in-depth analysis is indispensable to succeed in two important tasks:  to develop plausible forward-looking scenarios on how Europe’s agricultural machinery market and industry might evolve in the coming years;  to derive meaningful conclusions on how such future changes of the market and the industry should best be reflected in EU regulation. In all of this, it is of utmost importance to bear in mind that farmers – as the final customers and ultimate users of agricultural equipment – are the most important factor determining the future of the agricultural machinery market and the industry servicing it.

1. The cyclical nature of the farm machinery business is not a structural trend The most well-known economic theory about the farm machinery business is that it is cyclical like agriculture: when agricultural commodity prices go up, demand for farm equipment tends to rise accordingly. This correlation is commonly acknowledged and follows a well-known logic: since commodity prices determine farmers’ income, they – in turn – decide how much farmers can eventually spend on investments into new machinery. Commodity prices can thus serve as a helpful indicator of the peaks and troughs in demand for agricultural equipment. However, being cyclical and volatile, they do not qualify as a fundamental underlying trend that is shaping the structure of the agricultural machinery industry.1 For instance, they cannot explain major structural changes within the industry such as, for instance, the fact that an entire range of famous tractor brands (such as Lanz, FAR, Ford, Citroën, Röhr, BMB, Steel hoof, Merlin, Latil, SFV, Energique, to name just a few) gradually disappeared in the 20th century from the industrial landscape.

“Trends in commodity prices cannot explain long-term structural changes within the farm machinery industry.”

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Moreover, peaks in demand for agricultural machinery, as they can be observed for the years 1987-1989 and 20072012, could seriously distort market analyses that focus merely on data from a short period of time.

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From a broader perspective, the European agricultural machinery industry today is a mature industry that has faced major challenges and changes since the post-World War II period. Since then, it has essential re-adjusted itself over and over to new economic, demographic, regulatory, societal, and technological realities. This paper will primarily examine the demographic and regulatory changes and analyse their impact on the size and structure of Europe’s agricultural machinery market.

2. Misleading analogies: tractors ≠ cars When analysts try to examine the market structure of the agricultural machinery industry in Europe they usually do so by comparing it with the automotive industry. This is based on the – misleading – assumption that both industries are structurally similar. The view of these alleged similarities runs wide and deep, as can be seen from a recent French study which claimed that: “The agricultural machinery sector bears similarities to its neighbour, the automobile industry: the chain from vehicle producer to the final consumer (farmer) via the dealer network involves similar actors. As in the automotive sector, a reduced number of upstream producers also seem to develop better control strategies of the downstream distribution network leading to a growing use of exclusive supply”.2

Most importantly, the view of the alleged similarities between the agricultural machinery industry and the automotive industry is also shared by the European Union (EU) – which, today, acts as the primary regulator of the industry in Europe. Historically, the European Commission has always compared tractors to cars, and both tractors and cars belong to the same administrative unit inside the Commission. As a result, most of the EU’s regulations on tractors have been derived from regulations that were originally designed for the automotive sector. The view of the alleged similarities between the agricultural machinery industry and the automotive industry is based on the (false) presumption that certain analogies in terms of industrial processes and distribution practices would also point towards the existence of similar – or at least, comparable – market structures. Yet nothing could be farther from the truth. As will be shown below, the fundamental customer-related demographic trends for both markets reveal that the tractor and automotive sectors are, in effect, not at all comparable. In fact, in terms of their structural realities, they follow opposite paths.

“The tractor and automotive sectors are not comparable. In terms of their structural set-ups and commercial realities, they follow entirely opposite trends.” 2

Effets des restrictions verticales et accès au réseau de distribution: Les pratiques d’exclusivité dans le secteur des machines agricoles

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3. Demography is destiny: urbanisation meant a shrinking customer base in the countryside It is evident that Europe’s demographic evolution since World War II has structurally favoured the passenger car market, while it has structurally disadvantaged the agricultural machinery business. Looking at the three most populous countries of the EU, we can see that their population grew since 1950 by 58% (France), 36% (UK), and 16% (Germany) respectively (see also Figure 1 below). Figure 1: Total population of France, UK & Germany, 1950-2016 (millions) France UK Germany 1950 41 49 68 1985 55 55 78 2016 65 65 81 As a general rule, it is safe to say that the more the population grows the more potential customers manufacturing industries can – in theory – cater for and win. However, the case is inherently different for the agricultural machinery industry whose number of potential customers has declined drastically after the First and Second World Wars. While farmers represented about 50% of the European population in 1900, their share declined to 30% in the 1950s. The below charts show the dramatic decline of farmers and farm-holdings in France, the UK, and Germany. In the EU, the long-term decline in the number of agricultural holdings is still continuing. Between 2005 and 2013, the average rate of decline was 3.7% year-on-year. Accordingly, the total number of farm holdings fell by 1.2 million. This has led to further consolidation with the average farm-holding area rising from 14.4 to 16.1 hectares. During the same period, the overall area of agricultural land in the EU fell by 0.7% due to urbanization and growing forestry areas. Figure 2: number of agricultural workers in France, 1955-1997 (in thousands)

