You, Sanna. And also a great welcome on my behalf to all of you. It's again, I must say, great to see that so many of you have taken the effort to come here today to discuss with us how we are continuing our journey at KONE through our systematic development towards working towards achieving our strategic targets. As we'll be talking today, we have made good progress in that respect. But we can also see that our market environment and we can see also we can say the technology and business environment is changing quite rapidly.
And that means also that for us, we need to make sure that we are clear and have a clear direction for that phase in the market that we are seeing. But KONE, we actually think that change in the market environment is a good thing because change in market environments, they always gives new and better opportunities to differentiate provided that you have a clear direction and you know how to execute on your strategy. And that, I believe, we know how to do at Kone. So during this opening session, I'll be talking about our performance. I will talk also about what's happening in our markets.
And then what we are doing at KONE to develop in this current phase to succeed in this environment and continue our good performance. But before I go into that, I thought it's actually a good thing a little bit to give an example of our way of working with our customers. How we want to approach our customers and how we want to work with them so that we can provide value to them and, of course, create a good business for KONE. I have here 2 examples I want to talk about, both of which, say, I know personally quite well and something I have been involved in when we have been working with our customers. 1 is a project called District 8 in Jakarta, Indonesia.
It will be the most it's the most prestigious development going on in Indonesia at the moment, very significant development. And the other one is China Zun. It will be the highest tower in Beijing, really a new landmark for Beijing. And it's clear that competition for projects like this is always significant. But the approach we took here with both customers is rather than to tell them what we have what products we have and so forth, we worked in-depth to understand what are they trying to achieve and what are their challenges.
In both of these cases, the builders had a challenge that they need to compress their schedule. They're very prestigious buildings that had to be finished soon. The District 8 was sold out immediately when it was planned. So we worked with them. We actually worked earlier on with the traffic analysis to help them what are the solutions, how many elevators, escalators do you need.
And actually, one of these, we said you need to reduce the number of them because we can help you get better people flow even with less. The second one we had in both of these, to be able to compress the schedule of building these buildings, was to suggest that one of these put in KONE Jumplift. KONE Jumplift is a unique solution where our elevator goes up as the building gets built, so we can have an elevator during construction time. And in this Chinese project, our customer has publicly even said that they believe that they will save more than 1,000,000 hours of constructing time because of the solutions we have them do. So they get faster finished and they can faster start earning rents.
That is great. And then of course, we work with both of these to see what are the solutions to make sure that they have the best, smoothest and best experience in their people flow. So both of these, therefore, have many of our solutions. But that was the whole approach with this was what are the challenges, how do we meet them. And therefore, we have 2 customers who we work very closely with.
But this perhaps shows more how we want to work and the approach we're taking when there are well, with all of our customers to provide value to them. And I'm happy to say that both of these projects are progressing very well. I visited one of them very recently, and both us and the builder are ahead of schedule. So that is a good thing. So that is what we call our approach to work with customers, that how are we winning with our customers.
If our customers win, then we're going to be able to have a good business. That is the approach we have at KONE. But let me go into start 1st, how we are performing. I think the start of this is very familiar to you. First half of this year, we have had a continued good operating performance.
Our orders received had declined slightly because of the challenging situation in China. But despite this, we have a strong order book, gives us good situation going forward. We have continued to grow our top line, but the most important thing with our growth is that it has continued to be profitable. So we have improved our margin from 13.8% to 14.2%. And as important as that is that we have had a continuous strong cash flow.
That is an important sign that even though the markets have been very challenging, we have maintained a good discipline in our business. And that, of course, one can see from cash flow. And the reason we have continued to have a good performance is that we have made a lot of promises to our customers and others, to ourselves, and we have delivered on those again this year. We have many new great solutions for our customers that help them run their businesses better. We have brought out new innovations and new products that have been needed in some of the markets, and we can see good progress with many of these.
You will hear, for example, Larry talking about what we've done in North America. And our growth in our Maintenance and Modernization business has been good. Solid continued growth in Maintenance and clear acceleration in our modernization business. So overall, the performance has been strong and broad based. And it's not only, of course, these 1st 6 months of the year that's been the case.
I think this is also very familiar to you that if you look at our orders received and our sales, they have been growing in the double digits over the past 5 years or so. And in fact, if we look at this year in orders received, we have grown our orders received in each of our geographic region in all of our businesses, except for China New Equipment. So when we set out our current phase of development in 2014, one of our objectives was to accelerate the growth in our Services business and also to drive a more broad based growth to compensate for what we already then saw that will be a more challenging situation in the important Chinese market. And this we have done. Done.
And we have had good broad based development, and we can see that has a good impact. And also, if you look longer term at our EBIT and cash flow, we have continuously had a cash flow better than EBIT, again shows that we have maintained a good discipline in our business practices. And when we look at our growth over the past years, it's clear that Asia Pacific has been a significant growth driver, compounded annual growth rate of close to 30% from 2011 to 2015. That has clearly been excellent and something very good for us. As important as that is that we have also grown in all the other geographic areas, in North America and Europe, Middle East and Africa.
So it's not only one area we have grown, it's been actually a broad based growth. And the same thing is if we look by business, that it's clear that new equipment has been the most significant growing business. But because of our good growth in new equipment, we have been able to drive a good growth also in our services business. So we can see that whether we look at it geographically or by business, growth has been good and broad based. And the way we at KONE measure our performance and measure our success, that's against our 5 strategic targets.
So our 5 strategic targets, we believe that if we develop constantly towards this, then we are building a stronger company. And our 5 strategic targets, they also should be very familiar. The first one is to be have the most loyal customers. And here we can see over the past years, we have strongly improved our customer loyalty. We had a very significant improvement in both 2014 2015.
This year, we have more consolidated those gains to be at a good level. Employee engagement. Very important for us to have engaged and motivated employees who want to continue to drive our performance and improving our business. And we can see also here constantly improved employee engagement. We consider ourselves a challenger in our industry because we have competitors that have a larger service base than we do.
Therefore, our objective is to continue to grow faster in the market and that we have done. So in each of the past years, we have grown our market share in new equipment by about 1 percentage point. But also, what I don't show here, but we have also grown our market share in services. So we have grown faster in our market. But growth in itself, as I think we can all agree, is not important.
It's that you grow profitably. And therefore, we have our target of having our best financial development. And there, we look at how our profitability is improving, and we can see that we have, over the past few years, been able to expand our margins. And then finally, want to be the leader in sustainability. That also that is a broad subject naturally, but here we more look at what is the resource efficiency of KONE.
We look at the energy consumption of our products and services. We look at our carbon footprint and so forth. And here, we can also see that we have made good progress over the past years. So I'm happy to say that the systematic development and consistent development we have had has taken us closer to these targets. This is, of course, a continuous journey.
And in all of these metrics, we can constantly improve. And if we then look at the current phase of our development, which are our current development programs that we launched in the beginning of 2014, And we can see that they have very much contributed to the success and us developing towards our strategic targets. In our 1st in customer loyalty program, here, we have used much better insight from what the needs of our customers are, what they expect from us to drive better communication and all this has led to a better customer loyalty, very important to us. In our winning team, our Crew Professionals program, here our objective has been to help every KONE employee to perform at their best. This is about having a structured way of ensuring everyone has a good personal development plan and how you deliver on those development plans.
And I'm happy to say that last year, 94% of all Kona employees had a documented personalized individual development plan with actions of how that person needs to be trained. This is how we help every KONE employee to perform at their best. It's hugely important when we have a changing environment. Here also, we've built up a lot of infrastructure to deliver online learning, mobile learning, so we can spread our courses much broader to employees in a scaled way. In our most competitive People Flow Solutions development program, here, as I mentioned, we have constantly improved our market share.
And we've done that because of the approach we have and also because we have brought new solutions, products and solutions to our customers that meet their needs. An example of this is a little bit over about 1.5 years ago, we launched our new product family in India. And the reason we did that is that our customers said that for standard residential buildings, they wanted to have something that increased the value of their buildings with a great quality, modern elevators and people flow with good design. So we brought them IKONE iMono to help them improve the value of their buildings and the lifetime performance of their buildings. And the reception from our customers has been great.
But as again, we looked at this need and then we developed the product. In our preferred maintenance partner, here we have invested much more than in the past years in developing our services business. And we can see that growth has been solid, and we have brought a lot of new value adding services. You haven't seen many of these being launched yet because many of these we have pilots. And actually, we have quite broad based pilots going on because we also want to see work with our customers on what is it they really value when we understand what that is, then we push the accelerator.
And our top monetization provider, a much better proactive approach, has led to good results. So I would say again, the systematic and structured development we have is something that works for us. And I'm glad also to say that it has worked for our shareholders because as a result of our good development, our Board of Directors has been able to constantly recommend a improved dividend. And while this is quite a long period of time, I must say, I do like it. You can say that since 1980, we have compounded our dividends at 15%.
So I think that it shows that when we perform well, our Board of Directors also want to make sure that all shareholders benefit from that. And then finally, on our performance outlook for this year. If you look at market outlook, that is unchanged. I will not go through this now in detail because I will talk more about our markets. And the same thing comes to KONE's business outlook, where we expect that our growth in sales is between 2% 6% and that our EBIT will be in the range of €1,250,000,000 to €1,330,000,000 and that's based on the translation exchange rates for the first half of the year.
So no change there. But perhaps more importantly, when we go into next year, we can see that there are a number of things that are driving our performance, but also we have some headwinds. And what is then, we can say, boosting or driving our performance? Well, it's our continuous improved competitiveness that is helping us, and we can see that we are executing on this. Also that our operating performance, when we look at it, it's more broad based than it has been in the past years.
This is clearly important to us. And also that our services business overall, if you look at maintenance and modernization together, we've been able to accelerate that. All of these are actually good to our performance. But we have also some clear headwinds, some of them that are in our own control that we have made decisions on and some, which I would say, are more external market related. The one we decided on ourselves is that we are increasing our investments into our future competitiveness.
Because we see good results in our new concepts, new developments, we are accelerating our investments in R and D in technology overall. And I will talk about that more. We can also see, not a surprise to anyone, is a slowing market in China. And the intense competition we see in that market, it's clear that, that has an impact on us and it's a clear headwind for us. And also, currently, translation exchange rates are a clear headwind to us compared to last year.
Where would they be end of this year? I don't know, but we can see, but just the current picture. So here we can see that there are both good things and bad things. Of course, we're working all the time on compensating the challenges we see in the business. And then to wrap up this part, our financial targets remain intact.
Our objective is to continue to grow faster in our markets like we've done over the past years. 16% margin target over the long term is definitely there. We see that we have constantly gone in that direction. And that is what we target over the long term to ensure that when we drive growth, it is profitable and also have good continued cash flow by improving our working capital rotation, something we also have achieved very well in the past years. So that is about our performance, how we have done had good performance on a broad basis.
Let me next go into what we see in our markets more from a geographic perspective and what is happening give the perspective we have on world markets when we look in from our business perspective. The first observation is that the market environment is quite varied. If we look at the new equipment markets overall, as you can see, the good thing is that they are growing in all geographic markets except for in China. It's clear that Chinese market is very significant, but there is a lot of growth opportunities in other markets. The fastest growth opportunities our best growth opportunities currently have been this year, both in North America and many European countries.
There are a lot of long term great opportunities in Asia Pacific outside of China, but the political uncertainty in many of the countries is impacting those at the moment. The opportunity is good. China market, we expect to decline between 5% 10% this year. And when we start to look in towards next year, we expect that the decline in the market will moderate. And we also expect that the intense competition will continue.
So overall, that will be a continuously a challenging market from that perspective. But if I think about the Chinese market, Bill Johnson will be talking about that much more, but just a little bit some perspectives. If you look at the Chinese market at the moment, what is actually quite good in the market is if we look at the whole real estate market, is demand. Demand is there. The challenge with the market is that there is continues to be an excess supply of particularly residential real estate because over many years, there was too many apartments built, particularly in lower tier cities.
And therefore, we can see high inventory levels. But as I said, I don't think we have a demand problem because inventories are coming down constantly. Not very fast, but they are constantly coming down. And when we look at this picture, we see, yes, it's a challenging market at present. However, if we look long term, we continue to believe that there's good opportunity in the Chinese market.
If they look at our Services business, maintenance is growing in all geographic regions. It's clearly slower in the Western world, but continued strong growth overall in Asia Pacific, and that's great. And modernization is actually growing in all parts of the world. So that's a positive picture. But why do we are we positive on Asia Pacific even though it is a little bit more challenging at the moment?
On the left hand side, you see a very familiar picture, urbanization. The point is that urbanization continues and it continues strong. In Rest of Asia Pacific, urbanization is actually accelerating a bit. In China, the number of people that's moving to cities is not as high in the next 15 years as in the past 15 years. But the most important point is that people who live in cities, their wealth is going up.
And that is the most important driver. If you think about it, who are the ones who are able to buy or rent modern apartments? They are the middle income consumers and of course, higher income consumers as well. And here we can see that is where we see a significant growth. So actually, we can say that the kind of quality of urbanization is going up.
So that is what gives great confidence that, hey, we're going to continue to have strong and good markets in Asia Pacific because of how we look at how the growth in middle income consumers. So both, yes, urbanization is happening, but we can say that the quality of urbanization is constantly improving and that is driving the demand. And this is a very strong force that is happening. So this is on Asia Pacific. If we then go to look at Europe and North America, You've heard us also say that actually, we see a great new type of urbanization wave happening in most Western countries.
Big population centers are definitely drawing people to them. I think if you look at the middle chart here, that's one of my favorites. Over the next 15 years, it's expected that single person households will represent 46% of all households in France. That's 11% up from today. If we look at this in combination with population growth, that means that in the next 15 years, there will be 9,000,000 more single person households in France than they are today.
Think about what that means from a need for residential apartments. The same figure for the U. K. Is 10,000,000 more single person households. And this is what we see everywhere in the world.
I mean, even maybe some of you who came here to Helsinki saw that there are actually a lot of cranes in this city. Because what is happening here? Even here, there is an acute shortage of small apartments, while there's plenty of houses around in the periphery. So this is what we see and why we are continue to be very confident of our market also in Europe and Eastern Africa and North America over the long term. And we just took as an example here the population growth we see in some of the big population centers.
Larry Walsh will actually show a little bit more perspective in the U. S. And he's amazing. Big population centers are drawing in people. People want to live close to the services.
Also, aging population need better services. So this is a very strong trend. And also, we can see that buildings are aging. And when we look at this, this is actually a map that when we drew it ourselves, I was like, wow, what a change. This is construction output expectation for next year in Europe.
And it's expected that construction output will increase in all European countries next year. The growth may not be huge, but think about the difference from when we've seen multiyear declines in many of these markets. And the reason we're seeing this is really that consumers and people want to have modern apartments moving into cities, that's where jobs are and so forth. So this is actually, I think, quite an interesting picture to say that, hey, even things are happening in Europe. And Larry will talk much more about North America, what's happening there.
So all of this gives us quite good confidence over the long term prospects of our industry that we are continuously in a growth industry, although growth is coming from different places. And if you look at this market outlook I talked about and put it in perspective of KONE's business. So we can see that where we are right now, it's a little bit over twothree of our businesses. They operate in markets that are growing. In fact, the only market that is not growing where we operate is the Chinese new equipment business.
So you can see that, hey, it's actually quite a good picture that twothree we have growth opportunities in. Just to a little bit take it in perspective in how it relates to KONE. But that's the market. How are we developing KONE in this environment? This is perhaps important point to understand how we're going to continue develop KONE so we can succeed in the future.
And when we look at that, we always start from megatrends. I talked a lot about urbanization already. 140 people per minute, 200,000 people per day, 70,000,000 people per year continue to move into cities. That is a huge force and that really changes societies and that is very beneficial to us. That continues to drive growth.
