KONE (KNEBV)
Elisha Graves Otis invented the modern elevator as we know it today in the mid-19th century, but load moving systems have been around for more than two millennia. The first hoists were open platforms suspended with hemp ropes and powered by people and animals. It is believed that the first primitive elevator was designed in the 3rd century BC by Archimedes, but it was the Romans who extended its use. Proof of this is the Colosseum in Rome, which had up to 28 elevators to transport construction materials and wild animals to the arena level to fight the gladiators.
Elevators to carry passengers took considerably longer to arrive. It is believed that one of the first historical figures to use them was King Louis XV of France, who had quietly ordered the construction of an elevator in the Palace of Versailles to connect his lover's room to his. With the advent of the Industrial Revolution, British architect Decimus Burton and inventor Thomas Hormor designed a steam-powered elevator that elevated tourists to a considerable height in central London so that they could admire the spectacular views in exchange for a few coins.
Steam elevators spread throughout Europe and North America over the next few decades, but after several fatal accidents, safety became a major concern. This problem was solved by the American Elisha Graves Otis, founder of the current Otis Elevator Company. In 1852, Otis invented a safety system based on a brake that activated if the elevator collapsed. The invention was presented at the New York World’s Fair in 1854 and, just three years later, Otis installed his first commercial elevator. Steam elevators gave way to hydraulics and later to electric elevators. These could reach greater heights and higher speeds, which in turn allowed the development of the first skyscrapers.
Across the pond, Finnish manufacturer KONE began developing its first elevators in 1918. The first year, with 50 employees, KONE installed four commercial elevators. Ten years later, the company had installed more than 1,000. Today, KONE is the third largest elevator manufacturer in the world, only behind Otis and Schindler. KONE, which reported almost €11 billion in revenue in 2022, employs 60,000 people worldwide, is present in 60 countries and more than 1 billion people use its elevators, escalators and automatic doors every day. Reputation, brand and tradition are essential to lead an industry that has experienced recent consolidation (a large part of the global market is controlled by seven companies).
The elevator business is fairly easy to understand. Manufacturers compete for projects of different size and complexity at close to their production cost (for this business segment, EBIT margins higher than 7% are quite rare). The goal is to get hold of the maintenance contract (the most lucrative part of the business). Generally speaking – and excepting some specific geographies that will be discussed later –, success rate is between 85 and 90%. This means that in 9 out of 10 installations, customers end up signing a maintenance contract with the OEM. The unit economics of the maintenance business are very interesting: customers pay in advance, gross margins are between 85 and 90% excluding labor costs, and operating margins are between 20 and 30% once labor costs are taken into account. Maintenance is the least capital-intensive business line, it generates the most cash flow and is the most stable due to the fact that maintenance contracts are a legal requirement, regardless of macroeconomic circumstances.
Elevators can cost between €30,000 and 500,000 depending on building height, speed, load capacity and design. Regardless of whether Otis, Schindler, KONE, ThyssenKrupp, Fuji, Hitachi or Mitsubishi, which make up more than 60% of the new installation market, are present around the world, each geography is different and has different local dynamics. A manufacturer may be willing to take on a zero-profit, half-million-euro project because they control the maintenance of most of the elevators in the city and know that the marginal cost of getting those maintenance contracts is very low. Building route density and route optimization are key if one wants to successfully compete in the industry.