Source: Sénat français, Projet de loi 1999, Avis 68 (98-99), Tome 1 – Commission des affaires économiques

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Figure 3: number of agricultural workers in the UK, 1925-2010 (in thousands)

Source: House of Commons, Briefing paper, Agriculture Historical Statistics, n° 03339, Jan. 2016

Figure 4: number of farm holdings in Germany, 1975-2014 (in thousands)

Source: Statista

The same phenomenon can be observed in all OECD countries, noticeably in the US, where farmers represented 1% of the total population in 2012 (3.18 million of 314 million).3 Notably, the U.S. total population increased by 4% between 2007 and 2012, whereas the farmers’ population decreased by 3%. These opposite trends prove that the rural flight is still continuing in OECD countries. In other words, the share of urban populations is still growing. In 2014, urban population represented 79% of the total population in France, 82% in Germany, 82% in the UK, with a maximum percentage in Netherlands at 90% and Belgium at 98%. The above figures clearly demonstrate that the European agricultural machinery industry has had to deal for decades – and still has to deal – with the formidable challenge of a dramatically declining customer base. By contrast, the customer base for cars has followed the opposite trend and continues to grow until today.

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USDA NASS Census (2012).

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“Europe’s farm machinery industry has faced a sharply declining customer base for decades. By contrast, the customer base for cars has grown dramatically.” Figure 5: Active agricultural workforce in selected EU countries Country

Austria Belgium Bulgaria Croatia France Germany Greece Ireland Netherlands United Kingdom

% age of workforce active in agriculture 5% 1.3% 6.7% 1.9% 3% 1.6% 12.9% 5% 3% 1.3%

Year

2012 2013 2013 2013 2013 2011 2013 2011 2009 2014

Source: Statistiques Mondiales.com Population agricole active

4. Urban migration fuels the growth of the passenger cars’ market… The graphs below show the correlation between rural flight, urbanization and the booming of the passenger car market. This global trend started in the early 1950s and was only temporarily slowed down by the financial crisis in 2008. The same steep curves can be found in the three European reference countries: France, UK, and Germany. Figure 6: World Passenger Car Fleet, 1950-2004

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Figure 7: number of cars in France, 1900-2010

Figure 8: number of cars in the UK, 1940-2010

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Figure 9: number of cars in Germany, 1950-2014

The example of Germany is particularly striking. The car fleet expanded from a couple of thousands units in 1950 to 47 million in 2008 – a factor of 40,000. Even if the market will not expand at the same pace in the next decades, it went through an exponential growth phase for well over six decades. The manufacturing capacities followed the same path and grew by a factor of 6. Figure 10: Annual passenger car production in Germany (in units), 1957-2013

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5. …while tractor sales face a steady decline By contrast, looking at the long-term trend (excluding cyclical peaks and troughs), tractors sales in Europe have been, by and large, in a constant decline. The market in Germany, for which available data goes back to 1951, shows that the annual sales of tractors declined from 100,000 to 34,000 in 2013. Figure 11: Annual tractor sales in Germany, 1951-2014 120000 100000 80000 60000

Tractors in 2013: 34611

40000 20000

1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

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Source: VDMA statistics

The same trend can be observed in most of the other European countries. In Italy, for instance, tractors sales decreased by a factor of 2.3 during the last 30 years (42,000 tractors sold in 1987, 18,000 in 2015). The evolution of the Italian tractor market is even more striking than the German one, since it shows an acceleration of the downward trend during the last decade. Effectively, tractor sales dropped by 44% between 2004 and 2015 and still continue to fall in 2016. Figure 12: Annual tractor sales in Italy, 2004-2016