There are many other megatrends, but this is clearly the principal megatrend that drives our business. At the same time, we can see technological disruption drives the need for change. We can see that everything is becoming connected and mobile. There are ecosystems built up around smart buildings that we need to participate in. And the expectation for ease, convenience and experiences is increasing all the time.
So because of technology, our consumers and our customers and users much better aware, they demand much more from us. So we can see that is what is driving the change is when our customers and users see ability to get new experiences from technology. So this is a very significant driver. So how are we going to operate here? The first thing we did, again, is when we looked at, yes, urbanization is happening.
We wanted to go a little bit deeper in. And we said, what are the needs of an urbanizing world and urbanizing societies? And how can we cater to that? Because if we can cater to that, then we're going to have great growth opportunities. And we identified 6 needs, which sets the direction for how we develop our solutions.
It's affordable vertical housing. One of the biggest challenges for big cities is that housing is getting too expensive, particularly for younger people. And this has been clearly a success in China. Affordable vertical housing, that will continue and be a success for us. Then cities need safe, reliable and efficient infrastructure.
We can say that public infrastructure is the arteries of cities, and we have a very significant role to play to make sure that they operate efficiently. And I think this is a very significant opportunity over the coming years. As consumers get wealthier, they expect more out of their living. They expect more services and more experiences. Here is how we can make it personalized individual to them.
Eco efficient and sustainability, that's a pretty clear one. But here, we are already today the most energy efficient company in our industry and what we continue to develop here. Growing in building intelligence, buildings getting more crowded. They need to be much better managed. Also people expect much better services and efficiency out of buildings.
And therefore, we need to be part of developing smart buildings. Larry will have some great examples of what we're doing in this perspective. And then finally, we say, hey, cities are built for people. It needs to be well-being. We need to help cities being better places to live.
So these are the ones that we see that needs and help us in drive our development. And when we looked at these needs, what we also did earlier this year, as we articulated what is the purpose of KONE. You saw it in the opening video, but it's been important to us. So we articulated what is our purpose as a company, our mission. And we say that our purpose is to improve the flow of urban life, that we understand people flow in and between buildings, that we can make people's journey safe, convenient and reliable and simply make cities better places to live.
When we have been talking about this internally, I can tell you it's been a very important driver again of engagement and motivation. That's what we want to do. People nowadays want to see a good purpose. Why do I work for a certain company? And this is definitely helping us, again, drive the enthusiasm within KONE.
And then we have our vision that we have had already for many years that we deliver the best People Flow experience. So again, everything we develop, everything we think about has to be from a customer and user perspective. There's so much technology going on in the world today that everyone can have. When you look at connectivity technologies, all that, everyone can have that. That's not a differentiator.
Differentiator is to understand what is really needed from our customers and users, and then we develop technology to meet those needs. And we look at the change happening and the journey we are on, I would say that we've never been in a better place to continue drive the change here. Our positions in new equipment market has never been stronger, with a market leader in the world's largest market, China, and with a market leader also in Asia Pacific outside of China, and strong positions in Europe, Middle East and Africa and clearly strengthened position in North America. So this is a very good situation to go from. And clearly, we are a challenger in the maintenance business.
But if you look at the position we have in new equipment, I don't think anyone else has a good opportunity to grow the services business because of strength we have in new equipment. So we have a good position. And I'm also happy to say that what we've been talking about in the past years, CMD 2 years ago, we talked a lot about the modernization. I talked about that also last year. And there's always been a lot of questions, hey, why is modernization not growing?
But we can say when we've taken a focused approach, we're actually growing very fast. This year, sales growth 17.7%, Actually, in comparable currencies, it's about 20% year to date. And why have we been able to grow our modernization business? What are we doing? There's, again, a much better insight into what is a conditional equipment, what are the needs of our customers, so we can provide solutions that are relevant for them.
And we can also target the relevant opportunities. We can be focused to provide better value to our customers and therefore react faster and also in a more proactive way. And we can see that this approach is definitely delivering results. Another area, the ones who were in Shanghai last year may remember I showed this picture again also. It was then more of a concept.
Now there is a lot of hard things behind it. But if you remember what I said when we talked about this picture was that KONE's performance over the past 5, 10 years has been strong to a large extent because we have been able to differentiate in a strong way in our industry, particularly in new equipment. But I also said that I don't believe that anyone has properly differentiated in the services business in our industry. Frankly, we've been all a little bit too much the same. And this is our concept, how we are developing differentiation.
It all starts from having a much better understanding of the needs of our customers. And I talked about this in concept last year. Now what we're doing, we have much better understanding of our needs of our customers, of their feedback and using much better intelligence to understand what are specific needs of these customers. Then the very fundamental thing we are piloting in many countries with great results, I must say, is when we say, up to the top right, define our unique promise to all customers, is that our maintenance offering in some of these countries now is totally modular. We're not selling them what we want to sell.
We're selling what adds value to them. And as I said, we have pilots now in a few countries going on in Europe, and the results are very, very encouraging. So it's not only talk we're actually doing this. And when you define this unique proposition for your customer based on their needs, you also, of course, need to deliver on it. To deliver on it, you need much better transparency and information for both your field people, for your call centers and much better information about the equipment.
So we have over the past years rolled out a new generation of field devices for our people to help this and of course worked on our totally integrated system and also much better diagnostics of what's happening in the equipment. And also here can more and more so a lot of pilots going on in with diagnostics, how we can be much better accurately do what's needed and predict things before they happen. Again, a lot of good things happening here. So next one, deliver on our promise. But then what I think is one of the most fundamental things in a service business is that you need to have a promise.
And if you don't show your customer you're delivering the promise, they probably don't see it. So customer communication, hugely important. Here we have, again, rolled out many new ways for our customers to be able to interact with us or us interact with them and provide them information. And they can choose how they do it. We have very good growth in all of our mobile and online tools for our customers to have full real time transparency of what's happening, but also they may choose other ways of communicating.
So we believe that the way you differentiate this, understanding your needs, having something that meets the specific needs of your customers, you tailor to that, Of course, deliver on that promise and show your customers what's happening. Underneath this, there's a lot of technology going on. But that's not the important part. It's what we deliver to them. But in order to be able to deliver on this and because we see the encouraging results of what we're doing, actually quite broad based pilots around the world at the moment, we have decided that we are accelerating our investments both in R and D, in technology and also in rolling out connectivity more broadly.
So what are we doing on this front? Well, we are connecting our customers, our users, our equipment and employees. Each of these have a purpose. We're connecting customers to provide business value to them, help them manage their business in a better way. That is what we want to do, help our customers succeed in their business.
And that's about providing transparency, understanding to manage it over lifecycle what they have. It's about connecting our users to be able to provide a personalized experience to people, to make it much smoother, better to people flow. Naturally, to connect our equipment. And connecting equipment is really, I would say, a platform and a need to do all of this. And that's to be able to do our services based on specific needs of those equipment and diagnostics to react faster in a better way.
And of course, it's about connecting our employees to give them transparency, help them be out in the field and collaboration internally. All of this, we have technological enablers. We're using, for example, the IoT. IBM's IoT Watson platform is hugely important and the cognitive analytics that come with it, very, very important. And what we are intending to do over the next 4 years, we are going to connect more than an additional €1,000,000 of our equipment to the cloud.
This is going to be an ambitious program, and we have everything ready to do that. The technology and technique itself is not the challenging. It's how do you make sure you really provide value to your customers. And this is what we've been focused on. So with all of this, this is to be able to provide the infrastructure to have all to have what we call ease, effectiveness and experiences to our customers and our users.
Again, think about what is the value and the benefit we provide to them. And then that's why we are developing this. And again, the reason we have decided to accelerate our investments in both R and D, technology and connectivity is because we see that the value we can bring to our customers is great and we see very encouraging results. This is something we are we have decided that we will do. So what about then the new equipment business?
Here, as a little bit explained to you in the examples upfront, that's how we want to work everywhere. We want to work throughout the life cycle of a construction project and a building, everywhere from planning, design, construction phase and over the lifecycle to provide value. We can see that when we work early on with our customers, helping them with our, I would claim it's a unique traffic analysis, how we help them, what is really needed for this building, helping them with tools that help architects be much more productive, help them design buildings. We have some great things going on there as well. And then throughout the construction phase, if we can help our customers, general contractors, do their job in a better way, we think there's a lot of potential and we see we can do that.
And then of course, what we are known for is the life cycle value we can provide to our customers. So it's about going throughout the life cycle. That's why I say stronger support in planning and delivery, continue to have a differentiated offering, again, something that will be more and more tailored to our customers' needs, same as I talked to the service side, same concept here. And then it's important for us to keep economies of scale because that has been very important to us and has been important to our profitability to drive the scale in our business. So this gives a little bit of a glimpse into what you can expect to see over the coming years in both our services and in our new equipment business.
So to wrap up, we're happy to say is that our performance has been strong on a broad basis. We know we have some challenging markets, but because of broad based performance, we've been able to compensate a lot of that. We have good growth opportunities in multiple geographic regions. And that has been our approach over the past years. That where markets are growing, that's where we are focusing on also driving growth.
And again, as you will see later on today, that is what we're doing in many places. And then what is very fundamental is how do we continue to differentiate. It's to ensure that our services and solutions are tailored to our customers' needs. And that is what technology can do. If we think about what is the main thing of new technology, it's the ability to mass customize, and that is what we will do and what we're doing already.
And because we see such good results in a lot of things that are going on already today around the world, we have decided to accelerate our investments to bring new solutions faster to our customers and our users because we think it simply makes sense. So with that, I think we now have good time for questions. And I think there are some microphones that are also going around.
Yes. Please wait for the microphone and state your name and the company before asking the question.
I think we have first one here.
Good morning, and good morning, Sanna. Just Guillermo Pena from UBS. I miss a little bit of strategy around M and A within the current market conditions. And maybe a follow-up on that will be your investments in R and D. Can you quantify a little bit what you plan to do there in terms of basically size of investments relative to sales maybe?
How much will be capitalized? Will it be all expensed? Some kind of granularity around that?
So was it both M and A and how much we're actually investing in this new technology? So to give a perspective, our R and D investments at the moment have been around 1.5% of sales. When we look at IT and processes, they are similar magnitude, a little bit higher. Over the next year or so, you can expect that the share of R and D will increase by, I would say, roughly 20 basis points per annum. At least, that's what it looks like for the more near term future and similar impacts then on when we look at IT and processes.
So that's about the magnitude of it. When we're driving out this connectivity and pushing and bring it to our customers, there are going to be different business models how we do it. But I believe that majority of it will be such that we will actually provide a service to our customers. They shouldn't need to buy the equipment. We can put it in and we sell it as a service and then that clearly comes will show up as a CapEx type of item for us.
But that's what we think that the biggest value we can provide is. But there will be different models how we do it, but I would think that would be the prevalent one. And I think that model is probably going to live throughout the coming years. I think we have Antti here. Sorry, M and A.
Sorry. As you know, acquisition is something that is interesting to us. We believe that add on in people flow in the business we are in would be very beneficial. We continue, as you know, to buy about 2 companies a month, but they are small. And we will be very interesting to find something larger as well.
But as always, you need to find usually makes sense to have a willing seller when you have a willing buyer and that is perhaps where the challenge has been. But yes, interest is there.
Thank you. This is Antti Suttelin from Danske Bank. On China, I struggle to understand what's going on because when I look at the numbers, statistics, I can see that starts are going up quite notably this year, but you say that elevator demand will fall next year. So how is that possible?
We are not giving our full year guidance for next year will come in January with our full year result. But we say that when we start to look into next year now, then we see that the decline is moderating and the market will remain very, very competitive. So intense competition will continue. And I think you need to put it in perspective, and you will hear much more from Bill and he can answer this much better, is that if you just look at construction starts, they were in decline full year 'fourteen, 'fifteen. Now we have had a year of improvement.
So actually, what is the delay? How does it come through? And I think an important one is to see a total real estate investment. So we continue to see this as the outlook that overall quite challenging. So bigger cities are doing well, but smaller are still challenging.
Can you just explain how you come to that conclusion? Because clearly, you are not looking at this statistic. You look something else.
As always, there is never one piece of statistic that tells you what the future is going to be. I think it will be way too easy for all of us otherwise. But it's always a triangulation. You have the statistics. We have a lot of people out in the field where we get a lot of information from our customers, from builders, property developers.
And with all of this, as always, we form a view based on all of these data points and insight. That's how I can say we do it. It's
Manu, here. Manu, in Plenorde Markets. You mentioned the step up in R and D that you're planning to do. And I'm just trying to understand that. Is that driven by your competitors demanding these products and there is no products at the moment?
So you're kind of at the forefront of the development here. And then also adding to that question that are you able to monetize all of these investments that you're putting in connecting all the €1,000,000 equipment over the coming years? And are the customers willing to pay for it? Or is it something that they're just assuming that is part of the business going forward?
I would say that when we look at this, as I mentioned, why have we decided that we will accelerate our investments is that we have a lot of pilots and many of them quite large scale and trials ongoing and we can see very encouraging results from this. So we see, hey, actually what we're doing here is very much appreciated by our customers. That's why we have decided to push the accelerator here. Clear, competition is intense. I mean, in all industries, everyone is trying to race and see how do you find better value to your customers all the time.
But I think this competition is great. Our customers get better value. We need to run a bit faster. So clearly, competition is there. But I would say, it's because of the results we're starting to see, we are accelerating this.
When it comes to connectivity, what is important here is to again understand that what is the value you can provide with it. And that's where we have been working a lot on that. The basic to connect elevators or escalators, frankly, and getting collecting that data, frankly, anyone can do that. You just go out and buy a partnership with someone, you can do that. It's a question what you do with it.
And when you do the right thing, then it will be valuable to our customers. And I think, yes, you have a good business model. But that's where the that's what we are principally focused on. And there are many different concepts going on. And what we're winning 1, I think we will have to see.
Things are moving so fast. So I don't think anyone has the silver bullet here. And we are learning all the time and that's why we're investing in it.
Okay. Let's take the next one from the back.
I think we had we've changed it under there.
Good morning, everyone. Good morning, Henrik. You've been very clear about China being the only decline area in the group. And I understand you have an amazing service business. I'm conscious I'm always asking about the negatives.
But I'm really trying to scale the risks on this. I just want to be clear about what you've said. I think you're saying market volumes to decline next year, but less than this and continued price pressure. I wondered if you could perhaps scale whether you see the price pressure next year at a similar level to what we're seeing at the moment. And also something we haven't talked much about is mix, which is an issue for the whole industry at the moment.
Do you see the current mix pressures continuing at a similar level as well next year? So those are the first two questions.
Let's take 2 at a time. I'll start to forget what the questions are otherwise. On China, thank you, James, for pointing it out that in China, we have one business that's growing at a very good rate, our services business, We're doing very well there. It's a new equipment business that is more challenging. Then you said that how do we see going to next year price?
As always, we can't predict what price will go be going forward. That's an individual negotiation between us and our customers. And of course, we are working on providing value to them and price in the best way. What we continue to see is that competition overall in the market is intense. And I don't see a reason why our competitors wouldn't continue to be aggressive in the market and why we wouldn't keep up our ambition level.
So hopefully, this gives a flavor
of And on the mix?
Mix. There are different things happening in mix at the moment. Clearly, growing in our maintenance business is a good thing. But then on the other hand, a challenge is that, as you know, China is a very good market for us. It is a profitable and good market.
And the fact that orders received has been declining there this year, it's clear that, that will start to show up in revenues. And that is clearly a challenge for from a mix perspective.
And just finally, if I could ask about the Chinese margin development next year. I know you've never wanted to be overly clear about where it is, but if you want to change that, that would be great. In terms of the direction of travel next year, do you think it will be flat or down? And do you think the volume mix and price pressures that you face can be passed on to your suppliers? Or do you think you're going to have to wear some of them?
