It is no coincidence that elevator and escalator (E&E) companies such as Otis, Schindler and Kone have been in business for more than a century. New entrants face insurmountable barriers to entry due to economies of density. As a result, most established elevator companies are profitable and some are growing. Kone is exceptional because it is both growing and profitable. Kone’s profitable growth can be traced to competitive advantages at the unit level.
Industry economics
It is inconvenient and expensive to replace an elevator or escalator. Units are retired when a building is pulled down or during an (infrequent) major conversion. As a result, units typically serve for 30 years. Though many owners choose to have their elevator maintained and/or converted by independent local firms, the Original Equipment Manufacturer (OEM) often supplies critical replacement parts.
In a mature market, a new entrant capturing 50 percent of new unit sales, will accumulate a modest 15 percent share of the installed base over the course of a decade. Of course, local mechanics are unfamiliar with an elevator that does not already have a large installed base. Maintenance firms won’t train all their mechanics for an unordinary elevator or carry an inventory of spare parts for it. Maintenance firms can’t do that at a reasonable price. It takes decades to gain a decent share of the installed base in a given local market and all that time, economies of density work against a new entrant. It does not matter if you have a slightly better or cheaper elevator to sell. If you can’t provide support at a reasonable price, you will have a tough time selling that product. The established companies in a local market have pricing power for new installs.
As a result of these barriers to entry, E&E companies are able to defend their profitable franchises for decades. That’s true for the four largest global brands Schindler, Kone, Thyssen and Otis but also for lesser-known local franchises such as Zordaya (Spain), Fujitec (Japan) and Golden Friends (Taiwan).
Unit Economics
Though there are significant differences in the price of individual units, the average unit costs $40 000 and generates about $2 500 in annual maintenance revenue. That’s $75 000 worth of high-margin revenue over the lifetime of the unit.
At 6.6 million units, the big four have a 44 percent share of the global installed base.
Gaining market share is a matter of selling more new units than the competition over a very long period. That is exactly what Kone has been doing. Kone sells 20 percent of all new units.
Why?
A top-down analysis of the industry leads to the conclusion that Kone is gaining market share because it leads in China. China is by far the largest market for new equipment. Correlation is however not causation. The numbers do not explain why Kone sells more elevators in China or for that matter the rest of the world. Another question left unanswered is why Kone lags Otis, Schindler and Thyssen in the US.
The answers to these questions lie in the hoist motor. Kone’s EcoDisk (US patent:
US5429211A) has infinitely variable speed, runs on standard AC power and turns at a modest 0 -150 rpm. It was introduced in 1995.
At the time, AC-powered hoist motors used cheap induction motors running at fixed speeds; typically 1500 rpm. They switched to 500 rpm for leveling. These two-speed hoists required a gearbox and flywheel to get an elevator moving.
If you’ve ever been in a two-speed elevator, you will have noticed the jolt as the elevator launched at top speed and the long wait as it switched down for leveling. You might also have noticed the lights in the building dimming each time the elevator was used. The rough acceleration and slow levelling were uncomfortable for passengers and strained the electrical system of the building and the elevator's ropes.
The alternative for a two-speed AC hoist was an expensive gearless DC hoist. DC hoist motors do not need a gearbox and have high torque and variable speed. These hoists accelerate smoothly and level off quickly. They also require a large, expensive and hot AC/DC converter that does not fit in an elevator shaft. Gearless DC hoists last forever though and many classic New York skyscrapers still have their original DC elevator motors in the machine room up top.
For low-rise buildings or buildings that were not designed with an elevator shaft or machine room (retrofits), there was the option for a slow hydraulic lift with limited reach.
The slow-revving but powerful EcoDisk was just 25cm wide and did not need a gearbox or flywheel. By mounting the hoist flush with the sidewall of the elevator shaft, the EcoDisk eliminated the need for a machine room. The hoist was called EcoDisk for a reason. It could generate electricity when the elevator was running up empty or down fully loaded. This hoist has been at the heart of Kone’s successful Monospace product line ever since.
