Thank you, Sanna, and also a great welcome on my behalf to all of you. It is 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 will be talking today, we have made good progress in that respect. We can also see that our market environment, and also we can say the technology and business environment, is changing quite rapidly. 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. At KONE, we actually think that change in the market environment is a good thing.
Changing 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. That I believe we know how to do at KONE. During this opening session, I will be talking about our performance. I will be talking also about what is 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. Before I go into that, I thought that 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 two examples I want to talk about, both of which I know personally quite well, and something I have been involved in when we have been working with our customers. One is a project called District 8 in Jakarta, Indonesia. It is the most prestigious development going on in Indonesia at the moment, a very significant development. The other one is China Zun. It will be the highest tower in Beijing, really a new landmark for Beijing. It is clear that competition for projects like this is always significant. The approach we took here with both customers is rather than to tell them 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.
Very prestigious buildings that had to be finished soon, because District 8 was sold out immediately when it was planned. We worked with them. We actually worked earlier on with traffic analysis to help them. What are the solutions? How many elevators, escalators do you need? Actually, in 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 had put in KONE JumpLift. KONE JumpLift is a unique solution where our elevator goes up as the building gets built. We can have an elevator during the construction time.
In this Chinese project, our customer has publicly even said that they believe that they will save more than 1 million hours of constructing time because of the solutions we helped them do. They get faster finished, and they can faster start earning rents. That is great. Of course, we worked 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. Both of these, therefore, have many of our solutions. The whole approach with this was, what are the challenges? How do we meet them? Therefore, we have two customers who we work very closely with. This perhaps shows more how we want to work and the approach we're taking with all of our customers to provide value to them.
I'm happy to say that both of these projects are progressing very well. I visited one of them very recently, both us and the builder are ahead of schedule, that is a good thing. That is what we call our approach to work with customers, that how are we winning with our customers? If our customers win, we're going to be able to have a good business. That is the approach we have at KONE. Let me start first 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 have declined slightly because of the challenging situation in China. Despite this, we have a strong order book. Gives us good situation going forward.
We have continued to grow our top line. The most important thing with our growth is that it has continued to be profitable. We have improved our margin from 13.8% to 14.2%. 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, that, of course, one can see from cash flow. 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, we can see good progress with many of these. You will hear, for example, Larry talking about what we've done in North America. Our growth in our maintenance and modernization business has been good. Solid continued growth in maintenance and clear acceleration in our modernization business. Overall, the performance has been strong and broad-based. It's not only, of course, these first six 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 five years or so.
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. 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 would be a more challenging situation in the important Chinese market. This we have done, and we have had good broad-based development, and we can see that that has a good impact. 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.
When we look at our growth over the past years, it's clear that Asia-Pacific has been a significant growth driver. Compound 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. It's not only one area we have grown, it's been actually a broad-based growth. The same thing is if we look by business, that it's clear that new equipment has been the most significant growing business. Because of our good growth in new equipment, we have been able to drive a good growth also in our services business. We can see that whether we look at geographically or by business, growth has been good and broad-based.
The way we at KONE measure our performance and measure our success, that's against our five strategic targets. Our five strategic targets, we believe that if we develop constantly towards this, then we're building a stronger company. Our five strategic targets, they also should be very familiar. The first one is to have the most loyal customers. Here we can see over the past years, we have strongly improved our customer loyalty. We had a very significant improvement in both 2014 and 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 continuously drive our performance and improving our business. We can see also here, constantly improved our 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. In each of the past years, we have grown our market share in new equipment by about one percentage point. Also what I don't show here, but we have also grown our market share in services. We have grown faster in our market. 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. 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.
Finally, we want to be the leader in sustainability. It 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. Here we can also see that we have made good progress over the past years. 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. If we 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 first 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 True 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. I'm happy to say that last year 94% of all KONE employees had a documented personalized individual development plan with actions how that person needs to be trained. This is how we help every KONE employee to perform at their best. It is 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 products and solutions to our customers that meet their needs. An example of this is about a year and a half ago, we launched our new product family in India. 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.
We brought them the KONE I Mono to help them improve the value of their buildings and the lifetime performance of their buildings. The reception from our customers has been great. 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. Actually, we have quite broad-based pilots going on, because we also want to see and work with our customers on what is it they really value. When we understand what that is, then we push the accelerator.
