Kone is increasing investments to connect most of its installed base to the cloud

Business Strategy & Outlook

As the market dynamics in China and Europe shift, the established relationships with developers and end users will protect Kone’s position as a top global elevator player. The company’s success in winning contracts for new elevator and escalator installations stems from a record of delivering tailor-made solutions that can save costs by shortening a building’s construction time, lowering energy use, or improving people traffic flow. In China, now the world’s largest elevator market, Kone has the number-one share in new installations, and in Europe the company is the second-largest competitor for new equipment.

Winning new installations puts the company at a competitive advantage in securing maintenance contracts, which are more lucrative and important to long-term returns than new installations. In China, where it has now been present for 20-plus years, Kone shares the number-one position for maintenance contracts, and in Europe, the Middle East, and Africa, it is number three. As the original equipment manufacturer, the company is in a good position to win the associated maintenance contract on a new installation because it can offer lower downtime through the quickest access to spare parts, knowledge of its own equipment, and its long record of reliability. This last point is especially important in developing markets, where Kone’s European brand, associated with quality and safety, carries weight. Elevators have become more software-driven, enabling better usage management to lower energy costs or control access for security purposes. As with cars, increasing the sophistication of tools and skills needed to maintain software-enabled elevators has limited some third-party repair providers to servicing older models. Kone is increasing investments to connect most of its installed base to the cloud over the next few years, helping customers dynamically manage elevator and escalator flow as well as providing ongoing online diagnostics to minimize downtime. Once a customer signs on to cloud management, it will be even more unlikely to switch to a new service provider.

Financial Strengths

The company possesses a strong balance sheet, benefiting from a net cash position built by an asset-light business model and only modest acquisitions. Kone’s model of outsourcing most of its components lowers both the capital intensity of its business and the pressure on the balance sheet to finance future revenue with debt. Double-digit EBIT growth, combined with improvements in working capital, has doubled the company’s annual free cash flow generation over the past several years. The free cash flow to remain more than EUR 1 billion per year for the next several years.

Bulls Say

Kone’s well-known brand, combined with the market’s sensitivity to safety issues, should put it in a good position to retain a majority of its maintenance contracts in China.
As the revenue mix in China moves away from new installations toward higher-margin maintenance contracts, Kone’s EBIT margin should expand.
Replacement and modernization of aging elevators in Europe and North America should offset slowing revenue growth in the China business.

Company Description

Kone, whose name means “machine” in Finnish, is the world’s fourth-largest supplier of elevators and escalators. Kone began producing elevators in Finland in 1918 and today generates revenue in three ways: selling new elevators and escalators, overhauling or modernizing old equipment, and servicing its installed base. Most of the company’s profit comes from the last activity, where contracts are rolled over annually with built-in price increases. The bulk of the company’s business is in elevators, which are more numerous globally than escalators.

(Source: Morningstar)

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