Agricultural and Construction Equipment Segment is a global, full-line manufacturer in both the agricultural and construction equipment industries, with leading positions in many significant geographic and product categories in both of these industries. The Segment’s global scope and scale includes integrated engineering, manufacturing, marketing and distribution of equipment on five continents.
Agricultural and Construction Equipment markets its products globally through two highly recognized brand families, Case and New Holland. Case IH Agriculture (along with Steyr in Europe) and New Holland Agriculture make up the agricultural equipment brand family. Case and New Holland Construction make up the construction equipment brand family.
Agricultural and Construction Equipment also offers a range of financial products and services to dealers and customers in North America, Brazil, Australia and Western Europe. The principal products offered are retail financing for the purchase or lease of new and used Segment’s equipment and wholesale financing to dealers. As of December 31, 2013, 35,605 employees and 35 manufacturing plants (and further 3 plants operated under joint ventures) pertained to the Segment and the relevant products were distributed in approximately 170 countries through a network of approximately 9,400 dealers and distributors.
The product lines of the Agricultural Equipment business are sold primarily under the Case IH and New Holland brands and under the Steyr brand in Europe. In addition, a large number of light construction equipment products are sold to agricultural equipment customers.
In order to capitalize on customer loyalty to dealers and the Segment’s brands, relative distribution strengths and historical brand identities, the Segment will continue to use the Case IH (and Steyr for tractors in Europe only) and New Holland brands. The Group believe that these brands enjoy high levels of brand identification and loyalty among both customers and dealers.
Although the new generation tractors have a high percentage of common mechanical components, each brand and product remains differentiated by features, color, interior and exterior styling and model designation. Flagship products such as row crop tractors and large combine harvesters may have significantly greater differentiation.
Distinctive features that are specific to a particular brand such as the Supersteer® axle for New Holland, the Case IH tracked four wheel drive tractor, Quadtrac®, and front axle mounted hitch for Steyr remain an important part of each brand’s unique identity.
The Agricultural Equipment business product lines include tractors, combine harvesters, hay and forage equipment, seeding and planting equipment, tillage equipment and sprayers. It also specializes in other key market segments like cotton picker packagers and sugar cane harvesters, where Case IH is a worldwide leader, and in self-propelled grape harvesters, where New Holland is a worldwide leader. The brands each offer a complete range of parts and support services for all of their product lines. The Segment’s agricultural equipment is sold with a limited warranty that typically runs from one (1) to three (3) years.
The Construction Equipment business product lines are sold primarily under the Case and New Holland Construction brands. Case provides a wide range of products on a global scale, including a crawler excavator that utilizes technology from Sumitomo. The New Holland Construction brand family also markets a full product line of construction equipment in most regions.
The products often share common components to achieve economies of scale in manufacturing, purchasing and development. The Segment differentiates these products based on the relative product value and volume in areas such as technology, design concept, productivity, product serviceability, color and styling to preserve the unique identity of each brand.
Heavy construction equipment product lines include crawler and wheeled excavators, wheel loaders, graders and dozers for all applications. Light construction equipment product lines include backhoe loaders, skid steer and tracked loaders, mini and midi excavators, compact wheel loaders and telehandlers. The brands each offer a complete range of parts and support services for all of their product lines. Construction Equipment’s products are sold with a limited warranty that typically runs from one (1) to two (2) years.
Effective December 31, 2012 the initial term of global alliance with Kobelco Construction Machinery Co. Ltd (“KCM”) and Kobe Steel Ltd (“KSL”) expired and the Group entered a new phase of non-exclusive licensing and supply agreements. Subject to the terms of existing agreements, the Group will continue to manufacture excavators, based on current Kobelco technology, in the Segment’s plants and purchase select models of whole goods from KCM as well as component parts until at least December 31, 2017. With the end of the initial term of the global alliance, Agricultural and Construction Equipment sold its 20% ownership interest in KCM to KSL and unwound the co-ownership with KCM of certain companies formed in connection with the global alliance. In addition, the territory and marketing restrictions in the Americas and EAME and CIS (Europe, Africa, Middle East and the Commonwealth of Independent States) expired on December 31, 2012 and such restrictions expired in Asia Pacific on July 31, 2013. The Group continues to evaluate its Construction Equipment business with a view toward increasing efficiencies and profitability as well as evaluating its strategic alliances to leverage its position in key markets.
