IH Failure - tractor building business in general

The number of farms has been in constant decline for the last 100 years or more here. With the same number of suppliers fighting over a smaller pie -- they're all going to get hurt somewhat; some will be hurt a lot more than others.

Every outfit has some backbiting between engineering, manufacturing, marketing, finance, etc.; all finger pointing. It's the nature of company polictics. They all made some klinker tractors -- JD took #1 share in the mid 60's (I think) even after they'd made some klinkers with the 1010 and 2010. Read some of the comments on the JD board about those turkeys, and bear it mind that it might be difficult to blame IH's problems on one model or series; or one marketing department.

The way the tractor makers planned for the certainty that they'd have fewer farm customers seems to be as important as anything else. IH chose to diversify into construction equipment, trucks, etc. Not a bad strategy. They located at 180 N. Michigan Avenue in Chicago (that part of the big city being about as mentally removed as possible from the farm market) and employed "hired gun managers" to spread their risk by trying to juggle a number of balls (different, non ag markets). Deere, which seemed to be the most conservative of the bunch, stuck to just the AG business and stayed where the family had always been, a fairly small town in Illinois (interesting to note that the guys running JD have seem to always be related to John Deere himself, albeit oftentimes by marriage.) Deere was generally the slowest to innovate, therefore all their new products seemed to copy whoever else, and they were probably the last of the US makers to build/acquire production offshore.

The "family" at Deere never wanted to sell out (in much the same way as the Ford family still controls Ford). They stuck close to their knitting in the AG business, and generally didn't need gurus from Manhatten. The "hired guns" at IH and the other, more diversified, outfits needed financing to diversify, so they had to play by the "golden rule" meaning the guys on Wall Street with the gold make the rules. Easy to see why one outfit could get pushed too hard, too fast and eventually make a mistake and be dismembered of one or more of the balls they were juggling -- or maybe have the whole outfit sold down the river.

Fast forward to yesterday. Deere stock (ticker DE) trades at an all time high of $60.75, up 60 per cent from March of this year. This is a company that has underperformed the SP500 for nearly all of the last 10 years. How come? Looks like JD has shown Wall Street that most of their earnings come from outside the USA and outside the AG business. Will this now "International" company "Harvest" the same problems as IH? Time will tell -- but maybe the smart money will let JD run a few more bucks, then book it as a good, solid short for the next nine months.

Also yesterday I found the following info on some other remaining tractor suppliers: 1. "Italian FIAT owned CNH (Case IH + New Holand) has lost money for the past three years as it focused on integrating product lines from the merger of Case Corp. and New Holland NV. It said it still expects to report a profit before restructuring charges in 2003 the stock is rated underperform." 2. "Agco (ticker AG, known to us as Allis Chalmers tractors). AG is one of the world's largest farming equipment manufacturers, with operations in the U.S., South America and Europe. AG has already benefited from emerging reflation, with Q3 worldwide revenues up 16% to $800 million and Q3 earnings up 69% to 22 cents per share. Despite this uptick, shares of AG remain -33% below their 52-week high that was reached late in 2002."

Seems to me the worm has turned 180 degrees. The once pure ag play, Deere, is a diversified construction equipment supplier closer to CAT, and enjoys a stock multiple like CAT. While Case/IH, New Holland plus Agco are now seen as "pure play" all agricultural suppliers - with weak stock prices to prove it. Or, to use the phrase that is said to always be right for all occassions: "this too shall pass".

In my opinion the problems at IH started with fast hitch and that was the single biggest factor in their down fall. I know there are those amoung you who think fast hitch was and is great. However, no one else was using it. Harry Ferguson had won the hitch war before IH sold it's first fast hitch. IH flogged the fast hitch for close to 10 years, while everyone else had gone 3 point. Right away, a factor such as this eliminates all those customers who don't buy every piece of equipment from one source. In the late 1950s and early 1960s, many many customers left IH never to return, and it was all to do with fast hitch. The fast hitches on the 300-400, 350-450 and 460-560, being used as a drawbar for pull type equipment as well were crap. Big pull type implements beat the pins and pin hole to a point you may as well been pulling that pto forage harvester or baler with a 2 foot long chain. I cut the fast hitches on my 300 and 560 up for scrap before they were 10 years old and bought standard H-M type drawbars. This whole issue was never a big factor in my operation as I really never used mounted equipment. I was definately not the norm, mounted equipment came on market fast and furious during the 50s and 60s. No question in my mind that was the beginning of the end.

Other factors also happened along with this that sickened a lot of farmers. The 560 rear end problems. TA and IPTO were great but weren't perfected until 06 and 56 series tractors, much too long. Cavitation of the sleeves in the 66 series tractors, another boondogle IH knew of in advance and knew how to cure it. At 8,000 hours the performance of my 1066 was such if figured I was headed for 15,000 hours to first engine rebuild. Then one day on heavy tillage heat gauge started rising, too late, crank ruined from anti freeze. Just weeks before this tractor had been dynoed at 160hp, and that was as it came from factory. At same time I had a 100 hp Deere with power shift, that did go 14,000 hours before engine or power shift were touched. You can easily see where I would have been going had I been in the market for another tractor.

Then IH topped it all with those 88 series and the foreward air flow cooling. Didn't take an engineer to see that was junk.