With no machine room and standard AC power, the EcoDisk was much cheaper to install in new and existing buildings. It was simple to maintain because it had the same basic parts as previous roped elevators, just fewer of them. The variable speed made the ride more comfortable and also reduced wear and tear of the mechanical parts, including the ropes.
All over the world, elevators in low and mid-rise residential buildings were replaced by Kone’s superior solution. This included many hydraulic lifts. Of course, Schindler, Otis and Thyssen reacted by developing their own versions of machine room-less (MRL) hoists.
Nevertheless, almost 25 years after it was introduced, the EcoDisk still sets the standard.
The MRL hoists of Schindler, Otis and Thyssen can move an elevator at 3 m/s on the condition that it weighs less than 2000 kg. They do have hoists that can move heavier elevators at higher speeds but these hoists require a machine room. There is only one hoist capable of moving a heavy elevator at 3 m/s without a machine room and that is Kone's system.
Why?
In order to make their motors fit, the competition resorted to compact fast-revving motors. While the motors are AC powered and have variable speed, they also have a sheave with a much smaller diameter. Standard steel ropes would slip over the small sheave and so these hoists require rubberized steel belts for traction. Slip is dangerous. Once a sheave starts slipping, it can quickly wear through the ropes or belts. The more obvious effect is that the hoist can't properly accelerate the elevator. Elevators don't have multiple ropes or belts for safety, they need them for traction.
The Gen2 hoist developed by Otis has a sheave with a diameter of approximately 10 centimeters. It needs to run at 600 rpm to hoist an elevator at 3m/s. Otis being Otis, the company makes lots of noise about how their revolutionary rubberized belts are transforming the industry. Interestingly, they don't use this "superior" technology on their heavier and faster high-rise elevators. They use steel ropes for those.
Schindler and Thyssen have very similar systems.
By contrast, Kone’s patented EcoDisk has a sheave with a diameter of approximately 50 centimeters. It has a good grip on steel ropes and the motor runs at a modest 100 rpm to propel the elevator at 3 m/s. The EcoDisk is the only hoist capable of driving standard steel elevator ropes without the need for a machine room.
For faster elevators in high-rise buildings that do have machine rooms, Kone simply uses scaled-up versions of the EcoDisk.
Why not in the US?
Kone has trouble selling the EcoDisk in the US because many states insist on a separate machine room for roped elevators (not for hydraulic lifts). One advantage of a hydraulic lift is that it can be safely lowered by non-technical personnel simply by opening a valve. These local regulations eliminate a large part of the addressable market for the EcoDisk in the US.
Measuring the moat
Not only has Kone been taking share, they have been doing it with a single technology. Unlike Otis, Schindler and Thyssen, Kone doesn’t sell geared or hydraulic elevators and so their installed base is more homogenous. This is another advantage. Patents expire but Thyssen, Otis and Schindler have invested heavily in belt-driven technology. Switching back to ropes for their mid-rise models will leave them with even more diversity/legacy within their already fragmented installed base. That's expensive to support. To make the switch, they'll have to take significant pain. That's tough for a publicly-traded company.
To maintain its current market share of 9 percent of the installed base, Kone would have to sell 9 percent of all new elevators. At current rates that works out to roughly 75 000 new elevators annually. Kone currently sells 160 000 elevators so 85 000 elevators reflect Kone’s competitive advantage. At $40 000 per elevator, that's a $3.4 billion moat.
In a fast-growing market, the advantage is worth more than in a saturated market. This makes sense. Kone’s advantages are simply more valuable if and when more people are buying new elevators. Kone's moat is not static.
Another approach for measuring the moat would be to realize that Kone's advantage should allow the company to take an incremental 11 percent market share. That market is worth roughly $65 billion in today's money. This implies the moat should be worth $7.15 billion to Kone's competitors.
First published May 17 2019 by batbeer.
Sources and further reading
https://plus.credit-suisse.com/rpc4/ravDocView?docid=V7Zomz2AF-Z8M3