Seesaw Farm Economy Doesn't Depress Deere
IN November, Deere & Co., the world's biggest maker of farm equipment, plans to haul in the financial equivalent of a bin-busting harvest: a higher quarterly dividend and a stock split for its shareholders.
The boon for shareholders underscores how Deere, based in Moline, Ill., shows American manufacturers ways to cope with rising foreign competition and swiftly changing technology amid a seesaw market, say experts on heavy machinery producers.
Deere has wrested a high yield from a stingy and forbidding badlands of a market for farm equipment. Although many US corporations are reporting hefty profits and returns, few of them have faced the adversity that for more than a decade has dogged Deere.
"It has done really quite well if you consider that the farm economy went through a very steep downturn in the mid-'80s and Deere continued to invest in new products and was able to weather the storm," says Steven Colbert, an analyst at Prudential Securities in San Francisco. The company says it plans in November to raise its quarterly dividend from 55 cents to 60 cents per share and ask shareholders to approve a 3-for-1 stock split.
The investor windfall is the fruit of several widespread managerial efforts that, while tried by many corporations, have succeeded unusually well at Deere: downsizing, stepped up exporting and foreign investment, outsourcing, and diversification, to name a few.
Still, Deere faces numerous challenges. Not the least of these is the prospect that the US economy and market demand will prove less rosy than it forecasts. Moreover, labor could balk at Deere's expanding practice of outsourcing, even though relations between white- and blue-collar workers at Deere are comparatively good, say industry analysts.
The announced stock split and boosted dividend crowns a comeback from a bleak performance throughout much of the 1980s, when Deere suffered badly from a worldwide recession, foreign competition, and a depressed farm economy.
Beginning in 1983, commodity markets overseas shrank, surplus crops and bad farm debt mounted, and the value of farm real estate in the US fell. Many farmers and businesses tied to agriculture went under. Partly because of the subsequent shakeout, the world market for farm tractors - a cornerstone for Deere - has shrunk by about half since 1979.
As many of its US rivals folded or sold out, Deere took drastic steps. It was one of the first major US companies to embrace downsizing, reducing its work force between 1979 and 1986 by 42 percent. When a recession undercut sales in 1991, turning a 1990 profit of $411 million into a 1991 loss of $20 million, Deere again pared its staff. Last year it produced equipment at the 1990 level, but with 16 percent fewer employees.
ON a more positive note for workers, Deere expanded into insurance and health care in order to cushion itself from the extreme cycles of the agricultural economy. Both operations turn a solid profit. Also, in the past decade it has annually invested more than $200 million in capital equipment and $250 million in research and development, says Deere spokesman Robert Combs.
Deere also has expanded its trade and investment overseas. In the past five years its exports from the US have risen an annual average of 9 percent.
To cut costs, Deere has made several efforts to form teams throughout the enterprise. "Concurrent engineering" ensures that designers and manufacturing engineers work together to launch a new product. In cooperation, the two groups reduced the number of parts required for one series of tractors by 28 percent.
Deere has encouraged its blue-collar workers to learn new skills and suggest ways to streamline production, cut costs, and improve quality. The company gave workers an incentive for more efficient and meticulous work when it signed a contract last winter with the United Auto Workers (UAW) that links wages with productivity.
Finally, Deere has been conspicuously successful in handling relations between employees and management. It wins comparatively high marks from the UAW even as leading rival Caterpillar Inc. grapples with the disruption from a strike more than two years old.
"Our relations with Deere are as good as they are with any other employer in the country that we do business with," says Jim Hecker, the UAW coordinator at Deere. Hecker notes, however, that increasing outsourcing - the farming out of parts manufacturing to outside companies - and steady attrition have held hiring to less than a trickle. He also says that hourly employees with stagnant real wages resent the steadily rising pay of top executives. Mr. Combs of Deere declined to discuss executive pay.
Deere has been helped by trends in trade and the farm economy. The ratio of debts to assets on US farms has subsided to around the historical norm of 15 percent after spiking to 23 percent in 1985, reports the US Department of Agriculture. (As their debt lightens, farmers tend to buy more equipment.) The liberalization of both North American and worldwide trade is also buoying Deere. Executives say that the elimination of tariffs will eventually save the company $45 million.