Global Elevators & Escalators

Credit Suisse analysts forecast the industry through the next decade.

Credit Suisse analysts forecast the global elevator and escalator (E&E) industry to reach EUR100 billion (US$115.87 billion) in size by 2030, at a compound annual growth rate (CAGR) of 5% versus historic growth of approximately 4.5%. While we expect new equipment market growth to slow with stable development forecast in China, we see this as more than compensated by the China modernization segment, which we believe will grow seven-fold in the next 10 years.

New Equipment

We expect the new equipment market to grow at an approximate 1.5% CAGR over 2021-2030, reaching nearly 1,200 units per annum. The key drivers behind this forecast are the following:

• Relatively stable development in the China market after a period of rapid, nearly 20% growth over 2004-2014 and a relatively stable period from 2015-2020

• Slight growth in Europe, the Middle East and Africa (EMEA) and Americas regions in line with historical performance

• Around mid-single-digit growth in the Asia Pacific (APAC) region outside of China, improving versus the historical average, as we expect an acceleration in India

• In value terms, we forecast the global new installations market to exceed EUR30 billion (US$34.76 billion) in value by 2030, from our estimate of approximately EUR25 billion (US$28.97 billion) in 2020.

Maintenance

We forecast the E&E installed base to reach 20 million units in 2022 and more than 28 million units in 2030, growing at a 4.5% rate per annum over the period.

Our model is based on the annual new installations and an assumption of an attrition rate of 0.5% of the global installed base from 2025 onward (equivalent to approximately 1.5% of EMEA’s and the Americas’ total installed base). The attrition assumption sits against limited evidence of E&E retirements based on a reported-versus-modeled installed base (taking installed base from 2010 and adding the total new installations broadly equates to the current installed base estimates by the major OEMs).

We forecast 50% of the global installed base will be in China by 2030, with EMEA becoming less than 30% and the Americas, less than 10%. China maintenance regulation change (from current mandatory biweekly visits) is the key catalyst, in our view, to make this market increasingly more accessible to traditional international players. After two years of pilots, we expect the change in 2023-25.

By value, we forecast the market to also grow at an approximate 4.5% annual rate through to 2030, reaching nearly EUR50 billion (US$57.93 billion) annual market size from our estimate of roughly EUR30 billion (US$34.77 billion) in 2020. Although we anticipate some price increases in maintenance contracts across the Americas and Asia (including China), we expect Europe to remain broadly flattish. This, together with market mix change toward lower average maintenance contract price in China, results in a forecast for a broadly stable global average selling price (ASP) over the next 10 years.

Modernization

We expect the global modernization market to more than double from 2020 to 2030, driven almost solely by the China market that we forecast to increase seven-fold (700%) over the period. The strong China market growth assumption is based on:

1. Historical evolution of new installations from 2005 onward (that grew 6x)

2. Evidence of modernization activity now becoming realized in China with a lag in the new installations trend gradually closing

We expect the China modernization market to become >50% of global total by 2026 and to exceed 20% of the total global E&E  market by value in 2030 (versus approximately 12% in 2020).

Digitalization/E&E IIoT

The elevator industry has been among the early adopters of Industrial Internet of Things (IIoT), with the connectivity push by the large OEMs, as well as independent service providers (ISPs) and new industry entrants since 2016.

The large OEMs now report up to 10% of their maintenance bases covered by IIoT connectivity that generates add-on revenues further to standard maintenance contracts (driving 10-20% increases) and with up to one-third of their total maintenance bases being connected in some way (including old technologies).

We view digital adoption as a clear positive for the industry overall, as it fundamentally increases add-on value generation by service organizations with ultimately higher equipment availability and new data generated.

The key debate, in our view, is whether additional value added will be captured by industry participants (and in what mix across large OEMs/ISPs/supply chain/newcomers) or whether it will be passed on to customers.

We reiterate our view that add-on revenue generation from digital services will ultimately be the only sustainable monetization for digital. Although connectivity can drive substantial field efficiency improvements for the E&E service industry (higher first-time fix rate, remote resolution, better planning and preventive maintenance), our view remains that without generation of add-on revenue streams, these are at risk of being eventually competed away through lower maintenance prices, and, hence, passed on to the equipment end-user.