The financial service business for Agricultural and Construction Equipment (“AG & CE Financial Services”) offers a range of financial products and services to dealers and customers in North America, Brazil, Australia and Europe. The principal products offered are retail financing for the purchase or lease of new and used Segment’s agricultural and construction equipment and wholesale financing to dealers. Wholesale financing consists primarily of floor plan financing and allows dealers to purchase and maintain a representative inventory of products. In addition, Financial Services provides financing to dealers for equipment used in dealer owned rental yards, parts inventory, working capital and other financing needs. In addition, AG & CE Financial Services purchases equipment from dealers that is leased to retail customers under operating lease agreements. As a captive finance business, AG & CE Financial Services is reliant on the operations of the Agricultural and Construction Equipment Segment, its dealers, and end-use customers. As of December 31, 2013, AG & CE Financial Services managed a portfolio of receivables of approximately US$21.0 billion. North America accounts for 63% of the managed portfolio, Western Europe 19%, Brazil 13% and Australia 5%. In some regions, AG & CE Financial Services also provides insurance, commercial revolving accounts and other financial products and services to end-use customers and its dealer network.
In North America, the activity is carried out through wholly-owned financial services companies that support sales through dealer and end-customer financing, as well as operating leases.
In Europe, end-customer financing is primarily managed through CNH Industrial Capital Europe S.a.S. (the former CNH Capital Europe), a joint venture with BNP Paribas Group (49.9% owned by CNH Industrial N.V. and accounted for under the equity method) that operates in Italy, France, Germany, Belgium, the Netherlands, Luxembourg, the UK, Spain and Austria. Vendor programs with banking partners are also in place in France, Portugal, Denmark and Poland.
Dealer financing and end-customer financing activities not managed by the joint venture with BNP Paribas are managed through captive financial services subsidiaries.
In Brazil, the captive financial services company Banco CNH Capital S.A. offers both dealer and end-customer financing. For end-customer financing, the company mainly serves as intermediary for funding provided by the Banco Nacional de Desenvolvimento Economico e Social (BNDES), a federally-owned company connected to the Brazilian Ministry of Development, Industry and Foreign Trade. Vendor programs offered jointly with banking partners are also in place.
In Australia, Agricultural and Construction Equipment offers dealer and end-customer financing through a captive financial services company.
AG & CE Financial Services supports the growth of Agricultural and Construction Equipment sales and builds dealer and end-user loyalty. The Segment’s strategy is to grow a core financing business to support the sale of its equipment by improving its portfolio credit quality, service levels, operational effectiveness and customer satisfaction. The Group works to develop and structure financial products with the objective of increasing equipment sales and generating AG & CE Financial Services’ income. AG & CE Financial Services also offers products to finance third party equipment sold through Agricultural and Construction Equipment dealer network or within the core businesses of agricultural or construction equipment. Financed third party equipment includes used equipment taken in trade on the Segment’s agricultural and construction equipment products or equipment used in conjunction with or attached to the Segment’s equipment.
AG & CE Financial Services has certain retail underwriting and portfolio management policies and procedures that are specific to the agricultural equipment and construction equipment businesses. This distinction allows the Segment to reduce risk by deploying industry-specific expertise in each of these businesses. Agricultural and Construction equipment provides retail financial products primarily through its dealers, who are trained in the use of the various financial products. Dedicated credit analysis teams perform retail credit underwriting.
The terms for financing equipment retail sales (other than smaller items financed with unsecured revolving charge accounts) typically provide for retention of a security interest in the equipment financed. AG & CE Financial Services guidelines for minimum down payments for both agricultural and construction equipment generally range from 15% to 30% of the actual sales price, depending on equipment types, repayment terms and customer credit quality. Finance charges are sometimes waived for specified periods or reduced on certain equipment sold or leased in advance of the season of use or in other sales promotions. AG & CE Financial Services generally receives compensation from Agricultural and Construction Equipment businesses equal to a competitive interest rate for periods during which finance charges are waived or reduced on the retail notes or leases. The cost is accounted for as a deduction in arriving at net sales for the Agricultural and Construction Equipment businesses.