In our top modernization provider, a much better proactive approach has led to good results. I would say again, the systematic and structured development we have is something that works for us. 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 an improved dividend. While this is quite a long period of time, I must say I do like it. We can say that since 1980, we have compounded our dividends at 15%. 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. 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. 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 EUR 1.25 billion-EUR 1.33 billion, and that's based on the translation exchange rates of the first half of the year. No change there. 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. What is then, we can say, boosting or driving our performance? It's our continuously improved competitiveness. That is helping us, we can see that we're executing on this.
Our operating performance, when we look at it's more broad based than it has been in the past years. This is clearly important to us. 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. 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. We see good results in our new concepts, new developments, we are accelerating our investments in R&D, in technology overall, 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 is a clear headwind for us. Currently, translation exchange rates are a clear headwind to us compared to last year. Where will they be end of this year? I don't know. We can see, but that's the current picture. 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. 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.
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. 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 the Chinese market is very significant, there is a lot of growth opportunities in other markets. The 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% and 10% this year. 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. Overall, that will be continuously a challenging market from that perspective. 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, if we look at the whole real estate market, is demand. Demand is there. The challenge with the market is that there 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. As I said, I don't think we have a demand problem because inventories are coming down constantly. Not very fast, but they're constantly coming down. 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 we then look at our services business, maintenance is growing in all geographic regions.
It's clear slower in the Western world, continued strong growth overall in Asia-Pacific, that's great. Modernization is actually growing in all parts of the world. That's a positive picture. Why 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. 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. Here we can see that is where we see a significant growth. Actually, we can say that the quality of urbanization is going up. 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. Both, yes, urbanization is happening, but we can say that the quality of urbanization is constantly improving and that is driving the demand. This is a very strong force that is happening. This is on Asia-Pacific. If we 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 you look at this in combination with population growth, that means that in the next 15 years, there will be nine million more single person households in France than there are today. Think about what that means from a need for residential apartments. The same figure for the U.K. is 10 million more single person households. This is what we see everywhere in the world. Even maybe some of you who came here to Helsinki saw that there are actually a lot of cranes in this city. What is happening here?
Even here, there is an acute shortage of small apartments, while there's plenty of houses around in the periphery. This is what we see and why we continue to be very confident of our market also in Europe, Middle East, and Africa, and North America over the long term. We just took as an example here the population growth we see in some of the big population centers Larry Wash will actually show a little bit more perspective on the U.S., and it's amazing. Big population centers are drawing in people. People want to live close to the services. Also, aging population need better services. This is a very strong trend. Also we can see that buildings are aging.
When we look at this is actually a map that when we drew it ourself, I was like, "Wow, what a change." This is construction output expectation for next year in Europe. 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 multi-year declines in many of these markets. 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. This is actually, I think, quite an interesting picture to say that, "Hey, even things are happening in Europe." Larry will talk much more about North America, what's happening there.
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. If you look at this market outlook I talked about and put it in perspective of KONE's business. We can see that where we are right now is a little bit over two-thirds 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. You can see that, hey, it's actually quite a good picture, that two-thirds we have growth opportunities in. Just to little bit take it in perspective in how it relates to KONE. That's the market. How are we developing KONE in this environment?
This is perhaps important point to understand how are we going to continue develop KONE we can succeed in the future. 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 million 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.
Because of technology, our consumers and our customers and users much better aware. They demand much more from us. We can see that is what is driving the change, is when our customers and users see ability to get new experiences from technology. This is a very significant driver. 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. We identified six needs, which sets a 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. This has been clearly a success in China, affordable vertical housing. That will continue and be a success for us. Cities need safe, reliable, and efficient infrastructure. You 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. 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. Here we are already today, the most energy efficient company in our industry, and will we continue to develop here. Growing and building intelligence.
Buildings getting more crowded. They need to be much better managed. 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. 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. These are the ones that we see the needs and help us drive our development. 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. This has been important to us. We articulated what is our purpose as a company, our mission.
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 journeys 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? This is definitely helping us, again, drive the enthusiasm within KONE. We have our vision that we have had already for many years, that we deliver the best People Flow experience. 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. We look at connectivity technologies, all that. Everyone can have that. That's not the differentiator. Differentiator is to understand what is really needed from our customers and users, and then we develop technology to meet those needs. 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 to drive the change here. Our positions in new equipment market has never been stronger, with the market leader in the world's largest market, China, and with the market leader also in Asia-Pacific, outside of China. Strong positions Europe, Middle East, and Africa, and clearly strengthened position in North America. This is a very good situation to go from. Clearly, we are the challenger in the maintenance business.
If you look at the position we have in new equipment, I don't think anyone else has as a good opportunity to grow the services business because of strengths we have in new equipment. We have a good position. I'm also happy to say that what we've been talking about in the past years, CMD two 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?" 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. Why have we been able to grow our modernization business? What are we doing?
