Dominant Design Industry

Abstract

Once the teething problems of a new technology are over, many companies realize its potential and experiment with different solutions until a dominant design emerges. Years or even decades later consolidation sets in and few global players survive.

Standards are always out of date. That is what makes them standards.

Alan Bennett, born 1934, English author

The Economist: The lift business: Top floor, please

Things are looking up for liftmakers

© The Economist Newspaper Limited, London (Mar 16th 2013)

LIFTS help prove the adage that what goes up must come down. The profits of the companies that make and install them, however, seem to abide by different rules. Four firms control two-thirds of the global market: Otis, part of America’s United Technologies; Kone of Finland; ThyssenKrupp, a unit of a German conglomerate; and Schindler, based in Ebikon, Switzerland. All enjoy penthouse-level margins, even as their sales glide silently upwards (see chart).

People live more vertically than ever before. An estimated 70m the world over—more than the entire population of Britain—move to cities every year. Many live in blocks of flats or work in high-rise offices. Nearly all use escalators (which the big four also make) from time to time. Few can be bothered to take the stairs.

Jürgen Tinggren, Schindler’s boss, talks of a “second planet” of new consumers who are discovering the elation of elevation. Global demand for new lifts has gone from 300,000 a decade ago to nearly 700,000 this year. China, where two-thirds of new units are installed, accounts for much of the rise. Annual revenues are climbing steadily: the Freedonia Group, a consultancy, thinks they will have doubled to $90 billion in the decade to 2015.

The secret to the industry’s whopping margins, however, is maintenance. People hate getting stuck in lifts. So they pay $2,000–5,000 a year to keep each one running smoothly. Since 11m machines are already in operation, many needing only a quick look-over and a dollop of grease every few months, this is a nice business. Margins are 25–35%, compared with 10% for new equipment. Revenue from maintenance is far more stable than that from installations, which are affected by the ups and downs of the economy.

A captive business

Otis and its peers make more than half their profits from services, often by securing maintenance contracts at the time of installation. This raises high barriers to entry: a newcomer would need a dense network of technicians to get started. The incumbents do not compete ferociously on prices. In 2007 the EU antitrust authorities fined them €831m ($1.1 billion) for fixing the German and Benelux markets.

Much of the upkeep business is centred on Europe, which has around half the world’s lifts (and an even higher proportion of the creaking ones that will soon need to be refurbished, another profitable niche). The market is moving east, but it will take time. “The service business comes with a big lag,” says Henrik Ehrnrooth, Kone’s finance chief. Some fret that Chinese lift-owners are either maintaining the machines themselves or not at all.

Schindler’s Mr Tinggren says that concentrating on fixing old lifts rather than installing new ones is short-sighted. The industry must find other buttons to push; and up to a point, it has. Lifts are becoming more standardised globally, making it easier to find economies of scale. Manufacturing and R&D are increasingly outsourced to Asia, shaving costs. Sales of pricier offerings such as double-decker cabins or smarter control panels that improve the flow of people in large buildings are buoyant. Sidelines such as keycards and consulting services also pay well. New gizmos allow each lift’s performance to be monitored remotely, so repairmen have to make fewer costly trips to inspect them.

Yet from the customer’s perspective, lifts have evolved little since they first appeared 150 years ago. You walk in. You press a button. You avoid talking to the people standing next to you. You get off. Slim margins historically kept competition at bay. Now that the lift market is lucrative, however, it may grow more crowded.