AG & CE Financial Services provides wholesale floor plan financing for nearly all of Agricultural and Construction Equipment dealers, which allows them to acquire and maintain a representative inventory of products. AG & CE Financial Services also provides some working capital and real estate loans on a limited basis. For floor plan financing, Agricultural and Construction Equipment Segment generally provide a fixed period of “interest free” financing to their dealers. This practice helps to level fluctuations in factory demand and provides a buffer from the impact of sales seasonality. After the “interest-free” period, if the equipment remains in dealer inventory, the dealer pays interest costs. AG & CE Financial Services generally receives compensation from Agricultural and Construction Equipment Industrial Activities equal to a competitive interest rate for the “interest-free” period.
A wholesale underwriting group reviews dealer financial information and payment performance to establish credit lines for each dealer. In setting these credit lines, AG & CE Financial Services seeks to meet the reasonable requirements of each dealer while managing its exposure to any one dealer. The credit lines are secured by the equipment financed. Dealer credit agreements generally include a requirement to repay the particular loan at the time of the retail sale. AG & CE Financial Services employees or third-party contractors conduct periodic stock audits at each dealership to confirm that financed equipment is still in inventory. These audits are unannounced and the frequency of these audits varies by dealer and depends on the dealer’s financial strength, payment history and prior performance.
Sources of Funding
The long-term profitability of AG & CE Financial Services activities largely depends on the cyclical nature of the agricultural and construction equipment industries, interest rate volatility and the ability to access funding on competitive terms. AG & CE Financial Services funds its operations and lending activity through a combination of term receivable securitizations, committed asset-backed and unsecured facilities, secured and unsecured borrowings asset sales, affiliated financing and retained earnings. The Group will continue to evaluate alternative funding sources to help ensure that AG & CE Financial Services maintains access to capital on favorable terms in support of this business, including through new funding arrangements, joint venture opportunities, vendor programs or a combination of the foregoing.
Historically, AG & CE Financial Services has periodically accessed the public financial markets and asset-backed securities markets in the United States, Canada and Australia, as part of its wholesale, retail and revolving charge account financing programs when those markets are available and offer funding opportunities on competitive terms. The Segment’s ability to access these markets will depend, in part, upon general economic conditions, legislative changes and the Segment’s financial condition and portfolio performance. These factors can be negatively affected by cyclical swings in the industries that Agricultural and Construction Equipment serves.
Agricultural and Construction Equipment continuously reviews opportunities for the expansion of its product lines and the geographic range of its activities. The Segment is committed to improving product quality, reliability and productivity using, among other things, a Customer Driven Product Definition process to create solutions based on customer needs and to delivering the greatest competitive advantage. These improvements include continuing engine development, combining the introduction of new engines to meet stricter emissions requirements with additional innovations anticipated to refresh its product line. In addition, Agricultural and Construction Equipment’s product enhancements and innovations coupled with its initiatives to improve dealer and customer support should enable the segment to more fully capitalize on its market leadership positions in significant geographic markets and product categories.
Case IH released completely redesigned Precision Disk single-disk air drills, which deliver best-in-class seed placement accuracy for a wide array of crops.
In the first quarter of 2013, Case IH unveiled new features on its 2013 Axial-Flow combine lineup, including a redesigned cab – already recognized as the largest and quietest in the industry.
In May, Case IH won the Gold Gerdau “Best of the Land” trophy at Brazil’s Agrishow for its revolutionary new Multi-
Row sugarcane harvester which gives farmers the ability to harvest sugarcane with various row spacings.
At the Farm Progress Show in Decatur, Illinois, Case IH launched 18 new tractor models in North America that meet the upcoming Tier 4B off-road emissions standards. Among these models are the highest horsepower tractors available on the market today with the Steiger Quadtrac 620 and new models of the Magnum and Maxxum tractors. Case IH is the first and only agricultural equipment manufacturer to use Selective Catalytic Reduction (SCR) technology alone to meet strict Tier 4B emissions standards, while offering customers best overall fuel efficiency.
At the Bauma show in Germany, Case IH launched the 370 CVX Magnum, the most powerful model in the Case IH range of conventional, rigid-chassis tractors.