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As outlined above, the continuous structural decline of the agricultural machinery’s customer base and market in Europe has been fuelled by the rural exodus. On the contrary, the European passenger car market has boomed thanks to urbanization. Defenders of the alleged analogy with the automotive market tend to argue that the loss in tractor units sold has been compensated by the correlating gain in engine power and price increases per tractor that came with it. However, this reasoning is incorrect and confuses cause and effect. If tractors became more powerful this was essentially due to the fact that farm consolidation did not leave any other option. In other words, bigger farms needed more powerful tractors. Otherwise, they could not be operated efficiently. This trend has thus been clearly triggered by the demand-side and not by the structure of the production. Also, the assumption that the growth in horse power would have compensated for the overall decline in sales numbers cannot be verified by the statistics. In fact, if we take the German market as a reference and check how many kilowatts were sold in total from 1970 to 2001 (all tractor power categories taken together), we can find that this figure also declined: in 1970, 65,000 tractors were sold in Germany representing a total amount of 2.2 million kilowatts. In 2001, 24,000 tractors were sold representing a total amount of 1.8 million kilowatts. In sum, during the last decades, the agricultural machinery industry had to deal with the challenge of a declining customer base and has faced lower sales (even in terms of the total engine power provided) which were supplied to an almost constant area of farm land.

“Europe’s farm machinery industry has had to deal with a dramatically declining customer base and has continuously faced lower sales, even in terms of total engine power sold.”

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6. Customer density has a fundamental impact on the market structure Though rarely analysed, the change in costumer density for a given territorial area has a fundamental impact on the structure of a market. If we compare the tractor market for the years 1950 and 2010, we can find that 7 new tractors were sold in 1950 in an area of 100 km² inhabited by 210 farmers. In 2010, these figures dropped to 3 new tractors being sold per 100 km² which were inhibited by merely 34 farmers. Figure 13: Number of tractors sold per year and per farmer per 100km2

What does this mean? From a manufacturers’ perspective, it means that all logistical chains have become much longer and that all costs associated to distribution have increased dramatically. By definition, competition between brands and their dealers in such a scenario becomes far more intense. Only those able to invest into reaching ever more-distant customers and satisfy their needs can remain in the market. As shown above, owing to the rural exodus and the resulting demographic change in the countryside and the world of farming, a certain structural concentration of the market occurs naturally and automatically. When it comes to the structure of the agricultural machinery market in Europe, the underlying demographic trend thus is, in effect, the principal driver, not an alleged ‘’concentrative’’ strategy of the tractor manufacturers. Again here, the French study quoted above claims wrongly that: “From the production side, the agricultural machinery sector is led by a concentrative dynamic reflecting the strategies implemented by the tractor manufacturers. The global reconfiguration of production feeds a similar dynamic at the national level, linked to the globalization of strategy of key-players”.4

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Effets des restrictions verticales et accès au réseau de distribution: Les pratiques d’exclusivité dans le secteur des machines agricoles

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Once again, this kind of reasoning is based on a falsely presumed analogy with the automotive industry. Quite simply, it is impossible to compare two industries which show inherently different dynamics and have vastly different volumes. The concentration of manufacturers and dealers in a growing market is far more questionable than in a declining market such as agricultural machinery. Some figures can help to understand the differences between the two sectors. While the automotive market grew by 9% in 2015 and could be growing again by 8.5% in 2016, the agricultural market declined by 4% in 2015 (vs 2014) and is likely to decline by 3% in 2016. In 2016, about 16 million passenger cars are likely to be sold in Europe (another recordyear after 2007),5 whereas the agricultural machinery industry might be able to sell 160,000-170,000 tractors in total. In terms of overall size, the tractor market is approximatively 1% of the size of the automotive market. As a matter of comparison, the agricultural machinery industry sells almost four times less tractors in the whole EU 28 than the automotive industry sells cars in Belgium - 602,867 in 2015 –, a country with a total area of 30,528 km². These figures give us the density of sales for both industries in the EU (4,493,712 km²). The automotive industry sells annually an amount of 3.5 new passenger cars for each km² of the EU territory. By contrast, the agricultural equipment industry sales represent merely about 0.03 tractors per km² EU territory.

“Europe’s farm machinery industry sells four times less tractors in the entire EU than the automotive industry sells cars in just one single European country alone (Belgium).” A more in-depth research would show that the automotive sales are much denser if we take into account the territory where cars are mostly sold (=urban areas). By contrast, customers of agricultural equipment (i.e. farmers and contractors) are more and more difficult to reach since the most profitable farm holdings are more and more dispersed. The table on next page supports this analysis.

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http://www.francesoir.fr/tendances-eco-monde/union-europeenne-les-ventes-de-voitures-neuves-continuentde-progresser

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Figure 14: Distribution of agricultural holdings by area (2013) Area of holding Number of % of total Utilised % of Utilised holdings2 holdings Agricultural area Agricultural (ha) Area