Additional factors in this discussion include the phenomenon of new industry entrants on the back of digital development. This is witnessed across elevator service and supply chain segments. We list a number of examples below, but highlight Schindler citing tracking up to 200 new entrants globally and our recent industry channel checks pointing to just under 70 in Europe alone.

Outlook 2030

• By 2030, we expect over 50% of the large OEMs’ maintenance bases to be IIoT connected.

• We see clear scope for bifurcation among ISPs as a result of varying speed of IIoT adoption. The larger players that undertake digital transformation early are likely to grow larger, with some of the smaller players likely pushed into specific niches or down into lower-end segments of the market.

• We expect a number of the current newcomers to become established service providers and technology vendors in the industry and expect acquisitions of new entrants by the large OEMs, as well as, potentially, private equity players.

• Is there a disruption risk to the traditional service model? We believe there is potential for emergence of an Uber-like independent technology platform to allocate and manage elevator maintenance visits, but currently assign less than 50% probability to a potential disruption threat emerging from such a development.

• We also see scope for a growing degree of differentiation and, hence, divergence of performance among suppliers in response to digital adoption. We see two avenues to this: 1) traditional suppliers that adopt digital/connectivity faster and integrate it into their offerings (such as Henning and Wittur) and 2) new entrants into the industry focused purely on digitalization (e.g., Bosch Elevator Cloud, Lift AI).

We forecast 50% of the global installed base will be in China by 2030, with EMEA becoming less than 30% and the Americas, less than 10%.

IIoT-enabled service providers are supply chain firms that enhance traditional elevator services through incorporating IIoT capabilities. Solutions include real-time operational data capture, sensing, monitoring and predictive maintenance. Combining the software, hardware and service offerings by one provider into a proprietary internet-based platform aims to maximize the efficiency of elevator operation within that system.

Consolidation Potential

Large OEMS

The global E&E market is relatively consolidated by value with the top four players (the “Big 4” as we originally dubbed them in our April 17, 2012, “Elevators & Escalators — Long-term Attractions vs Near-term Risks” outlook report) occupying nearly 60% of the market. This is thanks to their relatively high market share in new installations (NI) and service in higher-value-per-unit markets in EMEA and the Americas, while China remains relatively fragmented with the international Big 4 share at <50% in NI and approximately 20% in service.

In recent years, we have seen a small number of major ownership changes and consolidation moves in the large OEM space.

Going forward, we see potential for further consolidation, especially as growth in maintenance and modernization in China is likely to increase overall market fragmentation over time. The key potential changes we are currently monitoring are:

• TK Elevator (TKE) future ownership beyond the current private equity holding state (TKE was acquired by Advent and Cinven private equity firms in July 2020)

• Potential developments at Toshiba, given the widespread “deconglomeratization” drive across the broader industrial group globally (e.g., Siemens spinning off Siemens Energy, ABB selling power grids to Hitachi), and the recent announcement by the Elliott Management activist investor that it would take a significant stake in the company

• The approximately 20% stake held in Toshiba Elevators and Building Systems business by KONE (and KONE’s prior statement of interest in generally consolidating the industry, as well as regular acquisitions)

• Any potential changes at Hyundai Elevator, given the approximately 17% stake held by Schindler and, as Schindler also stated, its interests in consolidating the industry (with regularly announced acquisitions)

• Potential strategic moves by the Big 4 in India as a potential future growth market

• Suppliers and independent service providers

We have been monitoring development in several directions further across the global industry supply chain. The common trends we see at this stage are:

• Supplier consolidation across Europe and the U.S., with increasingly active involvement by private equity firms (Wittur in Europe, Vantage in the U.S.);

• Extremely active independent service provider consolidation in the U.S. (American Elevator Group, Champion Elevator) and, to an extent, in Europe (Orona);

• First example of East-to-West move, with NBSL taking a majority stake in Prisma.