Let me give you a little bit perspective and Bill will give you much more insight to this and he'll, of course, much closer to situation. This year, as we remember that our orders received in Q2 and first half of the year were down about in mid teens. And that came from 3 different areas: volume, Q2 about 5% and then we can say and these are now again very rough figures, about 5 ish percent also from price and 5 ish percent from customers selecting, I would say, more value products, lower specification products, so kind of a mix change from that perspective. And despite this, because of the very good development we have had over the past years in our product competitiveness, I must say, I think our team globally and in China has done a phenomenal job here. We have been able to keep our relative margins relatively stable.
However, it's clear when average selling prices come down, even if your relative margin stays pretty stable, it's clear that the absolute profit you make per product you sell is going to be less. So this is kind of the situation we are in. But I would say this environment, I think, that we've done a good job. If you look at you said what cost savings you can have. Again, over the past 2 years, there's been many things happening.
The principal things have been the design changes we have done and how we have worked with our suppliers to be able to reduce cost and prices for us. And also thirdly, we have had a tailwind from raw materials. And raw materials probably been the smallest of these 3, but it's been a clear contributor. If we look at just now, I mean, where are raw materials going to be next year? I don't know, and I'm not going to make a prediction on that.
But just right now, we're looking instead at the slight headwind on that. So yes, we have on the all the other actions we are doing well, but raw materials probably a little bit more challenging than they were earlier. So hopefully, this gives a picture of where we are going today. Then exactly what happens next year, I think you have to wait to January for us to give you that clear insight again. There was another question.
It's Andre from Credit Suisse. I've got a couple of questions on maintenance, please. You expect the service markets to accelerate globally and you've been outgrowing them in the last 18, 24 months. Do you think as the markets accelerate, your ability to outgrow is higher, lower, unchanged?
And now when you say services markets, it's clear what has accelerated has been in our business been modernization. And in maintenance, we have been able to continue in I would say, if you look at past 3 years, our organic growth has been higher than it was before that. And we have been able to compound at a little bit over 6%, which I think for a maintenance business is a good rate. And clearly, ambition on maintenance side is to continue our solid growth. Whatever that rate is, we have to see, but continued solid growth.
And we see a lot of good opportunities there because of the strength we have in new equipment through conversions. So how many units we convert every year is growing at a good rate. And also, we have improved constantly our what we call our competition balance, so how many units we win in the market versus we lose. We're still slightly negative, but a clear improvement from where we have been in the past. So I think we're going in the right direction there, and we can see the actions we're taking are good ones.
Where we see an acceleration is modernization. And there, as I said, I think we've done pretty well. And our ambition in all of this is to continue to grow faster in the market. That's the ambition level.
Got it. And can I ask on those pilots that you've been running on modular maintenance, would your average sort of revenue per shaft be going up or down as a result of modular maintenance and allowing customers to pick kind of the exact level of the package that they want to pay for?
I would say that overall results are encouraging. We have done this in pretty large scale as pilots, but we are still learning. As I said, sometimes it may not be a problem if revenue comes to be down if your scope is also lower. But I think that there's more variety on scope. But I would say that overall results are quite encouraging.
Daniel from My First. A couple of questions on the modernization bit. Could you give us a little bit of color on what you see in terms of mix within your growth? Is this addition of new elevators to existing buildings? Is this modernization of entire elevators?
Is this modules? Where's the growth coming from? If you could give us a little bit of an idea in that direction. Also a little bit on pricing. How has pricing evolved in the modernization bit?
Okay. This modernization, which type of modernization is growing is very varies a lot market to market. So in many European markets, a lot of this, you put in elevators into old buildings to provide accessibility to them. But that's still globally look, it's not one of the biggest businesses. So I would say it's a combination of full replacements, modernizations components.
So it actually depends very much on market to market what you do and there is a broad mix of it. So, I can't say that it's really one of them that is driving more. I think Larry can probably give some insight on North America in his presentation, what's happening there.
Made your offering more competitive in terms of pricing recently?
Well, I would say that we have we constantly improve our offering and come up with something where we believe is valuable to our customers. That is what we are focused on and I think what we have continued to improve. But it's both this combination of much better insight and then matching that with what we have. That is where we feel that a lot of our improvement has come from and this proactiveness we can drive with that.
Given your regional exposure, is it fair to say that the absolute growth in modernization is mainly coming from Europe?
And North America. North America is a very big modernization market. So it's clear that Asia is still a much smaller modernization market because the age of equipment is much younger. But it will as you will see from Bill Johnson's presentation, we start to see over the coming years that a really big modernization market is emerging in China as well.
Okay. And lastly, on net working capital turns. You said long term, you would like to improve the turns Given that China is a headwind at the moment in new equipment and the associated prepayments are probably slowing, are there any near term measures that you have underway to improve the net working capital? Or would you rather expect that to look less favorable in the next couple of quarters?
So we're not giving outlook on this. But what I must say I'm happy with is that if you look at the improvement and the good cash flow improvement we have had in working capital, it is not that it's come from one place. It's actually been a broad based improvement. So if I look at cash flow this year and also last year, it's actually strong across the board. And this is what we're doing.
So it's clear that when you have a negative working capital like we do in our businesses, if you're not growing, it's more challenging to improve it. On the other hand, we have many other areas to improve and all of our geographic regions have improved. So there are always things you can work on and I still think we have way too much receivables out there and we can improve our inventory turns further and things like that. So ambition is definitely there to continue to drive a strong cash flow. On the other hand, I would say that over the past 5 to 6 years, the improvement we have had in our working capital each year has been very, very strong.
And in a slower growth environment, it's clearly more challenging to keep the improvements up at that level.
Okay. Thank you for the questions. We'll have time for plenty of more after all the presentations. We need to continue with the presentations now. Thank you, Henrik.
Thank you, Ron.
All right. Good morning. Or shall I say, like we say in Japan, where I'm coming from. I have today a very exciting topic to share with you. It's about how KONE has led and how KONE is going to lead the change to the customer focused innovations.
And I'm going to talk about some of the innovation, but it's going to be more about the overall innovation approach, how we are creating the approach which can constantly generate new innovations. So I will first talk about how certain innovations have played very important role in our growth story. And then we will talk about how elevators have got smarter along the way. And finally, we will talk about the future, how KONE is renewing the way how we innovate and how we are responding to the changes in our environment. I still remember the day when I joined KONE as a young engineer in Japan 15 years ago.
The market was quite different at that time. In fact, Japan was the largest elevator market at that time 15 years ago. Although there was a speculation already that whether China is going to pass Japan because of the fast urbanization. And but we couldn't imagine that China would eventually become 15x larger market than 15 years ago. So here I have picked some of the facts and which indeed prove that a lot has happened in 15 years' time.
Today, our annual volumes are 7x higher than 15 years ago. We do have well above 1,000,000 units in our service base. I also checked how many website we had in 2,001. We had actually only 9 external website in different parts of the world. And of course, today, digital channels are used everywhere and it's really central part of our business.
Think about our customers who are using every day our building information models, BIM models or our architect toolbox in order to plan and design their buildings. So it's really part of normal daily business today. So a lot has happened in these times. By the way, you might be wondering why I was in Japan. Well, we were working with our alliance partner, Toshiba Elevator, and we started actually R and D cooperation, which has continued very nicely until today.
Let me now dig deeper what has really happened in the past 15 years. You will soon see how certain radical innovations and incremental innovations played a hugely important role in our growth story. Maybe it's fair to say that these 15 years have been also the age of hardware innovations. And later on, I will talk about how the role of software is becoming more important in our innovations. In early 2000, so the time when I joined KONE, we were living in mass share rooms elevator boom.
It was driven by KONE Monospace Innovation, which was in the full swing in Europe. And it was really fantastic innovation because it was customer focused innovation. It was creating big value for customer, flexibility, architectural freedom, elimination of machine room. So we saw traditional hydraulic elevators market, which was quickly replaced by this new technology. And of course, there was an underlying EcoDisc Mortar technology, which was really playing crucial role in this innovation.
But in the end of the day, it was all about the value for customer. And it is amazing to see and you seldom actually see how market can change so quickly because of the technological disruption. But that was really one of the moments, I would say, revolutions what we saw in our industry. When we then introduced Monospace to China market, we were thinking that our customers should appreciate pretty much same benefits like in Europe. But pretty soon we realized that and it was partially true, but pretty soon we realized that, in fact, volumes were more in the mid- to high rise residential buildings, where a customer builds the machine room anyway.
So we were thinking about this. And technologically, it was not a radical idea. But based on very careful analysis, we decided to develop so called small messy room elevator, mini space. And it was pretty much using the same monospace components, but it was much more energy efficient compared to the traditional elevators. And the reaction from the market and from the customer was amazing.
In fact, no other products in the history of KONE, probably in the history of whole elevator industry has never sold as much as this product, small machine room elevator mini space in China. When we launched our new company vision in 2007, which is deliver best people for experience. We started to pay more attention to the things which are improving user experience, things like Ride Comfort. In fact, KONE was the 1st company which started to measure the Ride Comfort systematically before every single handover of the elevator to the customer. And we actually developed their our own unique device measurement device for our installation people so that they can really check if everything is fine.
We really wanted to make sure that we keep the promise to our customers. But it was interesting to see that we didn't only improve the ride comfort itself, but actually we improved the overall quality of installations, thanks to these measurements. So that was pretty cool. We did also everything to cut energy efficiency, energy consumption of elevators. We reduced energy consumption nearly by 88% of Monospace and the Monospace, which was already game changer in eco efficiency when it was launched in 1996.
So it's actually amazing how much engineers are able to find more benefits and improve the products continuously when you really focus on. One of the best decision what we did that time was to set up a design team in R and D. We hire excellent industrial designers and service designers, usability experts. And they started to build new KONE visual identity. And we came with different kind of solutions.
And again, the reaction from the market was really positive. We actually received many design awards like Red Dot Design Awards, Good Design Awards against in a competition against companies like BMW and so on. So that was really nice.
When we
and our journey towards the sky took a giant leap when we launched UltraRope technology in 2013. So this technology was it was radical carbon fiber rope technology, which enabled doubling of the elevated travel up to 1 kilometer compared to the traditional steel ropes. So this was really like a core innovation, a bit like EcoDisc motor, which enables different kind of elevator applications in the future. And the beauty of this innovation lays in the fact that we can actually use this technology in existing product platforms like a mini space and create new value for our customers, better energy efficiency, longer lifetime of the equipment, just to mention some of them. I have to say that we are still in an early phase of UltraRob story because we see more opportunities to utilize this technology in the wider range of our product portfolio.
But we have a good momentum. We have been winning increasingly major projects, which are based on this Ultra OP technology in different part of the world. So we are really excited about that. So all in all, we are proud of many of these innovations and achievements we have done in the past few years. We have been recognized 6 years in role as the most innovative companies according to Forbes Magazine.
Actually, the only elevator company which has been constantly be in that ranking list. But let's face it, world is changing. And we also want to change and we want to lead the change to new innovations. Now let's take a little bit different angle and discuss how elevators have got smarter along the way. This will also give a right context when we talk about how digitalization is impacting our industry in the future.
Let's say the first phase of elevators getting smarter was happening actually already in 1960s, a long, long time ago, when microprocessors were introduced for elevators and escalators. Surprise, surprise, surprise maybe, KONE was the pioneer in this area. We were the company who bring this technology to the elevators and escalators. We were a much smaller company than the big players at that time. During this the phase of microprocessor age of microprocessor, we also came with the 1st generation remote monitoring solutions, which already started to help our service business.
The second phase of this journey was and I think we can call it as age of artificial intelligence. So in that phase and that phase started around 1990s and it has continued until today. During that phase, elevators got smarter by applying artificial intelligence into the elevator group control so that you can use the better algorithms to manage the elevator groups, have some self learning functionalities and things like that. We also introduced destination control system, which actually enabled to integrate access control with elevators. And we also came with the remote diagnostics capabilities so that we actually knew what was the condition of the elevator and what kind of maybe failures there was and what was the reason for the certain failures in the elevator.
So that was really helpful for our maintenance business. Now where we are today. And I decided to use the picture to give a better idea that what we have already today currently in the, let's say, in the end of the second phase. So let me walk through this slide. This is actually everything is what we are already selling to our customers.
So if I'm the user who is now entering into this building, of course, I will first enter through KONE automatic building door. And I come to this beautiful building, beautiful lobby, which is very well organized. And it's the whole layout is supporting the smooth people flow, thanks to the our consultative planning services, which we are offering to our customers. And I also see clear guidance and information. And then I will go to the lobby desk, and I'm using visitor management system so that I can register very easily as a visitor and get access to the floors where I'm supposed to go.
Then after that, I will go walk through the security turnstiles, which are provided by KONE, which will also automatically create a destination call and guide you to the right elevator. So it's really a smooth and hassle free people flow journey. If I'm more a regular user in this building, I have downloaded remote call application to my mobile phone. And I'm making the elevator call using mobile phone because it's even more convenient. So this is what we can this is the experience with what we can offer today already.
Smooth journey, minimizing waiting time, things which works. But this is just the beginning. This is just the beginning. When we start to apply technologies like IoT, it opens completely new possibilities to create value during the whole People Flow journey. And I guess it's fair to say that most of the innovations, which I have been talking so far, there have been about things which are improving inside elevator shaft.
But we need to move out from the elevator shaft. And start to look at whole People Flow journey, start to see how the new technologies are going to help to enrich People Flow experience in the building. And therefore, we move now to the 3rd phase. And 3rd phase is something where obviously, elevators are not only connected as a group, but they are connected to the industrial Internet. This is the future we are now living.
And it's not just about our equipment, but it's about all the other intelligence devices in the building, which are interacting in IoT. So we are entering into the age of smart buildings. Digitalization is will help to create more personalized people flow like Henrik was already referring. What a personalized people flow experience would mean? Now it could mean that Elevator actually know your preferences, know your preferred flow with where you usually go and know what kind of information, what kind of news you are interested to read from the media screens in the during the elevator ride.
So that's something personal. And the cognitive IoT, which we are working with IBM, it has a huge opportunity and potential to enrich personalized people for experience. There will be things which is difficult to imagine even today. Finally, we come to the 3rd part of the a third important point in the 3rd phase of which is the edge of smart building. So it's about analytics.
We have been analyzing the data already for a long time. But advanced analytics capabilities and the technologies behind that will bring remote diagnostics into a completely new level. So it's not only about analyzing equipment data, but it's analyzing multiple data sources, data lakes internally and externally, helping customer to make better decisions in managing assets in the building. So there's a lot of opportunities there. So we are living really exciting times and I'm really lucky to be a part of this journey in KONE right now.
This journey will make KONE also much more open in the way how we innovate. So in my in the final part of my presentation, I will talk about some of the important changes we have decided to take in order to respond to the age of smart building, to the changes what we are seeing in the market. But before going to the changes, I still want to give a little better idea that what is the starting point we have here looking at the digital opportunities. As you know, data is at the heart of digitalization. The winners are those who are able to collect the data, analyze the data and turn data into the value which is valuable, which is important for customers.
And KONE is actually very data intensive company already today. Actually, we were recently told by one of our major ICT partner that the amount of the data what we have in different data centers in the cloud is in a similar level as the largest companies in the world. We were a little bit surprised, but actually there's a good reason for that. And the reason is that we have more than 400,000 customers in and we are serving more than 1,000,000,000 users every day. So the amount is big.
And most importantly, we are in the lifetime business. Our customer relationships are can last decades and that will create a very long digital footprint. And that's why we have so much data already today in our hands. Now when we connect more and more equipments to the industrial Internet, like Henrik already referred, the data will grow exponentially. And that is really good news for KONE.
