Opportunities and Challenges of Exporting Agricultural Equipment to China

The World’s Leader

China is the world’s largest agricultural economy. It produces, imports, and consumes more food than any other country in the world. As the World’s largest food producer, China offers significant opportunities for agricultural equipment manufacturers. On the other hand, Chinese government policies present equally significant challenges to international companies attempting to capitalize on those opportunities.

The estimated total Chinese agricultural equipment market size is $8.8B. Of that total market, imports account for roughly 10% ($865M). The U.S. share of the import market is approximately 43.5% ($376M). Opportunities clearly exist to expand the U.S. share of the overall agricultural equipment market as shown by the 2015 Top Markets Report for Agricultural Equipment which ranked China ranked #2 for exports and #1 for export growth.

Opportunities Abound

China’s domestic agricultural equipment manufacturers lag behind their international counterparts in technology and specialization. Generally, the Chinese manufacturers heavily compete for the low technology market. The low technology market accounts for roughly 25% of the total Chinese agricultural equipment market. Major international companies manufacture the more technologically advanced equipment.

Globally, mechanized agricultural economies typically employ about 2% of the population. In China, roughly 35% of the population is employed in agriculture. Over the past decade, China’s government has enacted policies to transition the farming system from labor intensive to mechanized. The policies include moving the population from rural areas to urban areas. Also, the policies place an emphasis on domestic food security.  This transition provides significant opportunity for companies that can provide high technology agricultural equipment. Technologies that increase efficiency and reduce reliance on labor intensive processes are in demand.

Additionally, demand exists for technologies that help Chinese agricultural producers meet changing Chinese consumer tastes. China’s urbanization is increasing the demand for fresh fruits and vegetables. Agricultural process efficiency is required to meet this demand. Also, Chinese agricultural producers need technologies that help producers meet the demand of global regulatory agencies. Global regulatory agencies, including the U.S., are placing more emphasis on the ability of producers to prove that the food they provide meets regulatory standards. Technology advancement can help Chinese producers more effectively provide that information to regulatory bodies.

Challenges Persist

China’s government has placed a priority on the development of the domestic agricultural equipment manufacturing industry. In 2004, The government began subsidizing domestically produced equipment. Under this structure, provincial and local governments decide which products receive subsidies. Subsequently, the subsidies encourage agricultural producers to purchase the Chinese manufactured models over the imported models.

Additionally, the Chinese government encourages domestic agricultural equipment manufacturers to improve technology. This is an attempt to compete with imported equipment. As with many products sold in China, intellectual property theft is a high risk. The risk originates because domestic companies attempt to match and exceed the technological level of their international competition. Export.gov has estimated the cost of protection for an agricultural equipment importer at $500,000 over a three year period.

The Tariff Effect

Although the U.S.agricultural industry has been hit hard by Chinese tariffs, specifically the tariffs on soybeans, the agricultural equipment exports sub-sector has been relatively unaffected. The Chinese tariffs are currently aimed at Trump voters in America’s heartland who are farmers and vehicle manufacturers. However, the tariffs aimed at the vehicle manufacturers are primarily on passenger vehicles. U.S. agricultural equipment producers have seen a dip in sales as U.S. farmers scale back spending in response to Chinese tariffs. The tariffs imposed by the U.S. have caused an increase in the price of the raw metals used in the agricultural equipment manufacturing. These tariffs have impacted the manufacturing process, not the export process.

Conclusions

The Chinese agricultural equipment market provides significant opportunities and equally significant challenges to U.S. companies looking to export products. The cost of doing business in China, such as protecting intellectual property, likely prohibits small and medium sized companies from entering the Chinese agricultural equipment market. At this point in time, large U.S. companies like John Deere can seize market share by offering technologically advanced equipment that improves agricultural process efficiencies.

 

Wil Stone

Global Business Projects –  Summer 2018