Going forward, we expect:

• Further “rolling up” of traditional independent service providers continuing at a brisk pace in North America and likely stepping up in Europe, both large OEM and private-equity driven. Over time, we see the scope increasing for rising willingness of generally less digitally advanced independent service providers joining forces with larger players or with more established newcomers

• Potential acquisitions of industry newcomers by more traditional players as part of acceleration or diversification of their own digital strategies

• Further “East-to-West” strategic moves in the supply chain

Credit Suisse View: Fundamental Attractions of E&E

We highlight the following key fundamental investor attractions of the elevator industry:

• “Ever-growing installed base.” As initially discussed in our April 17, 2012, report (“Elevators & Escalators — Long-term Attractions vs Near-term Risks”), we continue to see this as the primary attraction of the E&E space now nearly 10 years later. Although approximately 0.5%-1% annual attrition starts to set in (new buildings replacing old ones that already had elevators, hence not adding to the installed pool), we expect roughly 4%-4.5% annual growth over 2021-2023 and 3.5%-4% over 2024-2030, with rather conservative new installation assumptions.

• Regulation-driven maintenance model, already performed on a subscription basis. E&E maintenance is a legal requirement for building operations globally. As E&E equipment transports billions of people per day, equipment safety and availability are paramount. This makes the market very resilient to any type of external crisis, as witnessed in the 2009 global financial crisis and 2020 COVID-19 scenarios, with market growth through both instances. Elevator maintenance revenue and profit pool is subscription-based with upfront payment terms that add further resilience to near-term shocks.

• Extremely asset-light model. Big 4 OEMs operate heavily outsourced industrial setups for new equipment, with 75-80% production outsourced to suppliers with only limited in-house component and system manufacturing, while actual elevator “production” takes place on construction sites from flat packs, hence reducing OEMs’ industrial footprint to primarily logistics operations. Service business is naturally people-oriented with relatively limited capital requirements for spare parts storage and handling and no requirement for remanufacturing sites. Furthermore, the industry operates on very favorable payment terms toward the OEMs with upfront payments across new equipment and service versus traditional, three-months payables, resulting in consistently negative working capital. This creates an essentially infinite return on additional growth as it comes with upfront cashflows rather than an incremental capital requirement.

• High returns. As a result of the above combination, the Big 4 enjoy very high returns on invested capital with cash flow return on investment (CFROI) of approximately 23% on average for the three listed Big 4.

• Structural growth in new equipment, thanks to rising elevator density. Urbanization is a well-documented driver of demand for E&E equipment, and we continue to stress that it is the change in annual rate of urbanization that drives the E&E industry’s growth —i.e., adding the same quantity of people to the global urban population per annum would point to stable levels of construction activity and a stable E&E market. What we find truly structurally attractive in this context is the continuously rising E&E density as a percentage of the urban population. Japan’s case study points to E&E density in urban population rising consistently with GDP over the past 25 years. We see this driven by the vertical growth of cities, increasing numbers of mixed-use buildings, development of public transportation infrastructure and the aging population.

We view digital adoption as a clear positive for the industry overall, as it fundamentally increases add-on value generation by service organizations with ultimately higher equipment availability and new data generated.

Global E&E Market — Overview by Segment & Geography

We estimate the total E&E market value was about EUR65-70 billion (US$75.3-81.1 billion) in 2020.

• By segment, maintenance accounted for more than half of the overall E&E market value, with NI accounting for 35% and modernization, 11%.

• By geography, China was the biggest single market, with close to a 30% share. EMEA made up 30% of the global market, followed closely by the Americas at 29% and the Asia-Pacific (APAC) (excluding China) at 13%.

• By business mix, maintenance accounted for about 60% of market value in both EMEA and the Americas, whereas NI remained the major business in China (nearly 60%).

• By profitability, maintenance has the highest margin globally. For NI, we estimate that China is 2-3 times more profitable compared to the rest of world.

Global E&E Market — Competitive Landscape

In total, the largest four players account for about 60% of the global market.

• The NI market is more consolidated, with the top four players accounting for more than 75% of the market. However, the maintenance market is more fragmented, with many small, third-party players present.

• By geography, KONE and Schindler are more indexed to Europe. KONE has high revenue exposure to Asia (mainly China). TKE’s revenue exposure is skewed toward the Americas.

We expect the global modernization market to more than double from 2020 to 2030, driven almost solely by the China market that we forecast to increase seven-fold (700%) over the period.