It's a good news for also for many of our partners who can help us to create new digital services to our customers. So one of the first change what we did in our innovation setup was what we announced a year ago to was the setup of new KONNECT Technology and Innovation function, where we actually relocated R and D and IT under same umbrella. That turned out to be a very good move now that I look back because we knew that in the future, IT people and R and D people need to work together much more closely. So we assign people from the both function to the new project. We really started to immediately see how learning is happening, how we are sharing the competencies which are needed and how we became faster also, therefore.
And I myself, I'm representing Technology Innovation function in Executive Board. So I have been then maintaining very close dialogue with senior management and also making sure that we make decisions without delay any delay. And I think one of my role has been also to bring people together from different parts of the organization really to improve the collaboration. And these all are helping us to gain speed. But I have to say that it is also important when we talk about speed, it is also important and it has always been important, but I think it's going to be even more important in the future, is the fact that our R and D locations and innovation centers needs to be very close to the key markets.
I we believe in empowerment. Empowerment means that the young engineers in India or in China, we give them responsibility. We give them ownership to innovate, develop new products. In empowerment, we'll also create speed. We still have a largest R and D entity in Finland, but we are really expanding our R and D network in different parts of the world, really widening our innovation potential also in future and making sure that we are really having close dialogue with our customers, with the partners, which is really where innovations are happening.
So here are some of the latest expansions and development in our R and D network, and I will explain some of them. In mid of actually, in the late of 2015, we opened a new high rise test tower in China, in Kunshan, which is now really boosting our R and D activity in the largest elevator market in the world. In the mid of 2016, we expanded our R and D and manufacturing facilities in Allen, Texas. We have also expanding our capabilities in India, especially in the area of software engineering, software development. Finally, we will soon complete our largest R and D facility investments in Tuturi Finland, which really upgrades our capabilities to develop super high rise elevator technology.
So these are all important and necessary when we move forward. And structural change is also important. But obviously, this is not enough. We need to renew the way how we also work in order to respond to the changes. Perhaps one of the most important change in a way how we want to innovate is related to the partnering.
Some of you may ask why partnering or partnership development is important in R and D. Well, it is important because 99.99% of the innovations are happening outside KONE. And when we work with the partners, we can learn fast. We can also focus our resources in the area where we are the best and we want to be the best. And of course, we also want to avoid reinventing the wheel and come with something which has been already done and then come to the market faster.
I think partnering will also make us more open in terms of innovation and better collaborator also internally. So based on our strategy, we have selected 4 partnership development categories and areas where we are focusing on. 1st area is technology partners second is start ups 3rd smart building partners and then customers. Good example of technology partner is IBM. IBM is the company which can really help to build technological platform for ecosystem of partners.
And I have to say that I'm really excited to work with IBM and seeing the potential of Watson IoT, for example. We have a lot of things going on and we are working very, very widely. And there's a lot of people from IBM working also in our facilities today. Once we build the platform where we need components like IBM, then we can actually involve innovative startup companies who can build applications on top of it quickly. And we have already started to organize hackathon events and invite startup companies.
And I have to say that they are really promising companies who will help us in the future. We also need so called smart building partners. Smart building partners are typically the companies which actually have same customers we have. They're operating in the same smart building. And a good example is Kaba.
Kava is a Swedish access control company, important partner for us. They have been helping us to develop KONE access solutions, really enriching the Peopleflow experience. Finally, of course, the most important partner is the customer. And customers are facing digital transformation like we are facing. And our role is to really help and participate in this journey.
And I believe that when we are working closely with the customers, we will also find some new revenue models and business models. And a bit like what Uber or Alibaba has been able to find in their own businesses. And I think the key point is that we need to experiment. We need to have courage and curiosity to experiment and pilot and try different new things because you never know what is going to work beforehand. So this is the last slide.
So I've been working now about less than 1 year leading this technology and innovation function. I have to say that we are making good progress. We are working with world leading partners who were, by the way, not existing a year ago. We were not working with them a year ago. And we are gaining speed.
We are becoming more open. And we have many customer co creation projects and pilots going on right now in the different part of the world. So I think we are on the right track. If I summarize now briefly what were the key points of my presentation. So first of all, KONE is becoming more open in the way how we innovate with the help of customers, with the help of partners.
Secondly, we are building partner ecosystem, which will give us speed, which will ensure that we are one step ahead of our competition. And then we are, let's say, moving out from the elevator shaft and looking at the old opportunity what we can find during the whole PeopleFund journey. But I want to emphasize that we are also building on traditional strength. With the traditional strength, I mean all these amazing people who are working, who have been constantly generating new innovations, who are maybe a little bit more in the hardware side, but they are very important also in the future because I believe that there is room and there is opportunity for the new radical elevator concepts in the future. In the end of the day, of course, what is important is how we are how are we seen by customers, how we are different compared to the rest.
And this is something we I keep telling to R and D people all the time. And what is really the thing? What is really the value what we are creating for our customers? What this is what we are after and this is this will make KONE always as a challenger in the market. Thank you.
Thank you, Tomio. We now have time for maybe 1 or 2 questions and more than later. There's one in the back.
One of your competitors is going to make an elevator that goes sideways. Does that matter? Do you think that's something you need to do? Is that going to change the industry?
Yes. As I said, I think there's room and opportunities for radical elevator concepts. And obviously, we are working very closely with that kind of things also. I think the important thing is that what is the point is not the technology, but it's about what is really the value for the customer. And this is what we are focusing on.
But obviously, we are looking at all the opportunities, and we are building this capability where we are able to work with the partners, where we'll be more open in a way how we innovate and be able to then come with the good innovations to the market.
This one on the side.
You mentioned in the presentation the connection of devices and the use of data analytics. Can you give us any specific examples of where you've presented that data or use that data to your clients today and how you've actually been able to monetize that? Is there anything concrete that you see today that's been used?
Good question. I have to say that there are a lot of opportunities, a lot of use cases, I would say. Of course, one of the use cases which we are working on is, for example, condition based maintenance, where we collect the data, obviously, from equipment, but we also collect the data from different sources, from our ERP system, from and using the different data sources, we are able to understand the condition of the elevator, but also what kind of services this elevator will need, how we can predict, how we can predict some of the things and how we can serve the customer better. So this is one of the example what we are working. That will require advanced analytics capabilities, which we are then now developing together with IBM using Watson IoT.
Understood. Is there any risk that as you make that data more transparent to your customer that they
demand push outs on service or less service that they actually get more control over the maintenance spend they might review?
Yes. I think one other thing where I believe we have a great opportunity is actually that we're able to create better transparency to our customers. So actually, we can demonstrate the value what we are already delivering. 1 of the big problem in the service business actually is that customer doesn't know what we are doing. And this technology will help us to really show what we have done.
And if the companies who are really doing the good service, they will actually benefit from that and they see the
value. Okay. One more, then we need to break.
It's Guillermo from UBS. Maybe a different way of asking kind of the same question, but have you seen for the connected elevators in which you apply big data, Have you seen increased conversion rates into service or have you increased better margins into the service? Or what kind of metrics do you actually use to see whether that actually innovation is driving growth and profitability?
Yes. I think it's probably a little bit early to say what is the relationship with this kind of analytics compared to some of the business indicators. But obviously, it is helping us to make right decision. It is helping customers to make right decisions how the way how they manage the assets. We believe that there are many, many angles, many values what we have not even found yet.
And but yes, I think it is too early to say that what is the relationship with certain conversion rate and analytics. So but obviously, we are working on that.
Thank you very much. Let's now take a break. We have until 10:30 when we will continue with the webcast. So please be back here, ladies, 10:25. There will be some refreshments served just outside.
Thank you.
Good morning, everyone. Thank you very much for coming to our Capital Markets Day. Wow, it's been an incredible year since we last saw you in Shanghai. There's a lot to catch up on, a lot to share with you. So I'm looking forward to presenting you today some of the progress that we've made over the last 12 months.
But let's take a little quick review of the agenda for this morning. First, we're going to cover the new equipment market and where we stand in the market today in China. Then we're going to look at the growing opportunity in our service market, very exciting. And then we'll also talk about how we're going to continue to lead in the China market, how KONE will continue to lead in this new market environment. But first, I wanted to give a quick sort of update, set the stage, a little snapshot of some of the things that have happened since we last saw you in Shanghai.
We had earlier this year a very important milestone we crossed, which is we shipped our 600,000 unit from our factories in China. That would mean cumulative from 1996 when we started our operation in China to the end to the beginning of this year we shipped more than 600,000 units of elevators and escalators. It's very exciting milestone. And I've got to tell you, we've got great velocity going forward. And I look forward to updating you when we hit the 7 figure milestone sometime in the near future.
Trust me, I'll let you know. When we look at 2015, our total share of KONI's global business reached 35%. And when you look at our order received monetary value at the end of 2015, it was roughly about 40%. At the end of 2015, we retained our number one market position with a total market share of 20% that would be the 2 brands. And as Henrik said earlier today, that for the last 10 since 2010, we've added 1 percentage we've had 1 point share gain each year, but he was too modest to say that last year we also added 1.5.
So we did pretty well in 2015. 2015 we also grew our service business quite well. We grew at 25% and that we're now we call it a shared number one position in the market. And just recently you saw I'm sure most of you have seen the announcement, we took the final share of Giant Kone and now we have 2 wholly owned companies, 2 wholly owned brands in China giving us great flexibility to go after this market from a variety of different angles from customers, products, markets, you name it, we have great coverage now in the China market. And we had it before, but we're going to continue it as 2 wholly owned shares.
Let's take a look though at how we did in the first half of twenty sixteen. What was our performance? What did it look like? Well, the new equipment side, we saw the new equipment market continued its slight decline from 2015. As you saw in 2015, the overall market was down about 5%.
In 2016, in the Q1, it was down 8%. Our performance was slightly below that, roughly around 10%. By Q2, we moved back up into the in par with the market decline. And it's been certainly very competitive and we're going to continue to work hard to find the right balance between volume and price and what kind of customers we're working with, what kind of projects, etcetera. So we've been really active in that regard.
For the first half of twenty sixteen, our services business has continued to grow very, very nicely. We're very encouraged by that. And we also reached a very interesting milestone, which is by the end of first half, we are half of our employees were actually service technicians. And as we say in the hood, this gives us a lot of street cred when we're looking at telling our customers we're really a very important service business. So I think this is a very significant sign that we're really taking the service business very seriously.
But let's now deep dive a little bit more into the new equipment side of the business here in China. Now there are a lot of data, a lot of charts that you see probably every day about how the construction market is and pricing and things like that. And I picked just a few of some of the ones that we think are indicative or interesting to take a look at. And the first one of course is, how is price per square meter growth? How is that going in the market?
As you can see from early 2015, the price began to really it inflected and started really going up quite rapidly all the way to where it is today. And it's gone very nicely. And we're also seeing that the sales growth area has also sales area growth also has from that same period of time gone up in a very positive direction. What we haven't really quite seen is that the amount of real estate investment really sort of match that kind of growth. We've seen some and it's been a little bit, but it's been kind of in a flattish area.
And there was an earlier question about why haven't we seen with all this real estate construction starts starting and things like that, why haven't we quite seen it. And I think part of the reason there are two main reasons. One is, I think developers are actually quite cautious. In 2014, 2015, they started to pivot away from the lower tier cities as they became overbuilt and they really started to move their energies in their direction back towards Tier 1 and Tier 2 cities. But then they started to get a little bit overheated and so they're kind of pulling back.
I think another reason you're seeing is that the they have a lot of capital, but they're sort of watching to see how the economy is going to go. And so in that way, think there's still a little bit of caution on the part of developers. Now of course, the numbers I just gave you are for all of China. How is it really looking across the different markets? Now one of the ways we segment our market is through tiers, Tier 1, Tier 2 and Tier 3, 4, 5 cities.
Some of you I know are familiar with the Tier 1 cities. These would be Beijing, Shanghai, Shenzhen, Guangzhou. And by the way Tier 1 cities are those cities with 10,000,000 population or higher. And so in 2,005, you can see that they were roughly 25% of all the market. But by 2015, they had shrunk quite considerably relative to the rest of the market.
Even though the pie expanded, they did not keep up with the same proportion. The really big growth was taking place in Tier 2 and Tier 3, 4, 5 cities. And as you can see in Tier 1 presently, the markets have overheated a bit. The government has imposed restrictions on multiple home purchases. And so that's putting certainly another dampening effect on the market, particularly in Tier 1.
And we're seeing in Tier 2 some of the hotter markets as well are a little bit under pressure. The market is the government has imposed also purchase restrictions to cool those markets a bit. So but we're also seeing in Tier 3 that the overhang of inventory remains and it hasn't quite gotten cleared out yet for the development community to feel more optimistic about that area. So we see kind of as I said this sort of more cautious approach taking place by the development community. Now looking forward or looking to where we have grown from over the last 10 years, you can 15 years, you can see that the market has rapidly grown, but where it was growing at double digits since about 2,002, 2003, 2003, the clearly the market has begun to cool off for the elevator and escalator market.
By 2015, we saw the market decline about 5% and we're seeing that for 2016, the market will decline between 5% to 10%. This is in terms of units. We have also said that during this decline, a number of our competitors have declared that they want to gain share. So you can imagine that the price competition is quite fierce. And also during this time, some of the mix has changed as developers are looking to conserve their cash, save some money, and what we call down platform their orders to more simpler platforms, more standardized equipment.
And so for us, we're seeing that the days of sort of double digit growth are probably past us and it's going to be there's going to be a moderating trend. And what we've said to repeat what Henrik said earlier, in 2017, we see that the rate of decline in terms of units is expected to moderate and that competition will continue to be quite fierce as we go forward. Just to identify a few interesting snippets of the market, infrastructure is doing quite well. And this I think is going to have a long term impact on our market, but it's not really so big a huge segment. It's about 10% of the overall new equipment orders going forward.
The big issue of course is residential housing. That's the one that's taking the larger hit when we look at which segments are being are coming down and which ones are losing a bit of volume. Now this is a short term immediate picture of what's happening in China. What about the long term effects? We still are very bullish on, I'm still very optimistic.
We as a company are very optimistic about the mid and long term growth potential for this market. And what are the reasons why? To repeat a little bit what Hendrik said and then add on to that urbanization is clearly one of the big use that we call that, the 3 big use urbanization, upgrading, which is the growth of the middle class, and of course, urban renewal. And we believe that over the next 10 years, there's going to be more than a doubling of the installed base in China going forward. So this is still a very significant market.
China, as we've said, is the granddaddy of the market, is the king. The next largest market is less than onetenth the size. So this is a very significant market for us, still a lot of opportunity, still a lot of growth. Why is urbanization a big issue? Well, let's give it a little bit more detail when we look at the China.
As you can see, China today is just slightly more than 55% urbanized. And over the next 10 years, it's going to grow to slightly more than 65% urbanized. That means in China terms, about 160,000,000 people moving into cities. Now most of the cities they're going to move into are Tier 3, 4, maybe some 2, unlikely Tier 1, but the big growth will be along in these smaller tier cities surrounding larger cities. And when you see this amount of growth taking place, here it looks linear, but I can tell you the impact is going to be exponential.
The network effect of all these people moving into urban centers will be phenomenal. What they produce, what they consume, what they move towards every day will have a phenomenal effect far beyond their individual number as a group, it will really be quite phenomenal. I have seen it when I got there in 2,000 in 1993 excuse me, there's virtually no middle class. Now it's huge and their power is growing and I'll get to that in a minute. Now where are these people moving to?
I said they're not moving into Tier 1. They're kind of some Tier 2, Tier 3, 4, 5. So what they what we're seeing is that they're moving into these cluster areas, these sort of hubs around China. There are actually about 20 of these emerging hubs. We have here in the map said about 6 identified 6 to talk about on the Yangtze River Delta that's where we're located our headquarters in Shanghai that's 150,000,000 people.
