China Wants Tractor Trade-up

China's farm machinery industry is  looking to trade up to more advanced tractors and equipment, according to officials quoted in Peoples Daily last week. A 13-year-old subsidy for farm equipment purchases failed to break the low-end product mix, so now Chinese officials are keen on subsidizing research and development. 

The remarks were made by officials commenting on their inspections of farm machinery manufacturers in Jiangsu and Shandong Provinces, China's leading regions for the ag equipment industry. According to Peoples Daily, progress in retooling the farm machinery industry is a key focus of "supply side reform" and an important means of revitalizing the economy. While China is already the world's top manufacturer of farm machines like tractors, combines, plant protection equipment, agricultural water pumps, officials have targeted the industry as one of ten categories for upgrades in the plan for "China Manufacturing 2025."

The inspection tours focused on the innovative capacity of the manufacturers. Zhang Baowen, an official with the Central Democratic League, visited Jiangsu, a province declared as a model farm machinery industry province despite its tiny per capita endowment of farmland.

Zhang asked each company he visited two questions: "Did you make the engine yourself?" and "Did you manufacture the transmission yourself?" At one company Zhang asked the questions as he gazed at a large tractor. The manager responded in the affirmative, saying, "We do all the R&D ourselves." Zhang responded with a thumbs-up and a hearty, "Good, good, good! Your R&D is very strong!"

While Jiangsu farm equipment sales have soared in recent years, the products are mainly medium- and low-end equipment. Zhang Baowen complained that the industry still relies on foreign joint ventures and imports for high-end equipment. And there is "room for improvement" in the quality of Chinese farm machinery, Zhang said. Energy-saving engines, special sensors, continuously variable transmissions, intelligent control units in large tractors, and environmental protection equipment are areas where China is behind, he said. Zhang thinks the strong Internet industry in Jiangsu will help the farm equipment industry innovate.

Jiangsu Province is pouring money into the industry. In 2016, the province budgeted 900 million yuan ($130 million) for upgrading strategic industries. The province has another 1.6 billion yuan ($235 million) for industry and information transformational upgrades. There are "awards" for machinery and reduced value added taxes. Moreover, the government nationwide has been subsidizing as much as 30 percent of the cost of agricultural machinery purchases since 2004. Jiangsu is said to budget about 1.5 billion yuan ($220 million) for the machinery subsidy annually.

Chen Xiaoguang, another Democratic League official and retired engineering professor, inspected manufacturers in Shandong Province and declared it a "big agricultural machinery province," but noted that it had a few problems. According to Chen, the farm equipment industry lacks core technologies, has insufficient support for public R&D platforms, and protection of intellectual property rights is weak. Chen criticized the machinery purchase subsidy program for taking too long to incorporate new types of machinery into the list of eligible products.

Chen stressed the need to eliminate institutional barriers and to rely on the market for resource allocation and innovation capacity. However, the first step he offered was to improve government policy and regulatory system to accelerate agricultural mechanization. He called for stronger property right protection to encourage bold innovation. Finally, he called for recognizing the coordinating role of the main market players in resource utilization, technology and personnel development.