As ag grows, so does Kuhn North America

Q: After Kuhn bought the Knight company and you were brought in as the new CEO, how did you manage any misgivings the Brodhead employees might have had?

A: I think obviously the difficulty is a question of bridging the cultures between the two companies. That is something that walking in you have to be very conscious and cautious about. But it's not necessarily the fact that we were an international company, or foreign people coming in that created the difficulty.

Typically, when things like this don't work well, it's because it was something that was put aside based on other business priorities. But this is the first priority, at least for the first phase, which is trying to earn the respect and the following of the people on site.

So, it was a big change. This was a group of 240-50 people at the time in a relatively small company, in the grand scheme of things; privately owned, family, small-town, rural, conservative, Midwest.

But we had some strengths. In North America we had a presence of 60 people on the Kuhn side. What made things possible was the Knight company was in very good shape, though not in terms of facilities and past investments.

We didn't have much to work with in terms of real estate, buildings, equipment. Not that it was in a bad state, but certainly there was not a lot of luxury. Typically when companies change hands it's because of that reason.

So we had a good base, and a very good group of people. Before we found Knight we had wanted to pick up a company in an industrial, mechanical area, located in the Rust Belt, not too far from Chicago and Milwaukee, with a very good work ethics culturally.

Knight had a lot of people, maybe half, with a farm background. They were born and raised on farms or they still operate or work on farms in the area. We liked that ethics, that culture.

What is important as well is that they have, to a large extent, a Swiss/German background in this area. I like to say that if I look at the internal phone directory here and the one from the plant in France where I'm from, which is only a few miles from Germany, they are almost identical. I think from that standpoint the alignment was very good.

Kuhn is not a typical cliche French company. The main company is located very close to Germany in the Alsace region. The ownership culture is a mix of French, German and Swiss culture, and that has helped us a lot. We approached things in a fairly international, non-biased way. And the people here I think saw the benefits.

The key factors in our success here were:

1) We were patient. We came in and explained our story: We are a fairly large company, but not gigantic. We have been very successful in North America distributing products, but we need additional product lines and U.S. manufacturing and engineering. We wanted to buy this business, and then grow it.

2) Synergies. We had no conflict with our people or within our product lines. None whatsoever. We were serving the same customers, but with different products, so when you put the two packages together we automatically became much stronger, and much more visible.

3) Communication. Being very close to people. We purchased this company that was doing very well with more than 200 people and Kuhn sent one person, me. It was my project, and I ended up being here alone. Kuhn made a conscious choice.

I think people did not necessarily embrace the new company immediately. That's just not possible. Change means a lot to people, always, but they gave us a chance, and wanted to see for themselves what we would do.

So the issue became doing what we said we would do. We purchased the company somewhat at its peak. 2002 was a good year for agriculture, 2003 was not. Very quickly we committed to investments on site which were very large, about $6 million within the first six months of the purchase.

Things were not rosy in agriculture in 2003, but we decided to invest in the future, and that changed a lot of things. People realized that we were committed, that we were pro-employment on site, pro-investment. Two years later we continued on, and now we're in the third phase of our expansion.

In the last five years we spent about $20 million at this location. And we pretty much doubled the work force.

Q: Do you plan to continue to grow the employee base here in Brodhead?

A: Yes. We hired 100 people last year here in Brodhead and the surrounding areas. We've hired another 25-40 here so far this year, and we will be up to between 550 and 600 in North America before year's end, provided the agriculture economy continues to go on well, which it should.

We are somewhat beyond our expectations here. Things have really worked well. We've been growing at a 10 to 25 percent rate per year, consistently. We have a three-year plan and a 10-year plan. We would like to grow at a rate of about 10 percent per year. Last year we were at 20 percent.

But growing employment has been a challenge. The large majority of our people come from Green County, within 15 or 20 miles around Brodhead. But the pool of committed, qualified labor has been difficult, especially in the last 24 months.

Things are easing a lot now. Recent announcements about layoffs are having an impact. From that standpoint, I think we are one of the only companies around really going strong.

Q: Kuhn N.A. employees make up close to 15 percent of the population of Brodhead. Has your company had to maintain a close relationship with city officials?

A: Yes. That was actually very good. There are three (major) employers in town, we are the largest, and the most capital savvy, so of course that means taxes. You would have to talk to the mayor, but I think we have been a very good neighbor. The city and county helped us in the first two plant expansions with tax increment financing. So we've had two programs for about $300,000.

Now, we did invest millions, but this came along with it and was good. And that money went into infrastructure: parking lots, fencing, security. That has been really a good relationship. We have had no issues with the city.

Q: Who are the primary buyers of Kuhn North America's products?