In Brazil, Case IH was named “Most Desired Brand” in the category “Agricultural Machinery” by the country’s automotive and capital equipment association FENABRAVE.
At the Agritechnica trade show in Germany, Case IH launched more than 20 new products for the European market including five new tractor series. At the show, the Case IH Quadtrac 620 was named “Machine of the Year 2014” in the XXL tractor category.
New Holland Agriculture
At the SIMA trade show in Paris, New Holland launched the new Tier 4A/Stage IIIB emissions compliant T6 Auto Command tractor range, equipped with continuously variable transmission.
On June 18, New Holland Agriculture celebrated the milestone of the 250,000th tractor manufactured in its Greater Noida facility, in India.
In EMEA, New Holland Agriculture launched the new CX7000 and CX8000 Elevation Super Conventional combines, featuring the Opti-Speed™ strawwalker technology, the Opti-Clean™ system and the SmartTrax™ rubber track system; as well as the new Roll-Belt™ round balers delivering higher baling capacity and better feeding ability in a wide range of crops and baling conditions.
At the Farm Progress Show, New Holland launched the new Tier 4B T7, T8 and T9 high horsepower tractors, featuring the ECOBlue™ HI-eSCR technology.
At the Agritechnica trade show, New Holland launched several additional tractors models, as well as material handling and harvesting equipment. The six model T8 Auto Command series tractors, introduced in Europe, were also honored with the “Machine of the Year 2014” award. The brand also received two Agritechnica Silver Medals for the Opti- Speed™ strawwalkers and the Cornrower header.
Case Construction globally launched the new M Series dozers. The five new models (750M, 850M, 1150M, 1650M, 2050M) represent a complete redesign of the product line.
In North America, Case delivered two important heavy equipment initiatives: ProCare machine support and the SiteWatch telematics solutions (SiteWatch has also been deployed in Europe).
Case Construction introduced its new Tier 4A/Stage IIIB 521F wheel loader in the North American market. Case also introduced several Tier 4B/Stage IV emission requirement compliant models, including the Alpha Series skid steer loader.
Two new midi crawler excavators were introduced at the American Public Works Association (APWA) exposition in North America: the CX75C SR and CX80C were launched as new C Series excavators and the CX75C SR received one of Rental Magazine’s “Top Products of 2013” awards, as well as being included in the “Top Rollouts of 2013” list by Better Roads magazine.
The SR210 skid steer loader has been named as one of the “Most Innovative Products of 2013” by North American Compact Equipment and Utility Contractor magazine in December.
In China, Case received the coveted “Golden Award for Best Application” for its WX210 wheeled excavator with hydraulic lifting cab at the “Top 50 Awards”, the most prestigious recognition in China’s construction equipment industry.
In Latin America, Case launched the 321E compact wheel loader and then expanded its wheel loader range upwards, with the introduction in Brazil of model 1021F, meant for mining and infrastructure segments.
New Holland Construction
New Holland Construction globally introduced the new C Series dozers. The three new models (D125C, D150C, D180C), redesigned from the ground up, make a complete break from the previous generation.
New Holland Construction began presenting its lineup of Tier 4B/Stage IV emission compliant equipment to the markets with the launch of four new models of its 200 Series skid steer loader in North America, and two models of its E Series midi excavator in Europe.
New Holland Construction introduced new products at the Green Industry and Equipment Expo (GIE+EXPO) in North America, including the new Tier 4B L221 skid steer and the C227 compact track loader.
New Holland completed the introduction of its new crawler excavator range in Europe with three Tier 4A/Stage IIIB compliant short radius models, which feature the patented integrated noise and dust reduction system.
In Europe, New Holland launched a new version of the W170C wheel loader for the recycling industry, equipped with a new heavy duty cooling box and a full package of protections.
Sales and Distribution
Agricultural and Construction Equipment sells and distributes products through approximately 9,400 full-line dealers and distributors in approximately 170 countries. The Segment’s dealers are almost all independently owned and operated. Dealers typically sell either agricultural or construction equipment, although some dealers sell both. Construction equipment dealers tend to be fewer in number and larger in size than agricultural equipment dealers. In the United States, Canada, Mexico, most of Western Europe, Brazil and Australia, products are generally distributed directly through the independent dealer network. In the rest of the world, products are initially sold to independent distributors who then resell them to dealers, in order to take advantage of their knowledge of the market and minimize marketing costs.
