John Deere-ization of Farm Machinery in China

A recent article bemoans the increasing reliance on imported high-end agricultural machinery in China. Like nearly every other industry in China, the farm machinery industry has thousands of tiny manufacturers who churn out low-tech machines and knock-offs of popular products. There is little capability or incentive to engage in research and development. China's push  for high-tech methods that maximize production from its limited resource base--like precision agriculture and laser-leveling of fields--relies entirely on imported equipment--what might be called a "John Deere-ization" of agriculture.

According to the article in China Comment, Chinese officials are now placing a high priority on technologies like precision agriculture, automated equipment and GPS that can raise the efficiency of agriculture. This is motivated by China's lack of land and water resources and the urgency of boosting farm output. However, Chinese farm machinery companies cannot produce the high-end equipment needed for this strategy. It has to be imported.

The director of the China Agricultural Mechanization Research Institute told the reporters that China is the second-largest producer of agricultural machinery and has nearly 20,000 companies in the industry, nearly all of them very small. He estimates that the output of the top 1,800 "above scale" companies (i.e., not tiny workshops) is roughly equal to the annual output of the John Deere company. He said only about 200 Chinese agricultural machinery companies have capacity to do their own research and development.

An official of one company complains that Chinese companies don't produce many large tractors. He says the largest tractors produced by Chinese companies are generally in the 90 to 120 hp range while overseas large tractors are often over 500 hp. Of course, a fundamental limiting factor here is that most of China's farmland is fragmented into small plots. There are few large fields--mostly on state farms set up 50 years ago in far-flung regions along the Russian border--that would justify use of a big tractor.

The Chinese equipment is also predominantly low-tech. A Ministry of Agriculture official estimates that 70% of "advanced" equipment for farm use and agricultural processing is imported. The chairman of a Chinese company says he has seen on his trips to the U.S. and Germany that laser-guided leveling of fields is much more accurate and efficient than the manual techniques used in China. He says Chinese companies have researched these technologies but have a hard time reaching the standards of foreign companies.

The Ministry of Agriculture official commented on the technology gap. He says foreign countries use automated fertilization using liquid fertilizer that is about twice as efficient as the 40-percent utilization rate achieved from Chinese practices of manually scattering fertilizer on fields. He notes that corn yields are 10 percent higher from using precision seeding methods.

The director of the machinery research institute complains that most high-end farm machinery is imported. He says competition from imports squeezes the domestic industry. He says "monopolization" [by foreign companies] leaves the industry in the control of other people and leads to high prices that raise farm production costs. His comments reveal an undercurrent of nationalism when he asserts that imports weaken the [Chinese] race's agricultural machinery industry (民族农机产业).

In fact, the industry's weakness and low profits seem to be internally generated, not created by a foreign bogeyman. According to the article, the farm machinery industry has low barriers to entry, so there are thousands of small manufacturers, some making only a few dozen pieces of equipment a year. There are constant price wars that squeeze profit margins. There is little innovation, and most companies make their living by copying popular equipment produced by bigger companies.

The chairman of a big Chinese farm machinery manufacturer complains that a company can spend 5 or 6 years developing a new product which is immediately copied by numerous competitors who sell knock-offs at a low price. He was perturbed when he recently went to a trade show and found 17 companies selling copies of his company's corn harvester.

Few companies have R&D capability. There are few patents granted and even fewer are for core technologies or innovations. One company in Hebei Province offered as an example is a leading producer but its sales are only 50 million yuan (less than $8 million) annually. Its profits are 3 percent of sales. The factory has about 200 workers and a dozen technical personnel. However, the technicians are older workers who have little or no technical education. They spend a few thousand dollars a year on R&D but their capability is minimal. The company pays low salaries and has not hired any college graduates in recent memory.

The farm machinery industry story is remarkably similar to that of other farm input industries like seeds and livestock breeding. As China tries to make a quantum leap from semi-feudal peasant farming to "modern" high-tech agriculture, it is bypassing the time- and money-consuming process of developing technologies suited to its own resources. The low-tech approach is encouraged by the lack of property rights protection which is now coming back to bite China in the behind. China is trying to boost agricultural productivity by importing the basic technologies...breeding animals, seeds, and machines developed for use in North American agriculture, a completely different economic, cultural and ecological environment from China's.

Those who have so much admiration for the "China model" of economic growth should take a closer look at this "take and make" approach.

Chinese government and industry officials call for establishing R&D institutes, offering financing for R&D, companies merging and forming alliances, and raising barriers to entry to the industry to promote innovation. Will these steps work or will the farm machinery remain a short-sighted industry on a constant race to the bottom? The success of such initiatives will determine whether the "China model" can be turned into a sustainable model that can create wealth instead of shifting it around from one place to another.