Again, much better insight into what is the condition of equipment, what are needs of our customers, we can provide solutions that are relevant for them, we can also target the relevant opportunities. We can be focused to provide better value to our customers, therefore react faster, and also in a more proactive way. 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.
If you remember what I said when we talked about this picture was that KONE's performance over the past five, 10 years has been strong to a large extent because we have been able to differentiate in a strong way, in our industry, particularly new equipment. 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. This is our concept, how we are developing differentiation. It all starts from having much better understanding of the needs of our customers. 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 the specific needs of these customers.
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. As I said, we have pilots now in a few countries going on in Europe, the results are very encouraging. It's not only talk, we're actually doing this. 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.
We have over the past years, rolled out a new generation of field devices for our people to help this, of course, worked on our totally integrated system, and also much better diagnostics of what's happening in the equipment. Also here, more so a lot of pilots going on 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. Next one, delivering our promise. What I think is one of the most fundamental things in a service business is that you need to have a promise, if you don't show your customer you're delivering the promise, they probably don't see it. 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. 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. 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. That's not the important part, it's what we deliver to them.
In order to be able to deliver on this, and because we see the encouraging results of what we're doing, and actually quite broad-based pilots around the world at the moment, we have decided that we are accelerating our investments both in R&D, in technology, and also in rolling out connectivity more broadly. What are we doing on this front? 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. 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 the People Flow.
Naturally, we need to connect our equipment. Connecting equipment is really, I would say, a platform and a need to do all of this. That's to be able to do our services based on specific needs. There's equipment and diagnostics to react faster in a better way. 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, IBM's Watson IoT platform is hugely important, and the cognitive analytics that come with it. Very, very important. What we are intending to do over the next four years, we are going to connect more than an additional 1 million 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 challenging, it's how do you make sure you really provide value to your customers. This is what we've been focused on. With all of this is to be able to provide the infrastructure 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, that's why we are developing this. Again, the reason we have decided to accelerate our investments in both R&D technology and connectivity is because we see that the value we can bring to our customers are great, and we see very encouraging results. This is something we have decided that we will do. What about then the new equipment business?
Here, as I explained to you in the examples up front, 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 life cycle 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. 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.
Of course, what we are already known for is the life cycle value we can provide to our customers. It's about going throughout the life cycle. That's why I say a 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 on the service side, same concept here. 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. 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.
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. That has been our approach over the past years, that where markets are growing, that's where we are focusing on also driving growth. Again, as you will see later on today, that is what we're doing in many places. 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. That is what technology can do.
If you 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. 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. With that, I think we now have good time for questions. I think there are some microphones also going around.
Yeah. Please wait for the microphone, then state your name and the company before asking the question.
I think we have the first one here.
Good morning, Henrik. Good morning, Sanna. Guillermo Peigneux From UBS. I miss a little bit of strategy around M&A within the current market conditions, maybe a follow-up on that will be your investments in R&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 be all expensed?
Okay.
Some kind of guideline around that. Thank you.
Was it both M&A and how much we're actually investing in this new technology? To give a perspective, our R&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&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. That's about the magnitude of it. When we're driving out this connectivity and bring it to our customers, there are going to be different business models how we do it. 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 will show up as a CapEx type of item for us. That's where we think that the biggest value we can provide is. There will be different models how we do it, but I would think that would be the prevalent one. I think that model is probably going to live throughout the coming years. I think we had Antti here.
M&A.
Oh, sorry, M&A.
Yes.
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 two companies a month, but they are small. We would be very interested to find something larger as well. As always, you need to find Usually it makes sense to have a willing seller when you have a willing buyer, and that is perhaps where the challenge has been. Yes, interest is there. Antti.
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. How is that possible?
Our full year guidance for next year will come in January with our full year result. What 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 competitive. Intense competition continue. 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 2014, 2015. Now we have had a year of improvement. Actually, what is the delay? How does it come through? I think an important one is to see a total real estate investment. We continue to see this as the outlook that overall quite challenging. The 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's going to be. I think it would be way too easy for all of us otherwise. 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. 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. We don't have one thing we look at that will determine how the future's going to look like. I think we have Manu here, yeah.
Manu Rimpelä, Nordea Markets. You mentioned the step-up in R&D that you are planning to do. I'm just trying to understand that. Is that driven by your competitors stepping up their investment as well, or is it more actually purely customers demanding these products and there are no products at the moment, so you're at the forefront of the development here? Also adding to that question that, are you able to monetize all of these investments that you're putting in, connecting all the 1 million equipment over the coming years, and are the customers willing to pay for it, or is that 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. We say, "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. Clearly, competition is intense. In all industries, everyone is trying to race and see how do you find better value to your customers all the time. I think this competition, that's great. Our customers get better value. We need to run a bit faster. Clearly competition is there, but I would say it's because of the results we start to see, we are accelerating this.