Consistent with its brand promotion program, Agricultural and Construction Equipment generally seeks to have dealers sell a full product range (such as tractors, combines, hay and forage equipment, crop production equipment and parts). Typically, greater market penetration is achieved where each dealer sells the full line of products from only one of the brands. Although appointing dealers to sell more than one brand is not part of the Segment’s business model, some joint dealers exist, either for historic reasons or in limited markets where it is not feasible to have a separate dealer for each brand. In some cases, dealerships are operated under common ownership but with separate points of sale for each brand.
Exclusive, dedicated dealers generally provide a higher level of market penetration. Some dealers in the United States, Germany and Australia may sell more than one brand of equipment, including models manufactured by the Group’s competitors. Elsewhere, dealers generally do not sell products that compete with the Segment’s products, but may sell complementary products manufactured by other suppliers in order to complete their product offerings, or where there was a historical relationship with another product line that existed before that product was available through the Segment, or to satisfy local demand for a particular specialty product.
A strong dealer network with wide geographic coverage is a critical element in the success of Agricultural and Construction Equipment. The Segment works to enhance its dealer network through the expansion of its product lines and customer services, including enhanced financial services offerings, and an increased focus on dealer support. To assist dealers in building rewarding relationships with their customers, focused customer satisfaction programs have been introduced and it is expected to incorporate customer input into the relevant product development and service delivery processes.
As the equipment rental business becomes a more significant factor in both agricultural and construction equipment markets, Agricultural and Construction Equipment is continuing to support its dealer network by facilitating sales of equipment to the local, regional and national rental companies through its dealers as well as by encouraging dealers to develop their own rental activities. A strong dealer service network is required to maintain the rental equipment and to help ensure that the equipment remains at peak performance levels both during its life as rental equipment and afterward when resold into the used equipment market. Agricultural and Construction Equipment has launched several programs to support its dealer service and rental operations, including training, improved dealer standards, financing, and advertising. As the rental market is a capital-intensive sector and sensitive to cyclical variations, the Segment expands such activities gradually, with special attention to managing the resale of rental units into the used equipment market by its dealers, who can utilize this opportunity to improve their customer base and generate additional parts business.
CNH Industrial believes that it is generally more cost-effective to distribute its agricultural and construction equipment products through independent dealers, although Agricultural and Construction Equipment maintains a limited number of company-owned dealerships in some markets. As of December 31, 2013, the Segment operated 12 company-owned dealerships, primarily in North America and Europe. The Segment also operates a selective dealer development program in territories with growth potential but underdeveloped representation by its agricultural and construction equipment brands that typically involve a transfer of ownership to a qualified operator through a buy-out or private investments after a few years.
Parts and Services
The quality and timely availability of parts and services are important competitive factors for Agricultural and Construction Equipment businesses, as they are significant elements in overall dealer and customer satisfaction and important considerations in a customer’s original equipment purchase decision. The Segment supplies a complete range of parts, many of which are proprietary, to support items in current product line as well as for products sold in the past. Many of the products Agricultural and Construction Equipment sells have economically productive lives of up to 20 years when properly maintained, each unit sold has the potential to produce a long-term parts and services revenue stream for both the Segment and its dealers.
As of December 31, 2013, Agricultural and Construction Equipment operated and administered 32 parts depots worldwide, either directly or through arrangements with warehouse service providers. This network includes 10 parts depots in North America, 8 in Europe, 3 in Latin America and 11 in Asia/Pacific (4 in China, 3 in India, 2 in Australia, 1 in Russia and 1 in Uzbekistan). These depots supply parts to dealers and distributors, which are responsible for sales to retail customers. These parts depots and the Segment’s parts delivery systems provide customers with access to substantially all of the parts required to support the products the Segment sells.
