Black Affairs, Africa and Development
US agri equipment giant AGCO explains why it will invest $100m in Africa
AGCO, a New York Stock Exchange listed multinational company that designs, manufactures and distributes agricultural machinery such as tractors and harvesters, ended last year with the promise to invest US$100 million into Africa and its future business on the continent.
How we made it in Africa catches up with AGCO’s director for Africa and the Middle East, Nuradin Osman, to find out a bit more about the company’s African strategy and some of the ways it will be dealing with the challenges facing agribusiness on the continent.
Tell us a bit about the reasons behind AGCO’s investment of $100 million in Africa over the next three years.
African agriculture is drawing growing interest from international investors, attracted by the shift to commercial farming, and signs that we are entering into a period of sustainable growth in farming returns.
There are several reasons for this growing trend. First, global factors including rising population, rising income levels in emerging markets, and a growing scarcity of arable land and water. Second, the World bank attributes 60% of the world’s uncultivated land to Africa, and also suggests that investment in agriculture has the potential to create millions of jobs on the continent. About 10% of cropped land in Africa is prepared by tractor, and only 4% of land is irrigated.
AGCO Corp, as the world’s third-largest farm-equipment maker, is making this investment of $100 million in Africa over the next three years to capitalise on the shift to commercial farming and increased mechanisation.
What is AGCO’s Africa game plan and how does it differ to the company’s strategy elsewhere in the world?
In Africa, AGCO is focusing on increasing the scope of its product offering, localisation, capacity building, improving distribution, and providing training to local farmers. The four leverage points of our strategy are:
- Future farms: Investing in human capital to improve the skills of local farmers and to improve local support for our products
- Finance: Developing a suitable finance solution and improving distribution
- Products: Tailoring our product and service offerings to the market
- Local footprint: Establishing local assembly centres
To be successful, you need to get the strategic decision-making right and this is particularly true in Africa where the opportunities, and the risks, are on such a massive scale. Working effectively with local/private partners, government, and the local communities, is essential for success and sustainability in the fast changing African markets, where the only thing certain is uncertainty, and investment strategies may need frequent and radical revision.
What financial services do you offer your African customers and what importance does this hold in terms of AGCO’s strategy in Africa?
AGCO plans to support African customers through the provision of equipment-financing solutions. To further these aims:
- AGCO has also partnered with the West Africa Agribusiness Development (WAAD) Corporation, funded by the IFC and USAID, which finances and develops agribusinesses in West Africa.
- AGCO is partnering with local and regional banks to deliver mobile information and finance solutions to the ‘non-bankable’ agricultural sector.
- AGCO Finance and USAID, together with Rabobank, are developing additional finance options for the current customer base, with a planned roll-out across key economies over the next two years.
By developing and providing a finance and lease solution for tractors to small scale farmers/land-owners with little-to-no working capital, AGCO intends to provide access to technology and mechanisation, and capacity building, which subsequently has a direct impact on those that matter on the ground.
AGCO has recently partnered with Algeria Tractors Co. to build a plant to manufacture tractors in Algeria. What benefits do local partners hold for companies like AGCO in Africa?
For either side, the possibility of joining with another company in the new venture lowers capital requirements relative to going it alone.
Also, for the foreign multinational, such as AGCO, there are numerous other benefits for being part of a joint venture with a local partner in Africa. We benefit from the local partner’s knowledge about the country’s culture, language, political system, and business systems. Since a joint venture also entails a significant equity investment, both companies invest significant resources, talents, and commitment to the new firm. This provides both companies with advantages in terms of sharing development costs and risks.
Additionally, joint-ventures are less prone to being nationalised or being targeted as a foreign firm since the local company has a significant stake in the joint-venture as well. As such joint-ventures provide a good opportunity for firms to enter markets where otherwise they would not have been able to enter.
Explain some of the challenges that AGCO faces in Africa today and the plans to overcome them?
Any international company looking to invest and work in Africa needs to understand and plan mitigations for the following challenges:
- Political stability – Civil unrest, regime instability, economic hardship and corruption.
- Infrastructure status – What are the quality, connectivity and reliability of transport systems, roads, trains and ports? How reliable are power and water supplies?
- Quality and reliability of local manufacturing – Is there a local supply and manufacturing base of sufficient quality that we can leverage?
- Customer understanding – Do we have sufficient insight into local customers across all target segments of the population?
- Variety and complexity of routes to market – Do we know and understand how to get goods to market? Can we leverage an existing distribution network or will we need to innovate and build our own?
- Local talent – Are there local staff available with appropriate experience and language skills? To what extent will we need to deploy local staff from day one in order to comply with local requirements?
To overcome these types of challenges, it is imperative to conduct a thorough investigation and assessment of the risks posed by these challenges, and to develop mitigation strategies; and to working effectively with local partners and national/local government, to navigate your way through.
In terms of future expansion plans across the continent, what is the next step for AGCO?
By 2017 we want to more than double AGCO’s market share to 32%. Such an ambitious target will be expedited by growth drivers such as:
- Optimisation and extension of product portfolio
- Expanding and enhancing distribution networks
- New market entries, e.g. Algeria and Nigeria
- Expanding the Model Farms and Training Centres to other countries
Already we have opened a $35 million parts warehouse in Johannesburg in May, 2012; signed the deal with Algeria Tractors Co, and already producing Massey Ferguson tractors; and planning to build smaller parts distribution warehouses in East and West Africa.