You go down south towards Shenzhen, Guangzhou, Hong Kong area, that's 90,000,000 people that's about yes, 60,000,000 people. You go to the capital area, Beijing, around Beijing, they're building another airport up there, they're building more high speed rail into that area, That's about 90,000,000 people. And a huge one that is actually a fantastic market for us is taking place was called the central region Wuhan, Changsha, Nanchang, 170,000,000 people, phenomenal growth there. Also in the Central Plains area, that's one of our better markets. Now let's take a look at why we believe that this urbanization is having a huge multiplier effect on what's going to happen in our industry.
Well, again a deeper dive into the Yangzhou River Delta, you can see Shanghai. And then over towards the northwest corner is the city of Nanjing. And in the southwest corner is the city of Hangzhou. And you can see all along this area are high speed rail hubs, light rail, inside the cities are multiple metro lines. There are highways, of course, airports, train stations.
It's a phenomenal infrastructure, as I mentioned, how important infrastructure is going to punch above its weight is really impacting this area. Again, 1993 when I was in China to go from Shanghai to Nanjing took all day, took at least 6 or 7 hours by train, road was very difficult, it would take that long. Today, a high speed train, 65 minutes from Central Nanjing to Central Shanghai. And along that way, our multiple train stops where these are 3rd and 4th tier cities and they're developing very rapidly along these train stops. So what's happening is people can work in a high income city, but live in a low cost place.
So this is the kind of transition that is taking place all across China today. It's actually quite exciting to see. And we've taken the train on multiple times. They're packed, the high speed train, they're packed, people moving at tremendous speeds across just this area alone. The other you we talked about was upgrading and that's related as I mentioned to the rise of the middle class.
1993, no middle class. Today, more than a quarter 1000000000 Chinese are middle class citizens. And this middle class means that they have property. And the property that they have is where they want to put their wealth now. And we're saying for the next in the next 10 years, we're going to add an additional 380,000,000 people to this already large group.
When they move into the cities, their wealth increases, they want to buy property or if they already have property, they want to upgrade, they want a larger property, they want a property that has better services, better hardware, more reliable hardware, and they want to use this as an opportunity to upgrade their lives. The final U is urban renewal. Most of you who were here in Shanghai, those who were in Shanghai were very familiar with this picture. Last year when we were in Shanghai, we were right by that very tall building in the middle there. But in the neighborhood just behind the tall buildings, this is what it looks like.
This is an example of what a lot of urban centers in major Tier 2 cities look like in China today. None of those buildings have elevators. The land, however, is now hugely expensive and really underutilized. What's happening is efforts to upgrade the urban landscape, add more high density housing, higher quality housing, modern housing and this will be the future for Shanghai. And you can even see that is already started to take place and it's a way that's continuing today.
It's going to take place across all these major Tier 2 cities in China. There are by the way, there are about 35 or so Tier 2 cities and then there are over 100 Tier 3 cities. So looking at today, tomorrow, the day after, we see that China will be the world's largest elevator market for years to come. There are strong fundamental drivers that are going to continue this incredible phenomena that we've seen. And we say that the era of fast growth well in our in new equipment well over, it's not finished in terms of the growth and we believe volumes will remain substantial.
I also want to remind people and I'm sure all of you in this room are very familiar with the fact that construction is some people say it's about 20%, some people say it's as high as 30%, but let's say it's about 25% of China's overall GDP. So construction is intimately related with the health of the economy and we see that going forward. What we probably need to see are more clarity from the government, how they're going to use fiscal and monetary policies to continue to support and stimulate the construction issue going forward. Now that's new equipment. New equipment leads to service.
Services for us the next very high growth area that we're pursuing with great vigor as well. When you look at the China installed base, you can see that it's been growing at double digit rates similar to what the new equipment was for many years. And clearly, it's already now surpassed other markets. When you see the installed base now in China of over 4,000,000 units, it is now larger than the next 4 largest installed markets combined. And it's going to double, at least double in the next 10 years.
So we see this as where the next wave of opportunity is going to come for us. Now KONE's maintenance space in China by units is already larger than our next largest installed market or service market, which is Italy. So we've got the right we're going in the right direction here. However, the sales per unit for KONE for the China units still lower. It's lower, yes, because the labor cost is much lower.
Margins on a percentage basis are around the global average, but we believe this also is an opportunity for us to grow forward as we add these services that we want to then charge for. So this is, we believe, good opportunities here. Modernization. Now modernization in my mind for China, it's still early days. We're just beginning to see the equipment reaching that kind of age about 15 to 20 years.
And they're going to be concentrated in 4 cities, Beijing, Shanghai, Guangzhou, Shenzhen, where they modernized and they advanced much more quickly than the other cities. And they're about to take off. And we're going to say that probably the most of the opportunities will be in the areas of hotels, office buildings, metros, airports where it's critical that the equipment be modernized, up to date, functioning well. And they also these places also have money and they have the ability to make quick decisions. I think residential modernization will be a bit more behind the curve going forward.
But we're seeing that the trend is definitely moving in the right direction. And we're also seeing the government is encouraging this behind the scenes pushing this a little bit along. And I think it's going to increase as the years go on. For China, it's not a need anymore. It's a requirement for high quality service.
Our customers, they are users, they expect reliable and high comfort ride equipment. This is for them a sign of the quality of equipment, the quality of the building they're in. People walk into a building in China and they look when they look at the elevator, they judge the quality of the building that they're in by the brand that they're writing. And we're finding that developers, developers, they're seeing increasingly, they want to protect their brand, they want to enhance their brand with top brand original equipment manufacturers, of which KONI is 1. And I think also what we're seeing is that people are coming to the realization that in order for really to have smooth efficient operation of these cities, they have to have reliable equipment.
If a metro, an airport, a train station, the equipment is not working, this can be a big problem. In Beijing alone, more than 10,000,000 people use the metro every day. Can you imagine if a train station if you've seen some of the pictures, the platforms are absolutely shoulder to shoulder of people. If the elevators escalators are not working properly, this will be a big problem, not just for that station, but for the entire system. So people are recognizing, the government is recognizing reliable equipment, reliable suppliers is not just a need, it's a requirement.
And that plays good for us. Now, how are we going to lead, continue to lead in this new market environment? Well, there are a couple of changes that are taking place, which I believe are really, again, working in our favor as the leading OEM in China. Number 1, our customer base is beginning to consolidate. As you can see from this chart, since 2011 to 2015, the top 100 developers have continued to increase their proportion of overall development in China.
In 2011, it was 24%, by 2015, it was 40%. So our customers are consolidating and these top 100 are a very material part of our business. They want to work with us and we want to work with them. In addition, what else is helping us is that there is we have the scale, much bigger than any other company in China. And this gives us great power in terms of sourcing, logistics, employment.
Also when it comes to service, our services are we're starting to see that in many large cities, we're getting the kind of density that we're looking for in our service business similar to some of the more mature markets. And this is a very good positive trend for us. And finally, technology. Technology we believe is going to be the big game changer for us in China, because we will have the resources and the speed to implement this new technology in this market faster than the smaller companies. And once people start to see these services, they're not going to really want to work with smaller companies.
So we believe this is going to be generally a very positive step for us. And we've already begun to start to see a bit of consolidation on the part of our own industry. When you look at the slide in 2010, the top 4 China OEMs 50% of the business. By 2015 when that market had almost or about doubled in size over that same period, The top 4 China OEMs were 55%. So we're seeing this trend taking place and we see that technology and we believe it will really accelerate this trend going forward.
And on the services side, in 2010, the top 4 OEM or the top 10 OEMs, excuse me, were only 25%. And today, it's still at a relatively low level. We believe this is another area for big opportunity and big growth for us. Remember our conversion rate in China is only about 50%, on the KONI brand it's about 60%, on the GK brand it's a bit lower. And but so we believe that there's once we introduce this technology, we believe that we're going to strengthen this side of our business quite well.
Now going forward, we want to continue to strengthen our focus on our customers. And one of the key areas we're going to do that is with our differentiating offer. Tomio talked about it. Henrik also talked about it. This is really key for us.
We have now 2 great brands, multiple different offerings to satisfy everyone from the very super high rise infrastructure projects, hotels, resident, high end residential, low end residential, affordable housing. We have a great suite of products that are very competitive to offer this market. And we're going to continue to develop those and add services on top layer services on top of that, which will be interesting and exciting for our customers. An area that we haven't really explored that much, and I think Tomio has been very modest about this, is how we deliver our product. One of the key areas that we have spent a lot of time and money on and a lot of effort is how do we deliver our product to the customer and our services.
We want to make that easy. We want to make that smooth. We want to make sure that when we execute, it's as productive as possible. And so we have a lot of systems that support us, processes that have been designed that work in conjunction with our headquarters, with our factories that make it very easy for us and our customers to work with us. So we're going to continue in this area, whether it's order, whether it's delivery, installation, handover to service, all of this is moving very for us very smoothly.
And this is an area when we look at how we're going to execute on our commitment to our customers, we want to be the best at this. And then finally, we want to continue to service our customers through the life of their equipment, enhancing their brand, protecting their brand, protecting our brand and making sure that we give our customers a great sense of security and comfort with their KONI equipment. Earlier this year, we got a couple of accolades, local some local web employment companies rated us the number one employer in China. It was a great honor for us to receive this. And this slide is really all about not just all our employees, but particularly our field employees.
Our field employees feel a great sense of pride working for KONI. Why? We're the number one company. And they have helped vote us the number one employer in China. In 2015 and this year, 2015 we hired 1800 field employees and this year we'll do the same and I believe for a number of years to come we'll continue to hire about close to 2,000 employees a year as we build our service business.
This is very this is an exciting and very important trend for us to keep going. By the end of 2015, more than 7,000 of our workers were using our field workers by the way were using mobile learning devices, communicating to them what we expect in terms of how to install better, how to install more safely, how to install more effectively. And this is another area I think Tomio, we got to spread this word a lot more that this is also very important part of our technology, not just what the customer sees directly, but what they're going to see indirectly through this. And of course, our people see it and they like it. And finally we've got a great pipeline of talent in the field among our employees to really support our growth in services and in installation because we can now fill 80% of our senior field positions internally.
Looking to the future for KONI in China, I believe we've got a great combination of brands, products, services, people that can continue to make us the leader in this important market. Thank you.
Thank you, Bill. I'm sure you will have plenty of questions on China. Let's start with Antti.
Thank you. I would have two questions. First, on the kind of China fundamentals. So if I understand correctly, what you are seeing is falling urbanization flow, and then you are seeing increasing average space per urban capital. Is that correct?
I'm sorry, you're saying falling urbanization?
Flow, the number of people per annum moving from rural areas into cities.
Well, I think you're still seeing a very healthy flow of people. Yes, it peaked at one period of time, but I think it stayed at if you look at the average level, it's been averaging out at this level. So I think that's going to continue. It's still a massive number of people moving into cities. Yes, that slide there you've got.
Sorry, this is a little harder to go. Right here, excuse me, sorry. So yes, so you're still seeing a very high average number of people moving to cities. Yes, it spiked in 2000, 2010, but it's still at a very high level when you see it historically.
So which of these two drivers, the falling flow or increasing space per capita is more important as you see it?
Well, I think you're continuing to add people into cities. So that's important. And I think the upgrade is also very important. Also what we're seeing a phenomenon is that people buying multiple houses, not just for themselves, but for their parents, for their children. And that's kind of ties in with what Henrik said about the phenomenon of people sort of in housing sort of degenerating so the generational effect, you're finding generations now living separately than they used to in the past.
Okay. Then my second question, I miss your construction estimates in this year's presentation. Last year, you said they will have to construct 21,000,000,000 square meters over the next 10 years. Is that still your estimates or have you changed that?
I don't have that figure. What have we said? I don't see a real I don't see we need to back off in that figure. I think it's still probably very close to that number, at least. The thing is the demand still remains.
In some cases, the government is trying to slow down a little bit of the tamp down a little bit of the pricing. But we're still seeing that there's still a huge amount of demand going in there. There's less there's still a little bit of overhang in terms of supply. But in a lot of the cities, there's still very strong demand.
Let's take
from there.
Tomi Eilif, CB. Can you just give an update perhaps on the market conditions as we speak? And have you changed your approach recently in terms of the sort of volume and price situation. There were some sort of strategy issues in the beginning of the year, but any update on that please?
Well, we still believe very much in our forecast for 2016, which is the market will decline 5% to 10% in terms of number of units. We're also seeing that clearly there has been downward pressure on pricing. We've also mentioned that that's also down probably about 5% overall in the market or I should say value in the market. We're also seeing a mix change. So we've talked about the 5.55 effect, the market generally being under this kind of pressure.
So we're still very much in that regard.
Yes, let's take from the front.
Manore Bolanore, Markets. Can you help me to understand how do you think about the growth in the maintenance? I mean, there should be no doubt about that growing very strongly. But Interested in the way you see the margin and the operational leverage because I mean, adding an elevator in Helsinki, for instance, probably doesn't add any cost. So it's pretty much free margin to you.
But how does that work in China because you're still kind of in the development phase? So do you see that you're able to expand those margins, which I think you said are in a global level in services in China as well? Or how should we think about the operational leverage as the speed of growth remains in the kind of 20s?
Yes, absolutely. We're now in a number of major cities beginning to see the leverage due to density, particularly Beijing, Shanghai, Shenzhen. But these are just a few of the cities. I think we're still growing very quickly. So I think there's still a lot of opportunity to once we add density that this will have a great leverage effect.
We're still I think still early in those days. And also as our people become more proficient, a number of our service people really a large percentage of them have only been in our operation I'd say 3 years or so, 2 or 3 years. So as they become more proficient and more capable, their productivity increases. So we're seeing a mix of density, leverage and productivity leverage coming over the years to come.
And if I may tempt you, do you expect that you can improve the margin in the China service over the next kind of coming 3 to 5 years? Or is it more of a question of maintaining at this level because these investments are?
It's hard to quantify that. Clearly, that's our ambition. We want to our ambition is to make the service business as profitable as possible. But that also has to we have to look at the kind of projects that we're working on, customer base, things like that. So it's hard to speculate, but our effort is to continue to make it a very solid business.
Okay. Let's take one from the back now.
It's Matthew Spur from Royal Bank of Canada. Just a quick question on the outlook longer term for the installed base and how that translates into new installations. So did I get it right that you said there's 4,000,000 installed base in China at the moment and you expect it to double over 10 years?
Yes.
So that's 400,000 units a year and we're already and we're at, what, 550,000. So longer term, we expect it to decline. Obviously, there could be an offset from sort of replacement in the installed base. But that's essentially what you're saying that it's a long term decline in the new Perhaps
I should have said at least double. As you notice our chart, it didn't quite give a hard stop. We think it will at least double. I think, yes. But again, it's hard for us to forecast and we're just what we're saying is that it's going to be a very significant growth over the next 10 years.
Whatever the specific number is, we don't forecast on a year by year basis, but it's still going to be very significant increase in overall installed base going forward.
To be clear, the new actual growth in new equipment, that's sort of looking unlikely now in growth per year, number of units that you install?
No, I'm not saying that. I'm saying that it is going to the installed base will continue at least double over the next 10 years, possibly more. But again, I'm not forecasting or prognosticating exactly what it will be year by year and what the exact number will be. But when you look at the trends, the long term trends, when you look at the trajectory of growth in China, the need, the increase in the number of people coming into cities, we can surmise that the demand will continue to be very, very strong going forward.
Okay. And in terms of that growth that comes from sort of pure new construction growth and if that's sort of 400,000 a year based on the growth doubling the installed base, how much comes from sort of replacement and demolition and things like that?
That would be new elevators, primarily new elevators going forward.
Okay. Let's take a couple from this side of the audience.
Yes. Hi. It's Chris Kennedy here from Berenberg. Just a question on your order intake in China. It's been down mid teens for 2 consecutive quarters in Q1 and Q2.
