Case Kone

1 COMPANY OVERVIEW

KONE is one of the world’s leading elevator and escalator companies. It provides its customers elevators and escalators, and solutions for their maintenance and modernization. KONE also provides maintenance of automatic building doors. In 2006, KONE had annual net sales of 3.6 billion € and approximately 29,000 employees. Its class B shares are listed on the OMX Nordic Stock Exchange Helsinki.

In 2006, KONE was implementing changes based on the revised strategy. KONE strengthened its customer focus and improved its product and service offering, which have taken significant steps forward in all market areas. At the moment KONE focuses also on raising the productivity. Among other actions, the industrialization of modernization, the renewal of a module-based maintenance method and efficient route capacity planning for field operations started to provide real results. With strategy to improve productivity KONE is optimizing its logistics network and centralizing its sourcing.

1.1 Market outlook

The global elevator and escalator market has changed significantly in the 21st century due to strong growth in China and some other developing countries. Over half of the world’s elevators and escalators are currently located in Europe, nearly 20 % in the U.S. and the rest in Asia and elsewhere in the world. However, it is Asia where new equipment sale are heavily concentrated, with more than 25 % of new elevators and half of new escalators being installed in China. On the other hand, the growth potential for repairs and modernizations is concentrated in Europe and North America due to wide and aging install base.

Urbanization and economic growth are continuing to increase the demand for new elevators and escalators and the related service in Asia, while economic growth and the need to modernize equipment and cater for aging populations is driving demand along with economic growth in Europe and North America. The industry is also affected by trends towards more efficient space and energy utilization, the use of new technologies, the requirement for better, more versatile services and the tightening of safety norms and regulations.

Based on outlook I think that company which has a strong global presence with capability to meet local market requirements, streamlined operations, and is able to provide products and services that cover whole expected lifecycle for elevators and escalators i.e. has a good value proposition for both construction companies and owners or maintenance companies for the buildings will have a sustainable strong position in elevator and escalator industries.

1.2 Addressable Markets size and KONE’s Position

The current annual size of the market for elevator installation, maintenance, repair and modernization is estimated to exceed € 30 billion. The corresponding escalator market is nearly B€ 3, and the market for door service amounts to roughly B€ 5 annually.

KONE has production in all major continents. It has operations in all key markets through some 800 service centers worldwide. In Europe, sales correspond to approximately 65 % of total net sales. The North American sales correspond to approximately 22 % and the Asia-Pacific sales to 13 %. However, the importance of Asia-Pacific is continuously increasing. In mature markets such as Europe and North America the modernization market is increasingly becoming more important. The main driver behind this development is safety (regulatory) and the need for upgrading. In emerging markets, the new equipment market is mainly driven by urbanization and economic growth. KONE’s share of the global market is at the moment approximately 10 %.

1.3 Customers

KONE’s most important customer groups are building owners, constructors, and facility management companies. Architects, elevator consultants, development companies, and designers are key parties in the decision-making process regarding elevators and escalators. KONE has approximately 250,000 customers globally, of which the majority are maintenance customers. Customer segments and maintenance contracts vary from one-elevator residential buildings with yearly contracts to large international accounts with long-term performance-based maintenance agreements.

1.4 Products

KONE has two product categories вЂ" elevators and escalators with respective spare parts and service business. In addition KONE has remarkable business in automatic building door services. All these areas are also present in a separate independent business KONE Marine under KONE Elevators.

1.4.1 Elevators

In 2006, the global elevator market size was approximately B€ 32. Of the annual B€ 32 global elevator market, 40 % consisted of new equipment sales and installations and 60 % of maintenance and modernization of existing systems. At the end of 2006 there were approximately 8.3 million elevator units in operation worldwide, of which 405,000 (2005: 335,000) were installed in that year. Markets are clearly growing in this industry and major new business growth is based on Asia markets.

The maintenance and modernization business is more stable than the new equipment business. Manufacturers aim to attract customers to long-term service contracts. The maintenance and modernization segment benefits from stable recurring revenues and predictable cash flows as the majority of the costs consist of labor in local currency.

The European market size in units is significantly larger than that of North America given Europe’s relatively higher population density and the increased prevalence of apartment or condominium dwellers. As a result, about 50% of the annual elevator installations in Europe are for residential buildings and only 20% for office buildings. Sales growth of new equipment in Europe was constant during the mid to late 1990s, but has been weak thereafter given the reduced construction activity.

In North America, the largest elevator market segments are office buildings, sports and leisure facilities, and residential buildings, each with approximately the same proportion of the total market.

The focal point of elevator markets has shifted even more clearly to Asia. The growth has been strongest in China, where resident construction is the engine for growth.

Growth Drivers - New Equipment Business

Demand for new elevators follows the general economy and developments in construction activity with about a one-year lag. There are several inter-related factors supporting growth, including demographic and