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BIP-1
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February 2020
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“How has the decline in the sales due to trade
war impacted profitability of John Deere
during crop harvesting season?”

BIP-1

2
Executive Summary:
The following report discusses how the seasonality plays a role in the profitability of an
organization in the presence of an external issue that serves as blockage for the organization
to avail perks of seasonality. In order to identify the following concern, the report has been
constructed. Context of the report discusses the operations of John Deere, an agriculture
machinery providing firm, and the impact of Crop Harvesting season on its sales in the
presence of ongoing Trade war between US and China. Where a constant growth was being
seen in the sales and profits of John Deere, specifically in the crop harvesting season, a
sudden decline of sales was reported instantly after the execution of trade war and imposed
Tariff. The context is followed by detailed explanation of the purpose of stating the report
along with a definite problem question that is further analyzed throughout the report. The
problem question states that, “How has the decline in the sales due to trade war impacted
profitability of John Deere during crop harvesting season?” In order to investigate the
problem question, a detailed analysis of the company is conducted in the light of PESTLE
and SWOT analysis. Both the analysis defined various internal and external factors impacting
the organization. Based on the findings the results were concluded highlighting the reasons
for this unwanted decline in sales. The report concludes with the possible recommendations
to be considered in order to improve the sales.

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Contents
Context of the Report:................................................................................................................6

Introduction of the company..................................................................................................6

Seasonality in Business..........................................................................................................6

Changes in the Business.........................................................................................................6

Purpose of the report..................................................................................................................8

Evaluation..................................................................................................................................9

PESTEL Analysis...................................................................................................................9

Political factors...................................................................................................................9

Economic Factors.............................................................................................................10

Legal Factors....................................................................................................................10

Summary..........................................................................................................................10

SWOT Analysis:..................................................................................................................11

Strengths:..........................................................................................................................11

Weakness:........................................................................................................................11

Opportunity:.....................................................................................................................12

Threats:.............................................................................................................................12

Summary:.........................................................................................................................12

Conclusion:..............................................................................................................................13

Recommendations:...................................................................................................................13

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List of Figures
Fig. 1………………………………………………………………………………… 7
Fig. 2………………………………………………………………………………… 7
Fig. 3………………………………………………………………………………… 12

List of Tables
Table 1………………………………………………………………………………… 8

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Context of the Report:
Introduction of the company

John Deere is known to be one of the largest manufacturing firm for equipment’s used in
agriculture and construction, natural gas and diesel engines, and industrial gas turbines on a
global scale. John Deere started its operations in 1837 (Deere, 2020). They are known to
provide equipment and machinery for agriculture, construction, forestry and lawn care.
Currently, John Deere is operational in approximately 30 countries providing equipment and
machinery on a global scale (Statista, 2018). John Deere has extended their operations and
services to china as well. Utilizing their manufacturing facility centers, John Deere produces
various machineries including undercarriage, motor graders, electric power generator,
excavators, compactors, hydraulics, and iron casting (Murray, 2019).

Seasonality in Business

The demand for agriculture equipment is noted to increase during specific seasons based on
the crop harvesting the major seasonality rise of such equipment is seen between the months
of September and December and almost in various regions (Xu, Boyce and Daley, 2004)..

John Deere is known to record an adequate amount of sales occurring in their operations
throughout the year. But a boost in the sales is often recorded during the harvesting season as
the sales of the product increases globally as a result of seasonality (Murray, 2019). As
during those seasons, many agricultural firms tend to purchase equipment to use during for
their crops harvesting (Mordor Intelligence, 2020).

Changes in the Business

Growth and profits of an organization are greatly impacted by the external factors not only on
their regular operations but also create issues for firms to gather profit during the peak
seasonality. A notable issue that has been faced by John Deere recently is the trade war
implemented between US and China (BBC, 2020). This war initiated in mid of 2018 and as
per this ban, both the nations implemented tariffs on import and export for each other. With
US implementing a tariff of 360 billion USD on Chinese goods while China imposed a tariff
of approximately 110 billion USD on US products (Swanson, 2018).

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 Fig 1: (BBC, 2019)

As a result of implementation of this issue John Deere records a decline of net income from
910 million USD to 899 million USD (Rovnick, 2019). Currently John Deere is facing a
major downfall in its profitability due to this implemented Ban as it is resulting in uncertainty
in sector that results in decreased sales. A major evidence of the downfall can be reported as
per the graph shown below:

Fig 2: (Howard Lindzon, 2019)

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 Moreover, in reference to the annual reports ranging from 2017 to 2020, the operating profit
in the field of agriculture and turf can be recorded as follows:

Operating profit 2016 201 Change in 2018 Change in 2019 Change in

7 percentage percentage percentage
(2016-17) (2017-18) (2018-19)
Agriculture and 371 584 +57 567 -5 527 -7
Tuff
Total Operating 518 862 +66 1063 +22 916 -14
Profit

Table 1: Annual reports 2017-19 (Ken Golden, 2017, 2018, 2019)

As per the above table, John Deere was having a massive profitability gain as a percentage
change of 57% has been reported in 2016-17 (Ken Golden, 2017). However, it can be seen
that upon implementation of the trade war in 2018, not only did the agriculture and tuff sector
faced a downfall in their profits but a total loss as well was seen in the total profits as a result
of the decrease in sales due to the trade war. Moreover, this downfall is continuous and has
been resulting in further decline of the profits (Ken Golden, 2019).