And given your outlook the rest of the year, it looks like we're going to look for another kind of same pace of decline. And that will hit your P and L as of Q4 this year. Can you just tell us what you're doing there in terms of cost cutting? Have you reduced your number of employees, etcetera, etcetera?
Hendrik, what was the specific guidance we've given on that?
Yes. So we haven't, of course, given an order to see any specific guidance, but we can talk, course about this what actions we're taking in a more challenging environment. Well, part
of the clearly, we're also looking at the cost structure, not just we're really looking at the cost structure particularly on the equipment and that has come down quite steadily. Our teams in the factory have really been able to reduce the margin or the cost structure and hold the margins on our new equipment. They've done a phenomenal job on that. We're also looking for productivity gains from our people both in the field and in the office operations. So yes, we're constantly looking at how to support our margins going forward.
Okay. And just the second one on your conversion rates because you said service is not a need, it is a requirement now. How do you explain the fact that your conversion rate both on KONE and Giant KONE brand not move up over the next 3, 4 years?
Well, all elevators in China are required to have an elevator maintenance contract that's required. The point I'm trying to make here is that there is a minimum level of service that's being required by the government and by the marketplace. And we believe that this is over time going to strengthen the requirement for service, the quality of the service, the reliability of the equipment will increase. And this will work in our long term favor as a top technology, a top quality product and services. So we think that this is really the trend that's happening.
Hi, it's Guillermo from UBS. Maybe a question related to that one. Given the fact that you have 50% conversion rates that the market is quite fragmented in maintenance, why don't you go for inorganic growth? So why don't you buy those maintenance contractors out in the market?
Sure. I think part of our focus now is to really focus on as much as we can the units that we can convert to ours. We don't want to chase necessarily the lowest priced. Some of our customers or when they hand over to let's say a building, they're not ready or they're not prepared to pay the kind of prices that we would like to gain so that we can maintain our business. They may go with a smaller independent company that will just come when they call.
We want to maintain our equipment at a different standard than these smaller independent companies. So we want to make sure that it's a healthy business, our service business. It pays, the customers have money and that we can grow with them and they're the kind of customers that we want to work with.
Okay. Let's take 2 more questions from that side and then we need to move on.
Hi. Richard Atkinson with Mizuho Bank. You clearly well, you clearly have a great business in China. And if I'll ask about slightly wider in the region because you seem to have experienced about the wider region as well, in terms of GDP growth, China about 5%, 6%, 7% for the next 10%, 15 years. If you look at India, about the same of the nation in terms of population, maybe faster growth even from GDP point of view.
Is that an opportunity for you?
Henrik, since I'm not responsible for Southeast Asia and India, the question was related to India.
Yes.
I mean, as everyone knows, let's say, we see good potential there, good urbanization, market is growing slightly. So definitely, we are putting a lot of effort, but I can answer that at the thank you, Beatty session.
Yes. And one more from there.
I just wanted to make sure I understood your comments about the competition being fierce. It's been that way for a while.
Exactly.
Are you saying that you've seen any signs that your local competitors in China are becoming more fierce? Is there more price competition that you've seen recently that makes you any more concerned? And separately, you put up in the nice chart showing 20% market share. Is the idea that you will defend market share or are you willing to concede a little bit of market share?
You're absolutely right. It's always been competitive and it will remain very competitive going forward. When we look at how we want to continue to grow our business in China, we're not going to take share at any cost. We want to make sure we've got the right kind of business. We want to make sure we get the right balance between price, volume, commercial terms.
We want to make sure we've got the right kind of customers, those that have money, those have the right kind of projects. If you and so that's what we're going to concentrate our business because we want to have a really healthy business going for years to come. That's what we want.
With all due respect, I didn't really answer the question. The competitors are very intense. Yes. Yes. And what I'm trying to get at is, do you have to follow them down or do you simply or do you give up market share?
That's really what I was getting at.
Understood. And as I said, we want to make sure that we're continuing to find that right balance between price and volume. We like being number 1. We want to be number 1, but I don't think we're going to do it at any cost. We're going to continue to maintain the right kind of business going forward.
Thank you very much, Bill.
Thank you very much. Thank you.
Well, I'm very pleased to be back here at Capital Markets Day. Day. I think it's been a couple of years since I saw several of you in London. But it's going to be a very nice opportunity for me to share with you the continued progress that we're making in North America today. Let's just take a look at how we're going to spend the next 30 minutes together.
I'd like to share with you a little bit about how the market's been developing in North America. I'll do a deep dive into our business performance, how we've been performing since we've last met, but also talk a little bit more depth about the long term growth drivers that I think some have fundamentally shifted in North America and those are positive shifts that make the market more attractive for us and give us more confidence in the fundamentals of the market over the next several years. And the last area that I'm most passionate about is the way we're running our business. So we'll talk more about the smart growth strategy that we've been executing successfully since 2012 and how we've been able to capture price and grow share at the same time. Let's first start though and getting back to perspective because we're talking about China a little bit before and we're talking about broader businesses with Henrik's presentation.
Let's just get grounded on what the size of North America is and some of its key facts. So first of all it's about a €1,500,000,000 business in 2015. The order book has grown very, very healthy in 2015 at 22%. So we've achieved double digit sales growth and double digit order book growth in 2015 and momentum continues into 2016. We have about 50,000 customers.
We're well spread out geographically to effectively cover the market both in Canada with headquarters in Toronto, also in Chicago as our headquarters and we're spread out very effectively to cover the East, West and South of the United States. We've invested early and proud of it in Mexico. So we're headquartered in Mexico and we have strength in Mexico and also we sell through distributors in Latin America. We have 4 production site centers that allow us to produce effectively out of Mexico, also out of Allen, Texas as a new facility we'll talk more about for presence in the marketplace for innovation consistent with the innovation strategy that Tomio discussed. We've also been investing in expanding our Cove Valley operations, which is part of our escalator business.
So very good footprint and then we've expanded our Moline Center which provides operations for our services business and modernization expansion. So I'm very pleased with the balance we've been able to achieve between footprint both in operations and also in sales. We conduct about 10,000 maintenance visits daily, so we have a very healthy and growing maintenance business. And rough numbers, we have about 6,000 employees in North America. So that's a good footprint.
So let's talk in a little bit more depth about how the market has been developing. And this is a graph of new equipment orders in units. And the market has recovered significantly and is at almost a record high level. And given just simple math it will probably achieve that record high level again in 2016. But that's reached a record level of almost 2,008 and the growth will continue as we go into 2017, but at a more moderate pace.
So we've had strong market growth in the United States. We'll talk more about that. Positive development in Mexico, very positive development in Mexico. Mexico is probably a case study in the megatrends that we were talking about. Mexico used to be flat, it's urbanizing.
Mexico used to be flat, now it's getting taller. So the mix of projects, the quality of projects and the level of technology to address modernization and urbanization, the stress of infrastructure is starting to be deployed there. Canada has been a very stable market for us and runs a very, very good business. I think the most important part about how these orders were achieved is that there's been a broad development across multiple market segments, multiple geographies and some of the segments have proven to be very attractive to us both residential, commercial and Infrastructure have been moving along very well over the last several years. Get grounded U.
S. Accounts for about 80% of the new equipment margins in this slide. So our growth is expected to moderate a little bit because it's at an all time high, but the market is expected to be very strong as we go into finish 2016 and as we enter into 2017. Pricing development has also been positive for these markets. Let's dive a little bit deeper.
Let's talk about these segments in a little bit more depth, so you can get a little better understanding of what's fueling some of these positive segments and fueling the growth. First of all, if you take a look at residential versus commercial, there's a good balance between the two segments. That helps us too because we actively participate in a good portion of the residential market which I'll dive into more deeper and give you some positive trends there. But obviously commercial construction starts were very, very active in our 3 geographies. I think the thing to point out here is if you look at 2016 not only is there incredible CAGR growth from 2,009, but you're now starting to see the residential construction starts get back to an all time high.
In fact there's even a better story here if you wait a few slides as we get into how we participate that I'll show you that chart is actually even more attractive to us at KONE. And then commercial construction starts are almost at an all time high back in 2,007. The other leading indicator that we use to plan our business, project our business, invest in our business is architectural billing indexes. And what we've seen in architectural billing indexes for this year that they're on the graph for their public knowledge, they're a great leading indicator of what's going to happen 18 to 24 months later in new construction starts. And what we're seeing is very strong architectural billing index is above 50 and we're seeing that in most geographies, actually 3 out of 4 geographies are above 50 which means the 3 month rolling average is growing at positive growth rates.
So Architectural Billing Indexes being strong all the way into where we're talking today means that will materialize into orders in 2017 2018. So that's a good trigger for us to say that the economy not only is healthy for elevators and escalators with respect to the previous slides, this is a good leading indicator of where architects are billing. There's one other thing that's happening in the marketplace that I thought would interest you. The type of billings, the type of products being selected have fundamentally shifted into our favor because we're the market leader in MRLs. So we have the majority market share, we're the market leader in the MRL segment in North America and we've seen now that this innovation that is the core of who our brand is, the core of who our innovation is progressing as And you see
the growth, we're participating in the bottom blue which
is the growth And you see the growth, we're participating in the bottom blue, which is the growth for the MRL market versus you see the decline in hydraulics continue to progress at minus 11%. If we shift gears here a little bit to the maintenance market, this is the core maintenance market, which represents about 40% of our business, it's growing at single digit rates. And that's a simple mathematical equation. If you have a large million installed base, very mature market and you're introducing only tens of thousands of units a year, it's going to grow 2%, 3%. So the math works out the way for the 1.4% CAGR.
The market is very competitive and there's more professional buying facilities managers, property developers who really look for efficiency response time. So I think it's a very efficient market and it's our most competitive. Also the OEMs have been most successful in that. We have a significant market share unlike other geographies. Okay.
The independents are non OEMs probably only have 15% to 16% to 20% shares more than 80% for the OEMs. The interesting thing about Tomio's discussion today is that foundation provides us an opportunity for further differentiation with digital technology, with digitalization, with the introduction of more IoT sensors and also the introduction of cloud based computing and most importantly the introduction of cognitive analytics which will allow us to gain more insight into how these assets are actually operating. When we get into how we differentiate later, I'll share with you some concrete examples of how remote monitoring is actually creating more productivity for us and differentiating us in the marketplace. The third part of our business which represents about 25% of our business is the modernization business and it provides a very clear untapped potential for us for several reasons. The first one is that the market has been growing low digits this year, but we've been growing in double digits and taking share.
The reason for that is that we're advantaged in this product category and we're actively participating in it and we've invested early. There's a large modernization potential here and the tendering activities support that across all regions. And why is that? Well, there's aging building stock in North America. There's over a 1,000,000 installed base of elevators in North America and greater than 50% of them are over 20 years old.
So that provides pent up demand for us to do several things, provide technology upgrades, provide controller upgrades, provide better functionality and provide better capacity redesigning the flow of the building so that we can get more throughput through existing elevators that exist in there. So modernization of van has demand has developed very positively since 2012. So not only is an AG building stock driving that, but competition from new buildings. So I just shared with you earlier how the net business is growing at double digit rates. That puts pressure on existing buildings to upgrade.
Nobody likes a brand new building across the street that has a beautiful lobby, top notch destination control, access control, beautiful speeds and you're sitting there trying to compete. So in essence, new construction drives more modernization for us and feeds on us. Also to share with you our foundation in our service business provides us greater insight into the assets of how those businesses are performing or assets are performing and allows us to then generate asset management plans and monetization proposals to our service base, which is more of an audience that has a greater insight into how their needs are and how we would actually meet those needs. And currently just to leave you the modernization business is probably one of the largest opportunities we have within KONE. Depending on how you slice it, it's one of the top opportunities and represents almost 25% of the modernization potential we have.
So that's kind of what's happening in the market. And since we I was last year, let's talk about how the business is performing for KONE in North America. We've been on this journey of doing 2 things. One is practicing smart growth and second, really improving our operational rigor of how we execute in North America. In the area of smart growth it first starts with a leadership position in the fastest growing machine room market.
So we're the number one share in the growing MRL market and you've seen the mix shift into that the specifications are going more MRL. The other thing is that we've been active in all building segments. Our product offerings have done very well in multifamily residential. It also done very well in infrastructure, lodging and also in transit work. We've been successful.
So we've had a good balance of volume and major project mix. In fact, our order book is 70%, 30% between typical projects and larger projects. We have a good mix strategic projects we've also have successfully won by working earlier with our customers. The other thing about strengthening our ability is we've done 3 things in a little bit more depth. One is we've demonstrated that we can capture price and gain share.
And that's not easy to do. It's kind of that's not really easy to do. And we've demonstrated we can do that over the last several years. And we've done that through excellent pricing excellence by understanding where we're advantaged in what segments for what type of building types, what type of customers and where our products fit and our advantage over our competitors. In some situations we know dropping price is not going to result in any more wins.
There's no elasticity there. In other cases we can raise price and know that we're capable of it because we're advantaged in those segments. We've been able to demonstrate great insight into pricing excellence and our sales force really looks at where we can add value by getting in early and providing greater value to command a premium. We also realize that 60% of our business in North America are projects. We're in the construction business and 60% of our business is either modernization project work or major project construction or volume business that we're installing into buildings.
So we recognize that we're going to be really good at productivity, really good at managing complexity, at managing risk and execution, we need to substantially strengthen our project management capability. So what did we do in North America? We reorganized our district and branches to look like what? A contractor. And our contractors are project managers.
So we also reorganize our districts to have our projects led by PMs. And so we look the same and we hired and supplemented the good project managers we had inside with people from the construction industry. So now we're more capable of meeting our GC's demands of being great project managers and we're also more equipped to manage through complex situations and manage through risk. And that has resulted in improved productivity and better order book integrity. What's going in our order book and what we're delivering are very close.
So what we deliver and what we promise is in alignment and that's pretty good given the size of the business that we're running. The last thing that we focused on was installation productivity. We're installing thousands of projects a year and how we install those elevators, extra hours in the most highest paid or labor rates are in North America. So saving a few hours, a few weeks through installation productivity in a very aggressive market provides us with very, very good margin expansion. And we've worked on concurrent work practices.
We've worked on extensive training where we're teaching our crews by taking the best crews throughout the Americas and we've actually put them on the road to teach our other districts how to actually work better. And I said work practice. It's not about more training. It's about how you actually do things concurrently. And we've seen very good productivity there.
So if you put that together, pricing excellence, better project management, installation productivity, if you get price and you get productivity, you get leverage and you get margin expansion. But also those are some of the things that are most important to our customers. So as a result, we've been able to capture some really strong customer examples, some showcase customers in new equipment, including some examples that were shared earlier here today. We've built some very successful high rises in Canada that provided schedule compression that introduced faster ways to build the building That was done completely with building information management or modeling models. So we've been able to capture share and price by providing those type of innovations to our customers.
If you look at the modernization business, which I shared with you earlier, we have advantaged product offerings. We've continued to invest in product offerings and it's not just in full replacement, but it's in rebuilding existing escalators. We have an advantage position there. So in retail, in malls, you can't do big tear out projects, you're in the middle of a mall. So we have abilities to actually upgrade, use existing trusses and we have advantaged positions there not only in full replacement, but also in escalator modernization and then also in modernizing lobbies to give them full upgrades.
There's a proliferation of new technology that can be used to upgrade a lobby and I'll go on more example of that later. So we've demonstrated we have broad capabilities across many segments and also in major projects on our modernization side. The maintenance business is the other part of our business, which is about 40% of our business. And we have done three things in that business. We've invested in strong execution to improve the quality of service and our delivery capabilities.
