Matt Coutts - John Deere: Centuries of Farming Innovation

Highlights and learnings from Business Breakdowns John Deere Podcast Episode

Oct 16, 2021

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Business Breakdowns is one of my favourite podcasts and this is the first time an agriculture related company has been broken down.

I have dove into the John Deere Annual Report’s for the last couple years, but the granularity and clarity of thinking is second to none from my friend Matt Coutts who in this episode gives a great perspective on the John Deere business along with novel ways to think about John Deere in the context of competition, moats and where precision and autonomy are headed.

Matt is uniquely positioned to talk about John Deere given he comes from a large farm operation (running all John Deere equipment), his experience building and exiting an agtech company in the software for machinery space and now as an investor in the food and agriculture sector.

Link to podcast and transcript:

Matt Coutts - John Deere: Centuries of Farming Innovation

Here are some of my favourite quotes, learnings and take aways:

“The Apple of Agriculture”

Matt has referenced this comparison to me before and it has shown up in Upstream several times. In the podcast he elaborates on this viewpoint:

Deere's done an incredible job of one, having the actual network effects and switching costs within a farm, but they've copied the Apple strategy of opening up their data at customer's discretion to different startups and other incumbents that have certain digital strategies. So they're able to continue to build the value of their digital and software business one, by owning the most advanced software layers that people get used to. And there's network effects you spoke of, but one, it's just a structurally a better product. And then two, they have the entire industry spending money on their app store to make their business better and to serve customers better through the John Deere platform as well. Just kind of like the Apple of agriculture. They bundle the hardware really effectively. They bundle the core operating system really effectively. And then they own all the most important apps so to speak. Generally makes everything work so much better.

A differentiated piece of hardware (iPhone = John Deere branded tractor and both command a premium in the market), create differentiated software (Apple iOS = John Deere in-cab software), then they bundle the hardware and software together that it works better in unison (Mac computer, Apple Music, iPhone creates simplicity and consistency just like a John Deere tractor, sprayer and harvester do) with an app store to integrate outside parties developing tools that augment their systems, equipment and ultimate benefit the customer/farmer.

If we think to CNH, they have some similarities in that they work better together if you have all Case IH equipment, but the software is not necessarily internal or proprietary and integrated…Although some of that is changing moving forward with the acquisition of Raven .

On the Raven note, Matt comments on the further importance of integration as we move towards autonomy:

Raven had previously done a couple acquisitions prior (autonomous company acquisitions), so it's a hodgepodge of things they have in there. And same thing, they're working towards autonomy. You could... Just like Ben Thompson's written about there's an anti-Amazon alliance out there. Both CNH and AGCO have formed these massive press releases where there's four or five different companies that try to create this technology. I think it's always been challenging. I think it becomes even more and more challenging as agriculture becomes autonomous, whether that's decisions being made autonomously or the equipment running autonomously, the interoperable or integrated value proposition from your digital providers becomes more important.

In the August 8th edition of Upstream I made a similar statement:

End to end integration and execution with a concept as complex as fully autonomous equipment is the approach successful companies will be focused on and this will likely be a driver of continued consolidation in the autonomy space.

If you listen to the podcast you’ll notice an emphasis of John Deere’s differentiation due to brand, quality, integration, network effects, service etc. There isn’t a significant emphasis on the engineering, an area within equipment that seems to be less of a differentiating factor today.

This week an interview with CNH CEO Scott Wine came out where he was quoted as saying this:

The acquisition of Raven gives the indication that I think we should or could have invested a little bit more some of our technology platforms. Precision and autonomy are an opportunity for us, and Raven really helps put us in a very, very competitive position. But our powertrains are industry leading, and some of the things we're doing with alternative powertrains are also industry leading.

Given the competitive dynamics in the space and my highlights of Matt’s comments, I found powertrains to be an interesting area to emphasize.

