Profit companies

Deere relies on an Apple-like technology model to generate revenue

BONDURANT, Iowa, May 26 (Reuters) – Deere & Co (DE.N) has been selling its tractors and other equipment to farmers for decades, but the world’s largest farm machinery maker is ripping a page out of the farming world’s playbook. technology – combining cutting-edge hardware with software and subscription models to drive revenue growth.

In a world with a shrinking number of grain farmers and a growing population, Deere and its rivals are developing autonomous equipment loaded with the latest software that harvests 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 have been watching eagerly.

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

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Investments in heavy-duty equipment automation are still in their infancy for Deere and rivals AGCO (AGCO.N) and CNH Industrial (CNHI.MI). The next step is to equip machines to plant seeds using satellite imagery and soil data, Sanchez said.

Although Deere didn’t say what that might mean for its bottom line, last fall U.S. automaker General Motors Co (GM.N) said it was targeting up to $25 billion in piloted services. by software by 2030, and added its Cruise self-driving unit. could reach $50 billion in annual revenue in six years. Read more

The race among farm equipment companies to automate farming has accelerated amid an emerging food crisis. And Deere’s strategy for scaling its tech lineup is now in the spotlight, after the maker’s shares fell 14% on May 20 following a quarterly revenue loss. It was the biggest drop for Deere in 14 years.

The moment comes as war in Ukraine and widespread drought in major grain-producing countries have rattled commodity markets, causing grain and farm input prices to soar as supplies dwindle. This, in turn, is pushing American farmers to scramble to increase crop yields, while limiting their use of fertilizers and pesticides. Read more

That and a shrinking agricultural workforce opened the door for Deere and others to push their push toward high technology. For farmers, the prize is better crop yields. For Illinois-based Deere, it’s revenue.

It is in autonomous machines that Deere places its bet as artificial intelligence is increasingly integrated into agriculture. Its autonomous 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 new tractor will cost $500,000. However, the autonomy function will be sold separately. Deere executives told analysts at a conference that the company would largely maintain its “point-of-sale” model for equipment, but incorporate a software-as-a-service (SaaS) model for its standalone solutions. This will likely include their autonomous tractor.

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

The Deere & Co. 8R autonomous tractor is pictured at Jensen Test Farm in Bondurant, Iowa, U.S., April 28, 2022. Picture taken April 28, 2022. REUTERS/Bianca Flowers

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

In Deere’s case, 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 RESULTS

Farmers have long been wary of how machinery and supplier companies profit from data collected about their operations and the security of that data. But with farmers facing economic pressures, Deere and other manufacturers said it was easier to sell farmers by making such investments.

One of the main reasons: the ability to glean crop information from massive amounts of agronomic data takes the guesswork out of when to plant and how many seeds to use, saving farmers money. the money.

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

In 2020, Deere acquired Harvest Profit, an agricultural profitability software company that became part of 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 AG has done for our operations and what we can accomplish in a day compared to 10 to 20 years ago, it’s so much easier,” said crop farmer Jeremy Jack. in rows 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 turns soybeans and corn.

The fourth-generation Iowa farmer said some of his new equipment was loaded with technology. “Unfortunately for us, it costs more, but hopefully the costs will be repaid in the long run through better efficiency.”

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Reporting by Bianca Flowers and Joseph White; Editing by Ben Klayman and Lisa Shumaker

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