Deere & Co. (DE) plans to expend $50 million to build a new factory in China to manufacture construction equipment for China’s domestic market and for export to other markets. The new factory will be located in the Tianjin Economic-Technological Development Area and will manufacture four-wheel-drive loaders and excavators.
Deere’s presence in China goes back 30 years, mainly confined to the agricultural equipment sector. In 2008, Deere forayed into the construction equipment sector on entering into a joint venture to own 50% of Xuzhou Xuwa Excavator Machinery Co. Ltd., the leading Chinese manufacturer of construction equipment. With the current facility, Deere will have six manufacturing locations in China, two of which are joint ventures.
Deere’s construction and forestry segment operates in highly competitive North American markets and is seeking to grow its competitive position in other parts of the world, including China, Russia and India. Global competitors of the construction and forestry segment include among others, Caterpillar Inc. (CAT), CNH Global NV (CNH) and Kubota Corporation (KUB).
China is touted as the world’s largest and fastest growing market for construction equipment. The infrastructure improvements in the country are triggering the need for construction equipment. China’s construction market is forecast to surpass the U.S. market in 2020, which provides immense long-term potential for companies like Deere. Over the 2008-2020 timeframe, China and U.S. are projected to represent around 51% of total growth in construction spending. Further, China & U.S. together will account for 36% of total 2020 construction spending.
Given the above numbers, we appreciate Deere’s expansion plans in China. Further, farm cash receipts are expected to be at record levels in fiscal 2011, which is promising. Given increased global demand for food, shelter and infrastructure, we believe the long- term outlook for Deere remains strong.
However, in the near term, margins are expected to be constrained due to elevated raw material costs and increased R&D costs associated with the new model introductions to meet rigorous global emissions standards. Lingering weakness in European markets also remains a concern.
We thus have a Neutral rating on the stock. The company is allotted a Zacks #3 Rank (short-term Hold recommendation) on the stock.
Illinois-based Deere & Company is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide. It also provides financial and other related services.
The company operates three segments: Agriculture and Turf, Construction and Forestry, and Financial Services. Deere sells products through branch offices in the U.S. and Canada as well as through distributors and dealers for resale of products internationally.
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