Installment and Deployment

Carlota Perez is world renowned for her interpretation of technological revolutions. In her popular book Technological Revolution and Financial Capital where she talks about the different phases that technological revolutions go through, going from the industrial revolution, steam and railways, to steel and engineering to now the IT revolution. She highlights the fact that these various revolutions go through the same process along their journey from beginning to become the standard.

The two main phases are “installment” and “deployment” which can be identified through the following:

Source

When a technology moves to “deployment” it is more mainstream and here is what Matt says about Deere’s influence on that:

So guidance, data management, and telematics, which they've identified as their key foundational layer of technology, which to me analogizes the installment period, which came to a head about '20 when Deere started smart industrial strategy. And that was reorganizing the company around production systems, which is your key product lines, technology, and then aftermarket solutions where they named their first ever CTO. So a lot of industries you may debate when the installment period ends and deployment period begins. And in agriculture, it's kind of like when Deere said so. When Deere adapted their strategy. Now the focus is on how do we use this massive installed base and this high end equipment.

Matt astutely communicates how influential Deere is. He also signals how Deere has been ahead of the curve on identifying and investing in foundational technology so that they can continue to lead through new technological periods, which Deere has been doing for over 180 years.

Where is Deere headed?

When I think about what Deere's end game is like a full autonomy business where decisions are being, whether in both or seeding and spraying and harvesting are all being automated. Whether it's a centralized computer making that or each computer and every different piece of equipment making those decisions on the go. So it's all about eliminating as much variance as possible, which is where I think you get the most upside incremental returns from the farm. So we'll slowly probably start to see almost like a software in a box or kind of a John Deere opex in a box to a certain extent to make all farms the most efficient as possible.

What external factors have contributed to Deere’s success?

There's kind of like what's set Deere up and then there's broadly from a macro perspective and then there's some more micro actions that they did. I would kick off kind of modern agriculture and modern agriculture demand and why Deere maybe had the volumes to develop into is one, the invention and commercialization of GMOs. It's kind of all in the late '90s and early 2000s, a few things here. So the commercialization of GMO corn increased supply and simplicity to grow. Two, Chinese demand for food. And then three it's alluded to kind of macro events and then too macro shifts so to speak that was promoted by Deere was auto-steer. And as I talked about, a farmer just clicks a button in a field, and then they drive perfectly straight, most efficient you could do it, which had a massive change on the industry. Kind of you actually want to farm all the time.
Deere's got an interesting spot where they're the key enabler of low cost food globally in general, what you may frame as industrial agriculture
Maybe the structure of it is, again, like a flywheel where they started with a quality reliable product, which is like anything that's going to generate more business. And then with sales, they invested in more stores & dealers, just like Domino's did which results in better service, which results in more sales... To Deere, which results in more product research, and then of course, more sales and store, et cetera. And these network effects just continue to accelerate more and more annually. So, one, great product with continued advancements in incremental technology, and two, the dense service base allows them to just keep pushing price and haven't even met their limits there yet.

This is a keen insight into the driver of consolidation at the farm and nicely ties in how important GMO’s have been.

Biggest take aways to learn from Deere:

Build off your strengths. Deere is a leading technology, but they didn't try to be the Amazon or the Uber of, et cetera. They just want to be the best John Deere company they could be. They built off their advantages and hardware to get into, as we talked about, software and these other essential technology layers that they have. Another important thing I think is, obviously, Deere has super long-term horizon. They have something like 10 CEOs. The first half of those are family and so it's only probably all internal hires with five non-family hires. But the challenge is, if I'm a farmer and it doesn't rain and commodity prices are in the toilet, I don't care how long John Deere's vision is. I need help, my combine's broken down today. I don't care about John Deere’s combine next year, and so it's important to one if you have a long-term horizon, they need to compliment with people that are to work with the users or the customers of your product to make sure that they don't get worn out from your long-term horizon.

What I think Deere has done an exceptional job of as well is anticipating customer needs. They began investing in technology early, likely because of their long time horizon. They don’t get too far ahead of their customer, but are ready to deploy capabilities when the customer progresses.

Check out the podcast or the transcript in the link at the start as well for more great insight into the company.