International Harvester Company – The Rise and Fall of a Monopoly
In 1902, the five largest farm machinery companies merged, including: The McCormick, Deering and Milwaukee Harvester Cos, Piano Mfg. Co, Warder, and Bushnell & Glessner to form the International Harvester Company (IHC). JP Morgan oversaw the merger. IHC had a virtual monopoly, controlling 85% of the US farm machinery industry and was the largest manufacturer in the world.
Let’s go back in time a bit further to see how this came about.
In 1831, a 22-year old Cyrus McCormick redesigns his fathers failed reaper (machine that cuts and gathers crops at harvest), and showcases it at a neighbors farm in Steels Tavern, Virginia. Cyrus patents the new design in 1834, and immediately begins selling them around his local community.
Cyrus continued to innovate on his designs and by 1848 he could no longer keep up with demand. He formed a partnership, purchased land on the north bank of the Chicago river, and constructed a new manufacturing facility in Chicago. He offers farmers a “full refund guarantee” if not satisfied, which makes McCormick one of the most innovative marketers in the industry. His manufacturing plant would employ over 123 people, and could produce thousands of reapers per year. The company and product would win national and international awards in London, Hamburg, Vienna, and Paris.
McCormick would continue to grow and by 1884, the time of Cyrus McCormick’s death, the company sold 54,841 machines that year. Cyrus McCormick Jr. was the eldest son of Cyrus McCormick, and the 25 year old would assume the presidency of the company upon his father’s death. He would lead the company through a tumultuous time. Known as the “Harvester Wars”, from the mid 1880’s until 1902 a vicious battle ensued between McCormick and other farm machinery competitors.
The supply of farm machinery outpaced demand, and manufacturers tried every trick in the book to sell their machines. It got so bad at its height that competing salesman would bribe farmers, sabotaged competitor’s equipment, and even physically attacked people. Sales prices plummeted. An eight-foot binder, which was $325 in 1882, fell to $110 by 1900. Companies were selling machines at a loss just to keep market share. Even for McCormick, a company with superior products, they too were forced sell certain machines at negative margins (30-40% losses), for a few years.
McCormick and Deering, the two largest firms, came together to try to end the wars through agreed upon price fixing and reduced production. They would agree to do so in domestic markets on certain machinery, but not on everything, and the battle continued much the same in international markets.
Throughout the 1890’s, Deering would make better long-term decisions by acquiring its own steel mill, coal mine in Kentucky, an iron mine in Minnesota, and timber property in Missouri and Mississippi. These purchases insulated Deering from raw material prices and provided a competitive advantage over McCormick. But even with such an advantage McCormick had a much larger market share of international markets.
Finally, in 1900, the two companies came together to end their battle and price wars. It called for a merger of the two companies and simultaneous acquisition of three of their competitors. In 1902, JP Morgan backstopped the $110 million merged corporation, International Harvester Company (IHC). In the end McCormick controlled 43%, Deerings 34%, JP Morgan 14%, and the acquired companies divided up the rest.
The Harvestor Wars were finally over, but the war with the government was about to begin.
In 1907, IHC introduced a new piece of farm equipment called the auto wagon, a high-wheeled, rough vehicle designed to carry a farmer, his family, and his produce over rutted mud roads to the marketplace. Prompted by the success of the auto wagon, the company eventually designed new models with water and air-cooled engines as well as lower, rubber tires rather than wooden wheels.
The company also began marketing its machinery more aggressively abroad, and, between 1903 and 1912, sales climbed from $53 million to $125 million, net earnings grew from $5 million to $16 million, capitalization more than doubled, and foreign sales rose 388 percent to $51 million. By 1912, more than 36,000 dealers in 38 countries were selling IHC products. During this time, the company’s work force grew to 75,000, and management invested in iron mines, coal mines, and acres of forest property, all of which provided the raw materials for producing farm machinery.
By 1910, IHC controlled an estimated 85% of the harvester industry, 90% of the grain binder industry, 75% of the mower industry, and 30% of the entire agriculture machinery industry (outside of harvesters). In 1911, the federal government broke up Standard Oil and also American Tobacco. The government now set its sights on International Harvester. A 15-year battle would ensue, and the US Supreme court ruled in favor of IHC in 1927.
In 1916, IHC started manufacturing tractors, and in 1919 the McCormick Farmall tractor is born. The Farmall tractor is considered to be the tractor that industrialized the United States. Starting in 1922, they were painted red for safety reasons and the color stuck and the brand was known as “Big Red”.
In 1923, IHC US farm equipment sales reached $150 million, triple that of second place Deere & Co. “Harvester is, of course, the greatest single agricultural enterprise in the world,” trumpeted Fortune magazine at the time.
But when the Great Depression hit in 1932, the company suffered. Sales dropped 78% in 1932 and tens of thousands of employees were laid off.
By the 1940’s the company lost its founding values and diversified into things that diluted its focus like air conditioners and refridgerators. The company grew complacent. A longtime IHC dealer commented back then: “They thought that whatever they built and painted red was going to sell.” Just three years later Deere green outsold Harvester red for the very first time.
In 1968, Cyrus H. McCormick’s grandnephew, Brooks McCormick, took charge of the company, closing several inefficient plants, including the famed McCormick Works in Chicago. In 1971 revenues passed $3 billion, but profits were only $45 million. New management was brought in again in the 1970’s and cut everything to the bone. Employee morale was all but gone and they went on strike. Between 1979 – 1985 IHC reduced its headcount from 98,000 to 15,000, and from 42 manufacturing plants to 7 plants, and even with all this cutting the company still lost $3.3 billion.
In 1986, International Harvester sold off most of its construction and then its agricultural division to Tenneco for $488 million. The remaining portion was renamed Navistar International (publicly traded today) which focused on medium and heavy duty trucks.
In 2001, ARGO SpA purchased the McCormick name and tractor factory in Doncaster, England. By 2006, McCormick products and tractors are being sold again in over 55 countries.
IHC and it’s predecessor, McCormick, dominated their market for over 100 years. If history has taught us anything it’s that it’s incredibly hard to stay dominant yet nimble and innovative. All great companies started as small companies, and if given enough time almost all great companies fall back to mediocrity. But I find it fascinating how businesses evolve. 186 years ago Cyrus McCormick took an idea and changed the agriculture industry forever. His son picked up where he left off, growing and defending the company through the harvest wars and helped to form IHC, one of the largest companies in the world at the time. The company dominated for decades, but ultimately purpose driven leaders were replaced with salary driven leaders and a slow steady decline occurred. The company was broken up and sold. Just like broken glass, it’s remnants are scattered all around us. Today, you will probably see a Navistar International truck, 18-wheeler, bus, or a McCormick tractor in the fields. You will also see dozens of other brands like Deere and Company that were forced to rise up and innovate against the great IHC.
A Profile of the Farm Machinery Industry: Helping Farmers Feed the World