GPS Technology Steering Deere Clear of "Commodity Hell"

Chief Executive Robert Lane says investment in a new breed of GPS-guided machinery will keep the company—and profits—on the cutting edge

11/22/2006  

Deere & Co. was founded on innovation. The maker of agriculture, construction, and grounds-keeping equipment opened in 1837 when John Deere, a Vermont blacksmith who had resettled in Illinois, came up with a breakthrough product: a steel plow that, unlike earlier iron models, could slice through the rich soil of America's prairies.

After 169 years Deere (DE) is still producing new things. It's field-testing an eight-wheel tractor, for example, that can work a field entirely on its own. Guided by onboard computers and a GPS (global positioning system) device that takes signals from Deere's own satellite network, the machine can move precisely back and forth over hundreds of acres. The driver's only job: confirming on a touch screen which way the tractor will turn at the end of each row.

The company has also developed sensor technology that automatically adjusts the loading bucket on construction equipment to get the biggest possible scoop, again without requiring the operator to do anything except watch. And it has built prototypes of its Gator, a utility vehicle that functions like a mini-pickup truck, that can move around without a driver, guided by GPS and an array of sensors or steered by remote control.

The Moline (Ill.)-based manufacturer bills these innovations as a plus for both itself and buyers. For customers it means greatly lower labor costs. Using its new front loaders, for instance, a construction contractor might get by with a novice operator at $15 an hour instead of needing an experienced hand at $30. For Deere, meanwhile, such innovations mean fatter margins, since many customers will pay a premium for machines that can do more than run-of-the-mill alternatives.

Deere needs every penny it can get. Chairman and Chief Executive Robert Lane wants the company to earn an operating return—operating profits divided by operating assets—of at least 12% in economic droughts and as much as 28% in times of bounty. On Nov. 21 Deere reported that its annual net income for fiscal 2006 (which ended Oct. 31) rose 17%, to a record $1.69 billion, on revenue of $22.15 billion—also an all-time high. It also said, though, that its operating return came to 22.1%, vs. 22.2% in 2005.

Before releasing Deere's year-end report, Lane, 57, hosted BusinessWeek Senior Correspondent Michael Arndt at the company's landmark, Eero Saarinen-designed headquarters, lunching in what used to be the executive dining room until Lane had it closed to share in the cost-cutting after taking over in mid-2000. An edited transcript of their conversation follows:

What's your overall strategy for Deere?

Let me put this in context first. The company was 163 years old when I became CEO. It had all of these enormous strengths—the heritage of the brand, a dealer organization second to none, really great products, a loyal employee group, a historic focus on doing the right thing—but one of the things we didn't have was a great business.

It was good enough—it had been around for 163 years, after all—but the fact is it wasn't great. We actually hadn't covered our cost of capital most of the time. And in the bottom of the cycle, we just bled economic profit, taking into account the cost of capital. We were really asset-heavy and margin-lean.

There are very few things that I actually think of at the company. This happens to be one of the few things I thought of myself. This little phrase: Our goal is to build a business as great as its products. What we aspire to do is distinctively serve our customers, linked to the land, with a great business as great as our products. That's a tall order.

How do you think you're doing?

I would say we've got a good start. We have now, for the last three years, delivered twice the previous record of economic profit. And our markets have not been necessarily robust. We're turning our assets about twice what we were at the beginning. We've taken the dividend up 77% after five years of no dividend increase. We've engaged in three stock-buyback programs, and we're investing heavily in producing technology—technology that customers will pay for. We're not a university.

In terms of technology, Deere seems to be integrating GPS into basically all of its equipment. You're also building computerized sensors into more and more products. Am I catching a couple of your bigger technology moves?

You might think about it this way. For all of these years, we have been helping our customers mechanize in a more and more efficient way. You have a tool that gets better and better. But you're still doing the task. The next step is not more mechanization, it's automation. Now the machines are becoming smart machines and they will do the work.

It's not unlike airplanes today—you still have pilots, but for all practical purposes you don't really need them. We don't expect to have equipment running around the fields with no person in them for some time. With some of these machines, you could, though. No question.

What are some of the first applications where these smart machines might be set loose?

We're testing a driverless mower in athletic stadiums. That's a pretty controlled environment, of course. And the day could come soon on golf courses. For example, you could set off one of these machines at night with an electric motor that doesn't make any noise. Then, in the morning, these highly expensive courses could be ready for play.

But technology and innovation cost the company money, and you're trying to reduce costs. So how do you persuade people to spend money on something that may or may not pay off?

There was an initial worry when we first introduced this economic profit concept that this would hollow out the company. But the organization really realizes now that there's only one way that you can sustain this economic performance: You cannot get into commodity hell.

From the very beginning, we intentionally had a massive investment in new products, so that there would be no question that this is what we were intending to do, to invest in research and development, to continue to encourage capital projects. Because if you just continue with tired products, pretty soon you can't charge the margins you need. Commodity hell is what happens if we stop investing and we stop delivering.

You emphasize that your customers are linked to the land. That, of course, is agriculture, construction, and, today, forestry. Are there other businesses that could be part of that mission?

We have a pretty predominant position today in North America in agriculture. But there's enormous opportunity for us still in the United States in construction. There's opportunity worldwide for us virtually in all of our markets. In Europe, for example, there are two competitors who have a larger share in combine harvesters than we do, which would be unthinkable in the U.S. That shows our opportunity. Another example is Brazil, where we just got into building tractors 10 years ago.

The macro winds are very favorable, too. Population is growing, but it's not just the numbers—it's the number of people who have the money to eat now. That's a huge story. Then, of course, our customers are going to be growing energy as well as food. Some people think ours is a mature business, that Deere is a museum piece. But there's so much opportunity, we don't have to go outside this sandbox.

Do you see any need to change U.S. farm or trade policy?

We're been very clear that our customers worldwide are so dependent on free trade. You wake up more dependent on free trade in Iowa than you probably do in Manhattan. What we do is help our customers compete worldwide. That's what this technology does. This isn't technology for games. This is technology for making money.