Catching Up with the ‘Core’: The Nature of the Agricultural Machinery Sector and Challenges for Chinese Manufacturers

Abstract

The current era of globalisation has been accompanied by China’s rise as a major economic actor. Chinese firms are expanding their presence globally and are seeking to ‘catch-up’ with firms in developed countries across different sectors. This paper uses China’s agricultural machinery sector as a vehicle to examine the challenges faced by firms from developing countries in their effort to catch-up with ‘core firms’. Chinese firms operating in the sector struggle to compete with a small number of dominant core firms based in developed countries. These core firms are sectoral leaders with a global presence. They are continuously strengthening their competitive advantage using diverse strategies, including: investing in R&D, focused acquisitions and developing relationships with actors internal and external to agriculture. The challenge of catching-up for Chinese firms in the sector has further increased as developed countries seek to protect firms in strategic sectors like agriculture. By examining the changing nature of the agricultural machinery sector, and the role of core firms, the paper highlights the substantial barriers facing Chinese firms in their efforts to catch-up. This paper has important implications, as it shows that even if firms from developing countries enjoy state-support, they will increasingly struggle to catch-up.

Acknowledgements

We would like to thank the anonymous reviewer for the valuable input which has helped improve the paper substantially. Data used in this article will be made available upon reasonable request by contacting the corresponding author.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Concentration is most visible in advanced technology sectors and strongly branded sectors (Nolan, Zhang, & Chunhang, 2007).

2. In 2015 and 2016, out of 157 firms which invested more than US$ 1 billion in R&D activities, 124 were based in the US, EU and Japan (IRI, 2017).

3. System integrators are in many ways similar to ‘lead firms’ as defined in the global value chains literature.

4. The largest deal in this sector is the US$ 130 billion merger between US-based Dow Chemicals and DuPoint. This is followed by Monsanto’s acquisition by Germany-based Bayer AG.

5. An example of such a technological solution is the rising use of drones for agriculture operations that are incorporated with advanced sensors and digital imaging capabilities. This technology is argued to help farmers increase fields while reducing crop damage (Anderson, 2017). Precision farming is another technological solution that allows for improvements in the sustainability of farming systems (Zarco-Tejada, Hubbard, & Loudjani, 2014).

6. According to Clarke (2008), a farmer using mechanical power can produce enough food to feed 50 people whereas a farmer using draught power can only produce enough food for 6 people.

7. Full line manufacturers produce a complete line of equipment including tractors, combines, tillage and planting equipment.

8. John Deere was the first company to attach GPS sensors to tractors and other farm machinery in the 1990s (Pham & Stack, 2018).

9. This is evident by looking at changes taking place in the domestic market. From 2000 to 2015, the category of medium-and-large sized tractors exhibited a compound annual growth rate of 13 per cent while the category of small tractors grew only by 2 per cent per annum (NBS, 2017).

10. Designated size refers to industrial firms with revenue of greater than RMB 20 million.

11. Backbone firms are innovating to take advantage of agricultural subsidies that have been re-oriented towards larger firms capable of manufacturing powerful ‘smart tractors’ (Wang & Goh, 2018). While local firms intensify efforts to develop such solutions, products offered by core firms meet the subsidy criteria and are likely to continue dominating this highly lucrative segment of the market.