Purpose of the report.

Seasonality is known to be a characteristic of a business that is experienced after regular and
predictable interval every year. Under the influence of seasonality, businesses tend to gain
maximum profitability as that is a peek time for a business to earn. As the seasonality is
predictable, companies tend to assign their resources accordingly.

An evident downfall for John Deere can be easily spotted as a result of this ongoing trade
war. Referring to the agriculture, not only farmers but billion-dollar multinationals have also
been impacted where John Deere is one of the most highlighted victims (Kumar, 2019). As a
result of this trade-war, china has stopped importing the US due to the increased amount of
taxes implemented on the products (Melloy, 2019) that has resulted in downfall in the
purchase of products from John Deere (Bromels, 2019). In doing so, china has started
reaching out to other competitors for the purchase of equipment. Before implementation of
this trade-war, a huge growth in the profitability was regularly reported for the crop harvest
seasonality (table 1). With china being one of the biggest customers of John Deere, this trade
war has had a huge tool on the company. As a result, John Deere is seen to fail in utilizing

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their opportunity of generating profits during seasonality as the issue has created a major
hurdle in the profitability of the business. The purpose of this report is to discuss the impact
of seasonality of John Deere in context to the harvesting seasons in agriculture and how the
profitability of John Deere is being impacted despite seasonality due to the trade war
(External issue). Moreover, the purpose of the report is also to identify the possibilities of
revenue generation with seasonality despite the presence of trade war. For the discussion of
the entire purpose, a

“How has the decline in the sales due to trade war impacted profitability of John Deere
during crop harvesting season?”

Evaluation
PESTEL Analysis

PESTLE analysis is known to be a market analysis tool that identifies the external forces that
are being faced and are impacting the organization. This analysis discusses Political,
Economic, Social, Technological, Environmental and Legal factors affecting organization
(Amable, 2019). In reference to the Trade war being a external element for the issue,
PESTEL analysis will help in discussing the factors in depth. In context to the concern, only
relevant factors have been analyzed.

Political factors
John Deere company is successfully operating in various countries and to achieve
productivity in construction, farm and machinery industries they need to get themselves
exposed to different kind of political factors (Tomaszek, 2019). The reason of facing
different political factors is that when the products are traded and moved from one country to
another, laws and regulations and the politics is always involved. And if these regulations are
not followed company's productivity may be reduced at significant level (Tirthgirikar, 2019).

Political stability is one major factor which affects Deere and company because agriculture
and machinery industry is always one of the important industries in a country and political
stability is required for the survival of most important industries in a country. In 2018, trade
war was started between United States and China. The basic aim of US was to enforce
changes on trade of China by calling it unfair practices or against the laws (Boak, 2018). To
impose the changes US applied different tariff and other barriers which affected the foreign
direct investors and increased the prices of different products mostly in manufacturing and

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farming industries (Swanson, 2018). Because of this trade war John Deere's net income was
significantly decreased from 910 million to 899 million.

Economic Factors
When a company is involved in trading in agriculture, machinery and construction businesses
on global level then economic factors play important role in the productivity of the company.
As per the current economic report, USA is one of the strongest economic power with an
increase in consumer spending by 3.2% as per recent findings (Amadeo, 2020). Thus, the
customers are known to have a strong purchasing power.

Another factor that affect the company externally is the economic growth of United States
(Tirthgirikar, 2019). If the growth is significant and positive, then it increases the purchasing
power of the users/consumers while if it is negative then it affects the attitude of the
consumers on global level and they show less interest towards purchasing products and also
start looking for the low-cost products so that they may be able to cope up with their
economies (Tomaszek, 2019).

Legal Factors
Since, trade and FDI are the complex and critical systems on country level so laws and
regulations are formed to control or manage it (Abhijeet, 2018). These laws are set to define
the process and run the processes smoothly under the authority's control (Abhijeet, 2018).

In 2018, trade war was started between United States and China. The basic aim of US was to
enforce changes on trade of China by calling it unfair practices or against the laws. In this
trade war, certain rules and regulations regarding trade and specifically tariffs were defined
(Boak, 2018). United states defined a rule for china in 2000s that china would buy the
operating components from local suppliers or face the higher tariffs and US increased the
tariff from 10 percent to 25 percent (Aleem, 2019). And the reason to apply this rule was the
claim by US that China is using unfair trade practices which is costing hundreds of billions a
year to United States (Swanson, 2018). This trade war laws and legislations affected foreign
direct investors (Aleem, 2019).