So maybe the point is why does any outfit try to reinvent the wheel with 2 point hitches. Even managers totally removed could see there was already a standard in 3pts. My point was that 1. they were arrogant because they worked on Michigan Avenue instead of a small town. 2. They had sold their soul to money lenders in the temples on Wall Street - so they were pushed hard to squeeze out every bit of extra profit by trying a "lock in your customers' add on buys" strategy like the 2pt system just to service the huge debt loan the company was under.

Still, they could have done it had they been aggressive and truly owned the company. The obvious contrary example is "crazy (like a fox)" ol' Henry Ford who knew that to set a standard (like 3pt on N's) you needed huge economies of scale that gave you the ability to undercut the market and do huge unit sales volumes. The family at IH didn't own the outfit like Ford or Deere - so they ended up doing half baked short term sniping tactics.

Remember this, my dad bought land in 1938 for $1.00 per acre in a tax sale, and yes it was land formerly owned by the boys on Wall St. You may not be able to take advantage of this type of purchase next time as your share of public debt will be quite high from governments around the world bailing these guys out. Our governments should have let this happen in 1983. By now hard working people would be prospering.

1. IH had just as many family members involved with the company up to the early 1980s as Deere did, including running the company at points. Fowler and Brooks were CEOs, other family members were on the board.

2. While Michigan Avenue may have been the big city, for much of IH's history the executives (up into the 1950s) had farms nearby- while most were gentlemen farmers, so were the Deere guys.

3. The hired guns held power at IH only from about 1978 on. Most of IH's executives started young with the company and moved up- maybe not part of the McCormick family, but definitly not outsiders. The IH white collar employees generally considered themselves part of a "IH" family.

4. Most of the diversification push wasn't hired guns- the guy who made the main push into trucks had started in the grain harvesting business at the age of 13, and switched to McCormick Harvesting Machine Company (it wasn't even IH) at the age of 18. Same gentleman was responsible for the development of refrigeration, although the push into that business (as well as contruction) was led by a sales vice president who had started selling farm equipment in 1913. THe first internal combustion experiments for Deering Company took place in the basement of the man who tested the very first binder twine. "Hired Guns" had nothing to do with the diversification.

5. CNH is not a pure ag play. Case of course has a large line of construction equipment, including a large market in loader backhoes. I believe that Fiatallis is also considered a part of CNH now as well. In fact, it's construction equipment that's been holding back profitability in the last couple reports I've seen.

1. They were involved on the board. A board gives advice. They didn't own 51%, so they didn't control.

2. Go stay a while on Mich Ave -- anywhere from the Conrad Hilton to the Drake / Playboy buildings on Walton. You might as well be living in London. There's a far different mindset there than Moline, Illinois.

3. The family control (blood family, not touchy/feely psycho babble stuff) - 51% ownership - had slipped away far before the 70's. Ownership resided on Wall Street. Compare that to Ford A shares which neither you nor I can ever own because our last name isn't Ford, or the proxy votes the family trusts can muster at DE.

4. Please re-read my post. Time order of things was a strategy to diversify -- then -- hire some guns to execute the strategy. The comparison was to Deere, which trailed by 40 or 50 years in diversifying out of the pure ag business.

5. Would you buy CNH to own part of the money hemorraging construcion business? Or, would you buy it to own the part that is making money? That's the ag part, and if you buy to make money; that's the part you're playing. FIAT does own majority control -- but that's not who makes the Allis tractor you can buy now. That's AG, or Agco, a totally different ag play - ticker AG versus CNH.

Read the 10Q filings from CNH. They have negative net assets even before you discount the >$2 billion booked as a phantom asset called "Goodwill". There's going to be a 2 billion dollar write down coming someday. The ownership is in Dutch, German, Italian banks who won't think twice about firing the lastest gun who can promise a pop in quarterly earnings and says he can turn the book value of the operation from red to black. Contrast that to the style you might see if your name was Ford or Deere-Wiman and ownership of the operation was a sacred trust passed down through the family -- meaning your blood offspring, not employees, or hired guns.

Since that time they have added large dozers, road graders, large earth movers and off highway dump trucks. In fact I have seen opinions that Deere's push into heavy equipment has been the only very real competition Cat has had. This probably had as much to to do with Cat's expansion into Ag Equipment as any factor.

If you're only looking to go long in equipment stocks, CNH might be the worst place to put the money. Negative net worth and run by Europeans who vacation a month or more out of every year. Sounds like colekicker works there, so for his sake and the sake of the stepfather outfit of our Farmall tractors - lets hope it's a good turnaround. But if it's your money and you want to sleep at night -stay away. AGCO only grows by acquistion, it seems. They're due for a fall when they run out of outfits to buy. The place to go would be the place with the most growth possibility -- and that's probably a China/Asia play. KUB, Kubota, is a lower risk/lower growth play. If you feel aggressive; try CYD, China Yuchai - a kind of Chinese Cummins. Same kind of play in India with Tata or Mahindra. Maybe safer to park in CHN or IFN (China and India exchange traded funds). I've got some money there and have done very well this past year, but it's high risk money (as all high growth money is) - so you should be set to dump at a moments notice, just set yourself rolling 5% stop loss points and you should be OK.