In December 2009, a 50/50 joint venture, CNH Reman LLC, was formed for full-scale remanufacturing and service operations in the United States. The joint venture primarily remanufactures engine, engine components, driveline, hydraulic, rotating electrical and electronic products. The joint venture is focused on serving the North American agricultural and construction equipment industries. Remanufacturing is a way to support sustainable development and gives customers the opportunity to purchase high quality replacement assemblies and components at reduced prices.
As part of a strategy to enter and expand in new markets, the Group is also involved in several commercial joint ventures, including the following:
- the Group owns 50% of New Holland HFT Japan Inc. (“HFT”), which distributes its products in Japan. HFT imports and sells the full range of New Holland agricultural equipment;
- in Pakistan, the Group owns 43,2% of Al Ghazi Tractors Ltd., which manufactures and distributes New Holland tractors;
- in Turkey, the Group owns 37,5% of Turk Traktor ve Ziraat Makineleri A.S., which manufactures and distributes various models of both New Holland and Case IH tractors; and
- in Mexico, the Group owns 50% of CNH de Mexico S.A. de C.V., which manufactures New Holland agricultural equipment and distributes equipment for all of the Segment’s major brands through one or more of its wholly- owned subsidiaries.
In December 2013, the Group acquired full ownership of CNH-Kamaz Industrial B.V. and CNH-Kamaz Commercial B.V., two consolidated joint ventures formed in 2010 in Russia to manufacture, distribute and service certain New Holland agricultural and construction equipment for the Russian market. The Group owned 50% of CNH-Kamaz Industrial B.V. and 51% of CNH-Kamaz Commercial B.V. before the transaction.
The agricultural and construction equipment industries are highly competitive. The Agricultural and Construction Equipment Segment competes with: (i) large global full-line suppliers with a presence in every market and a broad range of products that cover most customer needs, (ii) manufacturers who are product specialists focused on particular industry segments on either a global or regional basis, (iii) regional full-line manufacturers that are expanding worldwide to build a global presence, and (iv) local, low-cost manufacturers in individual markets, particularly in emerging markets such as Eastern Europe, India and China.
The Group believes having a number of competitive strengths that enable it to improve its position in markets where it is already well established while it directs additional resources to markets and products with high growth potential. The competitive strengths of Agricultural and Construction Equipment include well-recognized brands, a full range of competitive products, a strong global presence and distribution network, and dedicated financial services capabilities.
The Group believes that multiple factors influence a buyer’s choice of agricultural and construction equipment. These factors include the strength and quality of the distribution network, brand loyalty, product features and performance, availability of a full product range, the quality and pricing of products, technological innovations, product availability, financing terms, parts and warranty programs, resale value and customer service and satisfaction. The Segment continually seeks to improve in each of these areas, but focuses primarily on providing high-quality and high-value agricultural and construction equipment products and supporting those products through its dealer networks. In both the agricultural and construction equipment industries, buyers tend to favor brands based on experience with the product and the dealer. Customers’ perceptions of product value in terms of productivity, reliability, resale value and dealer support are formed over many years.
The efficiency of the manufacturing, logistic and scheduling systems of Agricultural and Construction Equipment depends on forecasts of industry volumes and its share of industry sales, which is predicated on its ability to compete successfully with others in the marketplace. The Segment competes on the basis of product performance, customer service, quality and price. The environment remains competitive from a pricing standpoint, but actions taken to maintain its competitive position in challenging market conditions could result in lower than anticipated price realization.
The financial services industry is highly competitive. AG & CE Financial Services competes primarily with banks, finance companies and other financial institutions. Typically, this competition is based upon the financial products and services offered, customer service, financial terms and interest rates charged. AG & CE Financial Services’ ability to compete successfully depends upon, among other things, the availability and competitiveness of funding resources, developing competitive financial products and services, and licensing or other governmental regulations.
Agricultural and Construction Equipment principal competitors in the agricultural equipment market are John Deere, AGCO (including the Massey Ferguson, Fendt, Valtra and Challenger brands), Claas, the Argo Group (including the Landini, McCormick and Valpadana brands), the Same Deutz Fahr Group (including the Same, Lamborghini, Hurlimann and Deutz brands) and Kubota. The principal competitors in the construction equipment market are Caterpillar, Komatsu, JCB, Hitachi, Volvo, Terex, Liebherr, Doosan and John Deere.