Summary
On discussed in political factor, With a large amount of tariff tax implemented on the trade
between USA and china, china had decided not to further import from US till things get
resolved between the two nations, with this political implementation, Major decrease in the

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sales of the equipment has been observed that resulted in the loss of the operational profit for
the company on a major scale as highlighted in the table 1. Moreover, similarly described in
the legal factors, this tax implementation is a bound situation for the company as they have to
be legally bounded to it due to the influence of the government. Both the situations are not
under John Deere’s control.

Moreover, as per the findings in economic factors, with the high purchase power in the
emerging markets, such as of US, John Deer can use the opportunity to capture wider market
and can also increase the product and its maintained charges as the US economy will not be
affected greatly by it.

SWOT Analysis:

SWOT analysis can be defined as the strategic technique that is used by the organizations to
identify their internal strengths and weaknesses. Moreover, along with the internal analysis,
the following tool allows organizations to identify their external threats as well. The
following analysis is being run in order to identify the strengths that can be enhanced,
weaknesses that can be minimized, opportunities that could be availed and threats that can be
avoided; all to overcome the declining condition of the company.

Strengths:
- One of the biggest strengths of John Deere is their extensive diverse portfolio. John
Deere is known to have three categories of products with different segments; Global
growth business (for agriculture), Complementary business (Turf) and supporting
business (Financial services). GGB is the source of major growth for the business
(Yunes, Napolitano, Scheller-Wolf and Tayur, 2007).
- Another important strength for the business is their brand image. Being one of the
strongest market competitors for the agriculture business, John Deere despite falling
low, can capture market share (Baird, 2014).
- Other strengths include, Technological advancements, strong R&D, Adherence to
core values and end to end construction portfolio (SWOT, 2019).

Weakness:
- One of the biggest weakness of John Deere is their inefficient utilization of the
available assets. Despite agriculture machinery being the source of 90% of company’s

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 sales, Deere has not placed their maximum focus on it to generate profits (Kingsbury,
2010).
- John Deere is unable to identify competitive advantage in farm equipment for smaller
scale markets (Azad, 2016).

Opportunity:
- One of the biggest opportunities that can be availed by John Deere is the expected
raise in the demand of agriculture business
(Elferink, 2016). The expected increase of
population is expected to be around 9.5 billion in
Africa and asia that would require output of
agriculture to be doubled. Thus, this opportunity
can be taken over as first mover advantage to
gain profitability.
- Another opportunity for the business could be to
avail technological advancement. While it is
currently effectively working on the
technological advancements, further Fig 3: (Elferink, 2016)
developments can be made by revolutionizing agriculture using technology (Murray,
2019).

Threats:
- Changing laws regarding imports and exports. As discussed, the on-going trade war
has a huge impact on the organizational profitability and if keeps on proceeding, can
result in a major loss (Swanson, 2018).
- Despite having less competitors in the market, one of the strongest competitors;
caterpillar is taking over the market (Lahiff, 2019).
- Other factors include changing federal power, changes in prices of steel, changing
agriculture regulations (SWOT, 2019).

Summary:
Despite the recognized opportunities for potential growth in the agriculture industry, the
weakness is that the company is not fully focusing on the agriculture market to gain
profitability.

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Conclusion:
In order to respond to the above stated question, “How has the decline in the sales due to
trade war impacted profitability of John Deere during crop harvesting season?” the following
research has been conducted. As identified in the PESTLE analysis, the external factors have
a great impact on the company’s situation. The trade war between US & China has resulted in
decrease in the crop exports between the countries, that has directly resulted in the decrease
in demand of the machinery. However, opportunity can be availed taking economic situations
into account by raising the prices and providing after buy services to the customers.
Moreover, as per the findings attained in the SWOT analysis, the company, despite the
company recognizing future opportunities for the agriculture industry as per increasing
demands and having strengths including brand image and strong R&D, the company is not
effectively utilizing its resources. Therefore, the conclusion upon discussion can be stated
that a loss in sales has incurred that has resulted in John Deere to fail in gaining revenue
regardless of seasonality due to the implementation of trade war.

Recommendations:
Based on the above findings, following recommendations can be identified.

1. Till the trade war doesn’t settle in, John Deere should divert their focus from China
and should start focusing on the countries that are agriculture friendly third world
countries. With that, John Deere can be recommended to focus on relocating partially
and focusing on the agriculture division to avail seasonality and regular sales in other
areas of the world as well.
2. In order to avoid high tariff, John Deere can avail their strong market position to
either acquire a smaller firm outside US or operate a sister company under a different
country’s ownership. In doing so, the trade can be exempted from these major tariff
charges.
3. The company should act proactive and keep their forecasting accurate so that they
could avail the opportunity to grab profitability from the market instantly once the
trade war starts settling between the two nations.

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