Deere relies on Apple-like technology model to grow revenue

Deere & Co has sold its tractors and other equipment to farmers for decades, but the world’s largest farm machinery maker is taking its cue from the tech world’s playbook – combining cutting-edge hardware with software and subscription models to drive revenue growth.

In a world where the number of grain producers is shrinking and the population is growing, Deere and its rivals are developing self-driving equipment loaded with the latest software that is reaping a new kind of bumper crop: data. All of this translates into recurring revenue, which companies like Apple have long enjoyed and industrial manufacturers like Deere are eyeing with avidity.

“The more technologies we can develop that allow farmers to get productivity out of their land without having to spend so much money on fertilizers and inputs, the better off everyone is,” Julian Sanchez, director of emerging technologies at Reuters, told Reuters. Deere.

Investments in heavy-duty equipment automation are still in their infancy for Deere and rivals AGCO and CNH Industrial. The next step will be to equip the machines to plant seeds using satellite imagery and soil data, Sanchez said.

While Deere didn’t say what that might mean for its bottom line, last fall U.S. automaker General Motors Co said it was targeting up to $25 billion in software-based services. by 2030, and added that its Cruise self-driving unit could hit $50 billion in annual revenue within six years.

The race to automate agriculture among farm equipment companies has accelerated amid a growing food crisis. Deere’s strategy to expand its technology product line is now in the spotlight after the manufacturer’s stock plunged 14% on May 20 following a drop in quarterly revenue. It was the biggest drop for Deere in 14 years.

The drop comes as the war in Ukraine and widespread drought in major grain-producing countries have shaken commodity markets, causing grain and agricultural input prices to soar as supplies dwindle. As a result, American farmers are scrambling to increase the yield of their crops, while limiting their use of fertilizers and pesticides.

This and the shrinking agricultural labor force paved the way for Deere and other companies to enter high technology. For farmers, the price to pay is higher crop yields. For Illinois-based Deere, it’s revenue.

Autonomous machines are where Deere is betting as artificial intelligence becomes part of agriculture. Its self-driving 8R tillage tractor will be the latest addition to the company’s algorithm-based offerings when the green machines go on sale in the fall.

The price of the new tractor will be $500,000. However, the autonomy function will be sold separately. Deere executives told analysts at a conference that the company will largely retain its “point-of-sale” model for equipment, but will incorporate a software-as-a-service (SaaS) model for its solutions. autonomous. This will likely include their self-driving tractor.

“While it may take us a few years to build a recurring revenue base, autonomous solutions, in addition to our underlying machine forms, will be recurring,” said Joshua Jepsen, Deere’s assistant chief financial officer.

The recurring revenue model may be economically favorable to heavy machinery makers “based on this data,” said Michael Staebe, a machinery partner at Bain & Company.

In the case of Deeres, using a subscription model by selling or leasing its driverless tractor can result in higher margins.

“After expenses, every additional dollar goes directly into the bottom line,” said Edward Jones analyst Matt Arnold. “We would expect this to be an attractive offering for farmers given the efficiency it offers them, and lucrative for Deere.”

AGRONOMIC DATA HELPS THE NET BOTTOM

Farmers have long been suspicious of how machinery and supplier companies profit from the data gleaned from their farms, and how secure that data is. But with farmers facing economic pressures, Deere and other manufacturers said it’s easier to convince farmers to make such investments.

One key reason: The ability to glean crop information from huge amounts of agronomic data takes the guesswork out of when to plant and how much seed to use, saving farmers money.

“Everyone in the industry is much more data-driven than we’ve ever seen them,” said Purdue University professor Michael Boehlje. “(Companies) can make profit projections by geographic space in fields. That takes you to a different level of thinking and analysis.

In 2020, Deere acquired Harvest Profit, agricultural profitability software that was integrated into the John Deere Operations Center. The platform stores and allows farmers to access their machine data from the cloud.

“When I look at what precision farming has done for our operations and what we can accomplish in a day compared to 10 or 20 years ago, it’s so much easier,” said Jeremy Jack, a farmer. of row crops in Mississippi and general manager of Silent Shade Planting Co.

Ron Heck’s fleet of Case IH combines and tractors are equipped with automated steering to harvest his 4,000 acres where he alternates soybeans and corn.

The fourth-generation Iowa farmer said some of his new equipment is loaded with technology. “Unfortunately for us, it costs more, but we hope that the costs will be repaid in the long term by better efficiency.”

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