We have benchmark response times right now, call out rate and customer and technical support, not only for small customers but also we put an infrastructure to support multi site customers which would be like retail chains across the United States, high end stores throughout the United States and we've done extremely well there. We've also implemented new field automation tools and remote monitoring technology to improve our customer experience. So I wanted to pause here and talk about a specific example of how we've been successfully using field automation tools and remote monitoring technology to drive improved productivity and also improve our retention rates. So just in the month of August, I did a call before I started this event. And I asked my remote monitoring team how the month of August went.
And they said that we had an example illustratively they picked 15,000 customers that were remotely monitored in North America, fully monitored, fully wired. We have full transparency how those assets are performing. Of those 15,000 customers, those are the ones that see a value proposition and remote monitoring, 5,000 of those elevators generated automatically a service need. It said the controller inside that unit said you know what I'm seeing something happening here. You know what I think you want to come out and fix this before you're on your next visit.
So we think about that 1 third generated service need, that service need went directly to the handle of the technician responsible for that elevator. And now he has an opportunity to make a decision. He's got a scheduled visit next week, which is part of the contract. When he's there, he's also going to fix this other thing to prevent another truck roll. Truck roll in the United States is $200 to $300 So one truck roll up that service need, okay, will save us $300 to $400 5,000 service needs that's over $1,000,000 of savings per month in productivity.
So this is a good example on a comprehensive contract if it's a fixed cost. If we can take that out and solve that problem and save a truck roll and prevent a win win for the customer of a unit going down, that's a win win. So you look at our retail customers, we don't want an escalator to go down or an elevator to go down, a hospital. These are sort of customers by commercial segment we target for that type of solution. Let's take a look now on North America specifically our performance on orders received.
They've doubled since 2,009. So we've been able to grow at a CAGR of over 13% and our Smart Growth threads have been emphasis on pricing excellence through market segmentation and we've grown faster than the market and have taken share with margin expansion in 2015 and the momentum continues and that's our ambition to do so in 2016 also. So we're expected to see some growth or continued growth in the net market And then we're seeing good growth in the modernization market and then obviously single digit growth in the maintenance core maintenance business. So in modernization, what happened in modernization? How do we capture that type of share?
And that is because we invested early in 2012 that said that we really want to build a strong modernization business because that provides us an opportunity with this aging building stock to leverage our capabilities. So we have a very strong approach with respect to a dedicated sales force around modernization, dedicated sales management and an advantaged product offering. So our results have been very, very good there and price has developed positively in the mod business also. If we move over to sales, what you'll see here also is strong sales growth in North America. So sales growth has improved with improved profitability also and I'll share you a graph of the incremental improvement in profitability.
And the sales growth as a result of the orders I've talked about have been double digit in both digit in both modernization and also in new equipment sales. The order book is up double digits and that provides us with a good foundation for 2017 and going into 2018 because our order book typically is a good mix of major projects, modernization projects and new volume projects. So our order book can be 1.5 to 2 years of good projects in the book to deliver. So this kind of demonstrates what's been happening with profitability that has clearly improved in North America over the last several years. I talked in great depth about how we've achieved improvement in new equipment profitability through pricing excellence and a recovery and also through how we set up the sales force to focus on price with a balance on gaining share.
And I've also talked about the investments we made in project management and productivity in our crews. So it's really been a multiyear focus on pricing excellence. And as a result, by good pricing, better project management, better estimating and better field productivity, we've created operational leverage in the business. So what I mean by that is that our sales are growing at double digits, our profit is growing at a multitude of sales. So we're leveraging very, very well on sales and profitable growth.
So that's creating good operational leverage for us. So orders are growing, sales are growing and then we're already our profit is growing at a multitude of those sales numbers. And then last, the technology and process driven productivity is occurring in all three businesses. So we've been investing in productivity through a combination of both field automation tools, but also process tools. So we use a lot of lean to make our business more proactive or more productive.
And so that provides you a demonstration that what Henrik showed and that is that overall KONE is having a broad participation of its units on how it's delivering its EBITDA growth. And I'm just telling you that E and A or North America has also been a positive contributor to that growth. But it's not just about growth and delivering the bottom line. At the same time, we've been investing in our people and most importantly and also our innovation capabilities. So we talked about innovation centers and we have opened an innovation center in Allen that's part of our global network so we customize and leverage innovations in North America to meet customer needs.
So in 2016 that is now open. It's a center of excellence. It's in Allen, Texas. It houses R and D, engineering, manufacturing, logistics and customer centers to co develop or collaborate on projects. That will strengthen our capabilities with velocity and speed.
We'll be able to introduce improvements to our products very quickly because we have test towers there, engineering and field support altogether. We'll also be able to innovate and bring new products to market quicker because of the capability and the presence of where it is in North America. At the end of the day, it's our people that make KONA great. And we've been investing in our people now for several, several years and we'll continue to do so. And our investments are in a couple of areas.
We've really besides the investments that we made in project management, we've been investing in upgrading our people skill sets and capabilities. In 2016 versus 2015, we'll increase our web based training by over 30%. We'll also I'm sorry, that's over we're going to double that this year, take that back. We're doubling our web based training this year. Our face to face training is increasing by 30% and our field safety training is increasing by 75%.
So we're using a balance between web based training and e learning with hands on training for service technicians for safety and then face to face training. We use a combination of all three because a balance is required to have effective training and we've invested in that and we continue to do so. As a result, we've been able to track talent, we've been able to develop it, and we've been able to retain it. So we have very good retention rates in our organization of our 6,000 people. And we've also substantially increased the depth of the management team, the experience with the combination of promotions internally and also with outside hires.
Long term growth drivers, let's just talk about a few. This supports the mega theme that growth centers are attracting more and more people. This chart shows that there's a cluster of cities where people are moving into and growth. If you look at that growth some of it's in high 10s, 15% growth. And in addition even the large cities are also having growth in the 5% area.
So it supports our theory of urbanization and the ability for us to help cities be smarter, help them flow better, modernize them because this trend is happening. The urbanization around North American cities is also continuing both in commercial construction, we see it in residential construction and we also see it in aging infrastructure. So we see a balance of trends of demand from companies moving in to changing living preferences to more colorful need or more demanding need for affordable apartments and then demand also to upgrade the infrastructure to support this migration. I also wanted to share with you that multifamily construction has developed strongly. So you've been patient waiting on that one slide that talked about household construction starts.
Let's break it down to a little bit better starts. If you look at 2016 or 2015, multifamily construction is almost back to an all time high. Single family construction has not recovered. There's a fundamental shift to multifamily construction in the United States due to a younger population getting out of school, not purchasing homes but actually moving into apartments, marrying later, moving and servicing debt from college later. So as a result, you'll see that multifamily construction developed strongly, which is an ideal sweet spot for KONE with respect to our product offering.
There's one other growth driver before I go into summarizing where we're heading with our business. There's one other growth driver that's occurring and that is in the area of innovation. The way that buildings are being designed, built and managed is changing in the United States. Architects are moving to a whole new level of modeling and design. That's through a combination of BIM modeling, which is building information modeling tools, which really combines 3 d modeling with all sorts of other business or building elements together including schedule, including specifications, drawings and allows architects to design buildings with less interference, less building construction problems earlier in the process and make them more productive.
We're participating there also by providing solutions that reduce schedule or provide schedule compression, new architectural toolboxes around BIM models. So the way that architects are working is fundamentally changing. They're more collaborative, more aligned and we're addressing those needs. Things like BIM and also Jumplift are allowing us to break that stagnation of productivity. Henrik illustrated how we can save money on trades moving by using higher speed elevators instead of outside hoists.
So we're seeing smart construction occur also. And then last, the area for innovation around service. With the proliferation of mobile technology, the IoT Economics, Cloud Based Computing and Analytics, it's changing the way buildings are being managed. And what I'd like to do is dive into that a little bit deeper before I finish my presentation. So we've been on a journey of smart growth over the last several years and we're going to continue that with high ambition and we're going to do that through both solutions and operations, continuing to invest in those areas.
In new equipment, we're focused on a broader holistic set of solutions in new construction. We're continuing our journey on operational excellence around delivery and installation productivity. I've demonstrated how we're starting to use advanced analytics to actually improve the service experience through remote monitoring and identifying the condition of equipment. We're further strengthening our modernization portfolio which I'm going to show you in a second. And then last, the core of all this is attracting investing great employees and making sure we enable digital technologies to help us be more innovative and improving the customer experience.
Here's the last slide about how we're bringing that to life. This is an example of how we're fundamentally changing the customer experience in lobbies. A new lobby or the modernization of lobby next door to a new building. And it's really a combination of first leveraging our core expertise around people flow, understanding how the building and lobby is actually being used, where the flow of people are coming in, how do you redesign that lobby to optimize people coming in, getting into their hotel quickly, getting into the lobby quickly, getting into their elevator quickly. So we optimize building traffic.
We also do that with improving the user experience And we also integrate more emerging technologies like access control, making sure people are going where they're supposed to go and making sure they go there at the right time. And then leveraging that technology in a reverse that says we need to evacuate how do we take advantage of the assets we have to get people out of the buildings more quickly. And then a quarter what we do is around eco efficiency. Putting these solutions together allow us to work early with other partners to create a greater brand experience and a greater customer experience in lobbies. So I'm going to wrap up here today and hopefully you've gotten at least some insight that we have a very high ambition in North America.
Our 2 core businesses, new equipment and services are both doing very, very well with good momentum. We're going to continue the rigor to how we run our business to grow faster than the market with a pricing focus. We're deep into operations. It's a core of what we do, but now we're changing how we collaborate earlier with customers to get into more value added solutions, not only new construction and major projects, but also in modernization. And we've demonstrated some examples today of how we can accelerate our growth in services and differentiation not only through new cloud based services but also through smarter building management offerings that leverage our core expertise around people flow.
So with that, I'm going to wrap up and thank you for your time and then open it up to some questions.
Thank you, Larry. Time for questions again. Let's take it from the back.
Yes, hi. Thank you. It's Andre from Credit Suisse. Could you talk about pricing and modernization and in service? How do you see that evolving over the next couple of years?
I can speak in generally how it's developed. Obviously, any rigid forecast would be done after it happens because pricing involves a lot of competitors. I would say that we've consistently stated that service maintenance pricing is extremely competitive and the it's probably the most competitive part of the business and that pricing will continue. We don't see that dynamic changing around competitive pricing and service. We've seen positive development in the net business in pricing in the markets in general in 2015 and we carried that momentum in 2016.
And so we'll see how it plays out, but we entered the market in 2016 very well. And then which is also positive not only has the modernization been a good area for us, but prices have developed positively in the modernization business and that has occurred both in traction and in hydro. So good positive price development in our markets.
Great. And just on hydro, obviously it's been shrinking. What do you think is the kind of fair share of hydro? It's not going to go down to 0, but do you think it deserves to be 10% of the market eventually?
I think as our technology evolves and becomes even more attractive, it will slowly move down. But there's going to be a class of very low story, 1, 2, 3 story buildings that kind of not sure if they really want an elevator, we'll still have elevators here and that will probably be a space where it settles at. We can do that calculation, but it's not going to go to 0. There's always going to be a set of small buildings that are just need an elevator out of a necessity, not out of a need, just mandatory.
And if you were to guess, would that be 5%, 10% or
I would hope so, because we don't participate in that market.
All right. Thank you.
Hi. Just a couple of questions in the back if I could. The multifamily cycle has been a clear case of new urbanization in the U. S. And it's been great for high rise buildings and new guys.
But you point out yourself that we've had 6 years and previous cycles have been of a comparable length. I know that there's been some nervousness about some of the Dodge and ABI data which bubbles around and maybe the U. S. Is just having a bit of pre Trump jitters, but do you see some signs as to where the new order market for equipment is going in 2017 2018? I know you have a backlog to deliver revenue, but how do you see that the new equipment order development All
we said was that the market is going to be a little bit more moderate which would be mid single digits. And I will say one thing about the market and it's just a market statement, it's not any forecast, is that the I hope I demonstrated today that the growth that's occurring over the last several years is in multiple segments and it's in all geographies. So as you start thinking about that to have a step function change that would be very difficult, the physics don't work. So I don't anticipate that would cause us to have a Trump moment, it's just not going to happen. So I think that we're more positive and we have a positive outlook of the U.
S. Market because of the long term growth drivers that we were able to demonstrate today. And they are not just in infrastructure, they're also in transit, they're also in stadiums, they're also in lodging. So it's a very, very broad growth that's occurring. So I'm a little bit positive and ambitious that we're going to continue to operate in a good environment.
And 2 more. I wonder if you could just remind us of the current split of residential versus non residential versus infrastructure as one question and then I'll give you the other. On the profit index that you show, I guess that's an EBIT development. Could you perhaps talk in terms of margin as to how the margin has developed?
Let me do the latter because the split between infrastructure and commercial and residential because it's blurred with the housing, I have to get that number for you. I cannot I can't pull that one out. And then the former question was around?
Just on the profit index where you show a number, I guess that relates to a dollar EBIT or a euro EBITDA?
I think the only thing I can tell you there because we don't break it up by business. What I will tell you is it's a really unique time at Kona right now that all businesses are actively participating in our EBITDA growth. And I can tell you that our percent of growth in North America is has been good year over year and it is also a strong contributor to that growth.
But in terms of the profitability margin, have you seen a particular development in one of the three areas?
Absolutely. Because the in 2012, we had pretty much of a downturn and the net margins collapsed. And those have now progressed back to acceptable levels that are consistent with our targets.
Are you saying you're back to where you used to be and so you're
I'm back to acceptable margins. I won't tell you what they are. Okay.
Thanks.
But yes, the recovery has been very, very strong for a multitude of reasons, which I've articulated.
Any more questions? Okay. Let's take it from there.
I'm Koos Henning from MN. I have a question on modernization. You say you're well positioned within that market in U. S. I was wondering in general if there are some sort of barriers to switch if there is Otis elevator inside or a KONE elevator, is there a barrier to switch to another brand?
And for example, costs or execution risk? And is there some sort of brand retention percentage in the markets or at KONI?
Retention of service customers?
Yes, within the modernization business.
Well, typically our best customers are service customers, right? So and doing proactively projects that improve their return on investment through modernization increases retention. And we see that because we work more cooperatively with them and we have a higher percentage of customers that will accept our proposals because we know their business better than anybody. With respect to modernization of competitive equipment, over 60% of our base right now in the U. S.
Is competitive equipment. So we proactively know how to modernize certain competitive gear and that may modernize with simple third party components, but we may upgrade it to more sophisticated destination control systems still using the core elevator as an opportunity. So I would say that since we've been very successful in modernization and more than half our base is competitive gear, we've demonstrated the marketplace that we can modernize and work effectively with 3rd party or OEM gears from other companies.
Thank
you. Was there a question in the front? Yes. Let's take it from here.
Thank you. Stephen Mitchell, Jupiter Asset Management. I mean you've concentrated a lot on the U. S. You've got 20% outside.
I was wondering whether you've mentioned Mexico, but I was wondering whether you say a bit more about Latin America and Canada
and ambitions there? Okay, good. The nice thing about the story today is that all three areas of North America are proactively participating and contributing to our results. So the positive news there versus the negative is I don't have any areas where I'm concerned about their performance. They've been actually positively contributing.
Obviously, Canada is growing at a smaller growth rate than North than United States and Mexico because of the environment that they're in. They're in low single digit growth rates there. But they run a very good business that has a good blend of major projects, service and also new equipment sales. So they have a very balanced business and it's run very well and their position is stronger than what's stated on the slides, their market position. If you look at Mexico, Mexico is a shining star for us.
I know I'm using a little colorful terminology there. But as a strategy, we invested 3 or 4 years ago seeing these trends. And so Mexico has also contributed to our double digit order growth in new equipment, our double digit order growth in service, which I haven't really said services, but they're growing at a much faster rate and they're doing it very well practicing smart growth. So they're delivering the results, it's not just getting orders. So they have accelerated their share position and they're now number 1 or number 2 leader depending on how you look at it.