A: We fit primarily three profiles of customers: hay producers, dairy farmers and beef producers.

To a smaller extent we also provide some products to hobby farmers, orchards, vineyards and some crop farmers, but those aren't our primary market segments.

As to the customer size, our product lines start with machines which would fit with a smaller, traditional dairy farm here in Wisconsin, and go up to the biggest dairy farms and the biggest beef producers in the world.

The U.S. and Canada are the biggest market for our products, 10-15 percent is exported outside North America. Our key countries for export are Australia, Japan, Brazil and Mexico. They are the anchors.

And now because of Kuhn we are doing business in Europe as well. Eastern Europe has started as well, which has almost unlimited potential in terms of tillable ground and yield reserves, and now they have a lot of oil money. There's a rush in the agricultural industry to get into this market. It is really big, and growing very fast.

Q: What current trends in the agricultural industry are driving Kuhn's production?

A: The size of machines is growing. This is not new, it's a linear thing. Farmers to grow, to survive, to protect their income are now really entrepreneurs, they run their farms as businesses, and they make decisions as an organized, professional business would make decisions.

So they invest in machines that generally are energy efficient, have larger capacity, very good performance and in some cases help them deal with environmental and transportation constraints.

Environmental concern is not new worldwide, but is relatively new in the U.S. It's coming with manure management. A large part of what we do is manure application, which is not a sexy business, but it's becoming very important.

Maybe in the short-term or mid-term we'll come to associate manure with gold, either for energy production or as a natural fertilizer, knowing that fertilizer comes from oil — it takes a huge amount of oil to produce fertilizer — and those prices are going through the roof.

You've read articles about the problem of polluting water sources, this is an issue that is really becoming a professional management issue.

Q: What effect have rising commodity prices had?

A: So far in a very positive way. Farmers are making a lot of money. With strong increases in commodity prices, milk, grain, hay, etc., farmers' income obviously goes up and they grow, they acquire more land and re-equip themselves.

So the capital investment in farms in general has increased substantially in the last two years, which means more equipment, which is the positive side.

The negative side is that commodities are not just agriculture commodities. We look at the other ones: diesel fuel, plastics, steel — which is in a real crisis right now. The million-dollar question is when will the costs and income lines cross?

Today there is no question that the margins are less comfortable for the producers and the equipment makers then they were last year. If commodity prices come down a little and costs continue to go up, at one point the lines will cross, and that will have an impact on our business and on farming in general. And it's going to happen, but not likely this year. Beyond that, we don't know.

As far as what that will mean for the company, based on our trends, our growth, market shares and what we have in research and development, I don't think we have an issue.

Right now we cannot keep up with demand anyway, and that's good. We have record high order levels. So people have to wait for equipment, in some cases six months, sometimes more. But in terms of employment, which is our number one issue, should the cycle change, and we watch that very carefully, I don't see our having an issue because of the new products we have in the works.

I don't think the industry is going to collapse, but we may see a correction down 10 to 15 percent, and that's no problem. Right now we are producing with everything we've got, every employee, lots of overtime, seven days a week.

Q: The UN Secretary General began talking in April about a world food crisis. What role do you see Kuhn playing in any such future crisis?

A: If we talk food crisis, we've got to qualify this a bit. There's two sides to the story, I believe. One is a question of food shortage. And then the other is a food pricing issue. They are two different factors.

The food shortage scenario I don't think is tomorrow. There's still potential in many areas. The question is do we want to develop that potential. There is land not utilized or under-utilized in many areas.

For example, Western Europe has had land set aside for a number of years due to overproduction. They're unfreezing that land and putting it back into production, especially this year. So that's going to help.

Populations continue to grow and food eating habits are changing, particularly in developed and transitioning countries, which leads to consumptions, basically.

The other factor is countries where people complain about food pricing. I don't deny that food is becoming harder to afford in poorer areas. We have data, however, that shows that in the world people have never spent so little on food.

In developed nations, food has gone from 30 percent of household budgets 50 years ago to something like 10 percent or below today.

So discretionary spending in developed countries have increased and food prices have been down. Why is that? Because of economy of scale, larger farms and lower production costs. This is changing now because of the increased cost of production.

So there is demand on one end and there is cost of production on the other. The trend will be to continue to be very efficient in farming, so larger farms, there's no question, specialized farms wherever possible, utilizing areas of production that are really good for this.

Kuhn is part of the chain to feed the world, it's a very noble industry. I'm personally very convinced of that. I think our business is a very noble activity. It's very important to provide safe, healthy foods to feed the world. We do quite a bit.

It's a great challenge every day for our engineers to come up with machines that are part of that chain.