But they are a leader in the marketplace in Mexico for us. And then as far as other geographies that we sell through, we do that through Mexico through distributors and that business is a healthy business for us with very, very good cash flow.
There's one on this.
Looking at these construction indicators in United States, I think one can say that looking back, the previous peak levels in 2,006, 2007 proved to be clearly overheated. Now we are back there. What makes you so confident that the positive development will continue?
I think it's a balance. It's doing 2 things. One is that it's been in multiple segments and multiple geographies. So we'll clearly watch those. So we're positive we're upbeat because we have a strong order book.
We're having good order pace this year. I can't say what that is. And tendering activity is good. But it's not being that we're going to be totally not watching leading indicators. And so in North America, as we see those leading indicators change, we will with great operational rigor change the way we run our business with respect to cost, with respect to targeting.
So we'll be flexible as we see when that occurs. But right now, I don't see anything until way past the markets in general into 2018. So I hate to speculate about something that's a couple of years out.
Any more questions for Larry? If not, thank you
very much.
I'd like to then invite Henrik back on stage. We'll have plenty of time for more of your questions to the whole of the team basically. Any more questions for Henrik or someone else? There's one.
Rickard, Messerhovenc. Can you share a little bit more information around the different three businesses in terms of their relative profitability to any of your peers? I'm trying to get the feeling for the potential upside.
From a global perspective, the good thing is that we run a good business in new equipment modernization and maintenance. I think it's clear as you know, we don't break down the margins between these, but it's clear that our maintenance business from a global perspective is our most profitable business. However, we run a very good business in new equipment as well. Actual modernization comes in the range comes 3rd if you take these 3 big businesses. So that's about the situation.
Okay. There's next one.
Yes. Yes. Guillermo from UBS. A question to you, Henrik, or to Bill. I wonder about the relationship between wage inflation and maintenance price in China.
So how do you translate wage inflation into the pricing for your maintenance contracts? Or if there's any relationship that you can apply in the contracts just to keep the margins at a high level since cost labor cost is the biggest component.
Thank you. Bill, do you want to talk about labor inflation and how we compensate that?
Sure. Many of our multiyear contracts, particularly on larger projects have indexes, so that we're able to increase the price over time to cover the increase in labor.
Please.
Hence part of the organic growth you're seeing hence part of the organic growth you're seeing is just basically that indexation to the wage inflation and not unit growth?
Correct.
Okay. Thank you.
Yes. A good thing, of course, in China is that the wage inflation has come down significantly from where it was just a couple of years ago. Okay.
There's one here in the front.
Thanks. This is Thomas Kogman. Capital deployment is always interesting in Kone when you have loads of cash, obviously. And we have understood they have been very interested in acquiring larger elevator companies the last years. What is new to me here today is to speak so much more about lobbies and Internet of Things and other things.
So are you really considering to spend bigger money on acquisitions also outside elevators now than you kind of thought 2, 3 years ago when you have not been able to close any larger acquisitions within your core operations?
You know what, our commitment we've made that we are in the People Flow business. That's our scope where we operate in. I think what both Larry and Tom here showed a little bit is what is the whole people for concept? How do we help to bring a total flow to buildings to make it better? Because you need to come a little bit out from the elevators to do that.
And that we've done very well with partners. Are there some areas we may acquire? I don't know. Let's see. But actually, we look for more partnerships and collaborations.
And we found very good such ones where it's a real win win, where we have people with very good knowledge in these areas and they're not necessarily playing in it that we can bring. So this is what we've done and I think that will be a lot of our approach. When it comes to acquisitions generally, as I said, if there are good targets out there that we believe will help grow our core business in a good way, then we're going to be very interested in that and something we or the smaller ones we do constantly a lot of.
And then I wonder about this IBM Corporation. Is that kind of exclusive so they cannot work with other companies in this industry, but they can use what they learn here in other industries or how this will work and how will you kind of avoid that the same happens in these industries and other industries that the value suddenly disappears to the IT company.
Exclusive relationship we have with them. We are a customer of theirs. But I think we are someone who they focus a lot on. As Tomio said that there are a lot of resources from them working with us, data scientists, experts who can help us because they see it on a I mean, they are I would claim they are the leader if you look at IoT more broadly. So they can also help us what they see in other industries, how we can apply it for us.
But it's not exclusive. And I think in the end, as I mentioned, that technology in itself, you can go to one of the vendors and you can get the technology. It is how we create the value for our customers. There's something better for them. And that is where we have spent an enormous amount of effort.
Yes, we have partnered. We looked at technology. That is something is out there and we can deliver. But how do you create value? That's where, as I mentioned, I'm very encouraged by the results we have, where we see the impact to our customers, how we drive customer satisfaction, retention and also pricing.
So I'm positive on this, but it's not an exclusive relationship, no.
And then finally, I mean, you highlighted early on that you have several kind of EBIT burdeners going to next year. Do you have kind of any fast cost cuttings that you could if orders would be a bit weak in the second half to kind of secure continued EBIT growth. We have many, many years of EBIT growth in the history. So do you have anything that you could work quickly on with costs?
We are naturally have always been working on our efficiency and productivity. Productivity comes from improving quality, and that is something we've been working all the time on. If you actually look at, yes, orders here come down because of the market in China being challenging. But still in a difficult market, we performed well, as I think Bill showed. But if you think about all of our other markets, all of other geographies are actually growing.
So I don't see a case to start to pull the handbrake here. We have actually we are growing our business in a good way in most places. And we see that the reason we are accelerating the investments is that we see good benefits from them.
Okay. Let's take a question from there.
Yes. Daniel from MainFirst. Brief clarification question on the 20 basis points you indicated for R and D and the 20 basis points for IT and Processes. Is that all going to be expensed? Or is a portion of it capitalized?
Just for clarification, whether this is the P and L impact you have been referring to.
Yes. As you know at that or basically at this point, we capitalized very small part of our development expenditures actually. This is something we expense and something we've done. Even if you capitalize something at some point, you will see it. So this is the approach we have taken.
Okay. Let's take here from the middle.
Yes. Hi. Just the end game behind the fierce competition that we've seen in China is literally the maintenance potential there. Shall we be worried about the levels of margins on maintenance in China going forward? I mean, whenever there is a region where pricing new equipment for an extended period of time, it tends to spread into the aftermarket business.
How should we think about margins on aftermarket in China?
If a little bit perspective on what you're saying is where we have seen strong competition on the service side on prices and actually pressure on service margins have been in places where you have had a prolonged weakness in the new equipment market and therefore, really no growth or stable service markets. But actually, if you look at the China service market, it is growing at very good rates. So there is space to grow. And I believe if we can constantly Bill talked about it that at the moment, we are expanding our operations. In the big cities, we start to get more leverage.
But as we expand, over time, we will also get more leverage in operation. And it's clear, any industrial business, we need to be all the time more productive show better value to our customers. That's something we need to do. I think, Bill, you had something.
I was going to add that our customers are we talked about the top 100 developers. That's a significant part of our growth working with them. And so as they want to hire maintenance companies, they're willing to be find value for the kind of OEM service that we provide. So I would say on that regard, we're allowed it gives us greater flexibility to work with a knowledgeable customer that's trying to protect their own brand and they're willing to accept higher prices in that regard. Okay.
And then secondly on I mean people flow is also about control and that's something that have been mentioned numerous times today. I think you have a small automatic door business that you bought a couple of years ago. What's the plan there? Are you willing to bulk it up?
Well, it's not we bought some additional parts of that. We have had it for a long period of time. It is not a big part of revenues, but in some European countries, it's quite a significant business for us. And it, again, helps in this when we work on stadiums, for example, we can do the whole people flow of them. So that is where it plays a role.
But we have quite a focused strategy in that business.
Maybe I can ask about 3 more markets, if I may. Yes. Could you comment a bit on the U. K. Situation, if there's any kind of quoting sensitivity regarding Brexit at all?
Also Middle East, which we hear that some of the tendering activity has been a little bit more muted. And similarly, I don't know what how big is Turkey out of your revenues. I guess it's very small, but also comments around that will be helpful. Thank you.
Okay. Let's start with the U. K. And if we look at the U. K.
Situation at the moment, actually, on standard residential construction, it seems to continue at pretty good rate because United Kingdom has a chronic shortage of apartments. So that is something that is needed. And they are the big cities who continue to draw people. It's clear when you look at the City of London, clearly, big commercial projects, we can see that a lot of people are taking a little bit of time out to see what is happening. But clearly, the largest market is the residential market, standard residential market.
And there, the customers I also have spoken to there are reasonably confident and continue to push forward. So that's on the U. K. But I think we have to wait and see. I mean, I don't think anyone else can make a prediction what it really is going to mean or at least we can't.
Then Middle East. Here, you continue to have a pretty good situation in countries such as U. A. E, Qatar and these countries. But then perhaps Saudi is a little bit that's a more challenging market at the moment.
But overall, markets have remained rather active there. And in Turkey, a market that has been very active, has been a great growth market for us for the past years. It's clear that the uncertainty is there now. And if you look at Turkey, there have been many different growth avenues. One very attractive growth has been tourism.
That clearly has been hit and we can see some hesitation there. On residential side, also there, we have a shortage of apartments, a young growing population. So there is perhaps a little bit better momentum. But it's clear that in a situation like the one we're seeing there, there is uncertainty. There's no question about that and a little bit hesitation.
Let's take from the back on this side.
Good morning. Chris Bordain from Handelsbanken. I was wondering if you've ever given out info on churn rates for service contracts and in the different regions and what you view as sort of normal or do you think you can make progress in that area? Do you think it's too high in some areas that you could improve? Or is it at acceptable levels?
The way we look at it is retention rates, which is, of course, same thing. But so retention rates in European countries are usually 95 ish percent. In some countries, they're going to go down closer to 90%. But they are pretty solid. And that is clearly an area that we're working on.
As I mentioned, one of the challenges, I think, overall in our business our industry has been in I would say, particularly South European market has been challenging, has been what we call competition balance, that how many units you win and you lose in the market. And there has been a lot of competition. The reason we've been able to significantly improve that is how we have worked on retention, understanding more deeply what our customers value, what they need, how we service them. And therefore, we can drive up our retention rates. So it's clearly an important focus area for us.
And clearly, retention rate shows a lot also about your how your customers view you.
Okay. Maybe time for 2 more questions. Let's take here first.
Manu Rimpela, Norde Markets. Can you maybe help us to think about the raw material headwind you mentioned for this year? Have you quantified how much you, for instance, gained the tailwind over the last couple of years? Or how should we think about it going into 'seventeen? And assuming that maybe we see cost inflation going on for many years now.
So we haven't quantified it exactly. We have put it in perspective here that, as mentioned, in a highly competitive market, the biggest new equipment market in the world, we have been able to overall continuously improve our competitiveness and our product cost. That's been because of design changes, because of sourcing actions, how we work with our suppliers and also raw material. Our customers know very well what's happening in raw material. So that tends to then go quite clearly into the price.
So therefore, is there a benefit or not? I think it's difficult to say what the impact is. However, the situation we see now that, that tailwind from raw material perspective, at least for the moment, is over. And actually, we see a little bit we see some headwind here. And therefore, we need to naturally work also on pricing and make sure that we can do the opposite of what's happening in the past years.
Where raw material is going to be next year, I don't know. But it's clear that if we look just now, then situation is a headwind. It is not huge, but we still talk about something that has an impact. Okay.
And then a second question is just on Europe. So you showed the fairly upbeat growth forecast from Euroconstruct on the construction outlook. And I mean, are you seeing anything in your business that would already kind of start indicating towards that, that you are starting to see the new equipment business in Europe picking up. I mean, sure, there are big differences on a countrywide basis, but if you just like try to think about it in aggregate level, has there been a change in the last 12 to 18 months compared to today, for instance?
I would say the answer is yes. From us, about a year ago, we started a bit more positive on the European market. And both second half of last year and this year, we actually have grown quite well in our new equipment business in Europe. So we've clearly seen that it's been more driven so far by Germany, U. K, perhaps the Nordic countries, but we can see that spreading and that we're seeing.
We're not talking about huge growth rates, but at least we're looking at most countries are going in the right direction.
Okay. And last one from the back.
Hi. Could I ask a question about free cash flow conversion?
Yes. If we look over
the last 4 years, I think it's been a pretty impressive number 130%, 140%. I think your free cash flow was down 20%, 30% in the first half. I wonder if you could help us think a little bit about the conversion this year and the next couple of years. And will it be more like 100% or even below that as the advances absorb into work in progress?
This year, we have grown our cash flow from operations. First half of the year, we're up year on year, and that is good. Our improvement in our working capital wasn't quite as large as it was a year ago. But it was something we discussed here earlier that it is clear that in a model that we have where we have negative working capital, their growth is important. And one but not the only one of the drivers of the improvement constant improvement in working capital has been that the difference between advanced payments and work in progress has expanded.
Now why is it expanded? It's expanded because we improved in all geographic areas. And then also, it's expanded because where you have the biggest difference between those are in developing markets and those have grown faster than others. So it's been both a mix and a fundamental improvement. The fundamental improvement, I think, we can continue, but this mix clearly is a little bit more challenging right now.
So our objective is continue to drive a good cash flow. And therefore, we may look at have to look at some slightly different areas. I said inventory rotations, you look at your receivables and so forth to continue driving good cash flow. So I can't give you a forecast on our cash flow, but our ambition is to continue have a good one. And I would say that the first half of this year, obviously, all last 12 months, when we know that our new equipment market overall has been clearly more challenging than it's been in any of the past years, we still have had driven a good cash flow based on how we manage the business.
But we've gone in 2,009, roughly, we went from about 0 to now minus €1,000,000,000 a slower growth environment, it's clearly difficult to improve it at that rate. That's clear.
Okay. Thank you very much for your questions. Maybe Henrik, now it's time to conclude.
Okay. Just a few words to wrap up today and then we can, of course, continue discussion over lunch and at the site visit we're going to. But I hope you've seen today that what we set out to do in 2014 when we introduced the current development programs is to drive a more broad based growth, a more broad based performance in, I would say, every aspect that actually we are delivering on that. And that is something that has been very important. I mean, it hasn't come to us as a surprise that the very significant the large Chinese market that is important, a great market for us, that is clearly more challenging now than it's been in the past years.
So we are well prepared for that, and I think we are in a good shape. I think you have also been able to see that when we have good markets and we put focus on them, we can drive a very good performance like we have had in North America over the past years. When I think about our industry and our business, A lot of you ask that, hey, what is the growth profile of your business and what's happening to growth? Still, I hope you've seen that we remain in a growth industry. Although, where growth is coming from, both geographically and from businesses, they are slightly different than we've been in the past years.
So more of the growth will come from services over the coming years and from slightly different geographies. But that's okay. When markets change, again, it gives you an opportunity to differentiate in a new way and that is what we are determined to do. And because of what the changes we see in the market and also because of the very encouraging results we have from a lot of customer pilots, And I mean, some of these, I wouldn't call them pilots anymore because we are doing it quite broadly. And when we bring our new service concepts, new ways of working for our with our customers, truly bringing value to them because we see the benefits of them, that's why we have decided to accelerate our investments in technology, in R and D and in connectivity.
Yes, that will have some impact on our result over the coming years. But because we see the great benefit, we think this makes a lot of sense to do. So while the markets are more challenging than they have been for us, we still think it's a hugely exciting time to be in this business because we can see that there are a lot of positive changes are happening and we can see we can play a bigger and important role with our customers. When we do that, what we say at KONE, when we win with our customers, then I'm convinced we can continue our longer term good performance. So with that, I would like to thank you for your attention, for your active questions and participations and also thank everyone who is online.
I understand we have quite a large group of people who have been following this also by webcast. So thank you also for your interest. And with this, I close this meeting and happy to continue discussions over lunch. Thank you.