When it comes to connectivity, what is important here is to, again, understand what is the value you can provide with it. That's where we have been working a lot on that. The basic to connect elevators or escalators, and 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. When you do the right thing, then it will value our customers and I think, yes, you have a good business model. That's what we are principally focused on. There are many different concepts going on and what we really want, I think we will have to see. Things are moving so fast. I don't think anyone has the silver bullet here.
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 James Andrew there.
Morning, everyone. Morning, Henrik. You've been very clear about China being the only decline area in the group. I understand you have an amazing service business. I'm conscious I'm always asking about the negatives. 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 volume's 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. 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? Those are the first two questions.
Let's take two at a time.
Okay.
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 is growing at a very good rate, our services business, and we're doing very well there. It's the new equipment business that is more challenging. You said, how do we see going to next year, price? As always, we can't predict what price will be going forward. That's a individual negotiation between us and our customers. Of course, we are working on providing value to them and pricing 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. Hopefully this gives a flavor of how.
On the mix?
Mix. There are different things happening in mix at the moment. Clearly growing in our maintenance business is a good thing. 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 from a mix perspective.
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 would be great. In terms of the direction of travel next year, do you think it will be flat or down? Do you think the volume mix and price pressures that you face can be passed on to your suppliers? Do you think you're going to have to wear some of them?
Well, let me give you a little bit perspective and Bill will give you much more insight to this, he of course, much closer to the situation. This year, as we remember, that our orders received in Q2 and first half of the year were down about in mid-teens. That came from three different areas. Volume, Q2 about 5%, then we can say, these are now, again, very rough figures, about 5-ish% also from price and 5-ish% from customers selecting, I would say, the more value products, lower specification products, so a mix change from that perspective. 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. This is 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 two 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. Also thirdly, we have had a tailwind from raw materials. Raw materials has probably been the smallest of these three, but it's been a clear contributor.
If we look at just now, where raw material is going to be next year, I don't know, I'm not going to make a prediction on that. Just right now, we're looking instead at the slight headwind on that. Yes, we have on all the other actions, we're doing well, but raw material is probably a little bit more challenging than they were earlier. Hopefully this gives a picture of where we are going today, exactly what happens next year, I think you have to wait till January for us to give you that clear insight again.
There was another.
I think that's right there. Yeah.
That's great. Thank you. 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?
Now when you say services markets, it's clear what has accelerated has been, in our business, modernization.
Right.
In maintenance, we have been able to continue in the I would say, if you look at the past three years, our organic growth has been higher than it was before that, and we have been able to compound that a little bit over 6%, which I think for a maintenance business is a good rate. Clearly our ambition on the maintenance side is to continue our solid growth. Whatever that rate is, we have to see, but continued solid growth. We see a lot of good opportunities there because of the strength we have in new equipment through conversions. You know how many units we convert every year. It's growing at a good rate. Also, we have improved constantly our what we call our competition balance. How many units we win in the market versus we lose.
Which is still slightly negative, but a clear improvement from where we have been in the past. I think we're going in the right direction there, and we can see the actions we have taken are good ones. Where we see an acceleration is modernization. There, I said, I think we've done pretty well, and our ambition in all of this is to continue to grow faster than the market. That's the ambition level.
Got it. Can I ask, on those pilots that you've been running on modular maintenance, would your average revenue per shaft be going up or down as a result of modular maintenance and allowing customers to pick 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 a pretty large scale as pilots, but we are still learning. As I said, sometimes it may not be a problem if revenue comes a bit down, if your scope is also lower. I think that there's more variety on scope. I would say that overall results are quite encouraging.
Great. Thank you.
Thank you.
There was one there.
Yeah.
Good morning.
Morning.
Daniel from MainFirst. 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 varies a lot market to market. In many European markets, a lot of this, you put in elevators into older buildings to provide accessibility to them. That's still globally, look, it's not one of the biggest businesses. I would say it's a combination of full replacements, modernizations, components. It actually depends very much on market to market, what you do, and there is a broad mix of it. 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.
Have you made your offering more competitive in terms of pricing recently?
I would say that 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. 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?
North America. North America is a very big modernization market. It's clear that Asia is still a much smaller modernization market because the age of equipment is much younger. 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.
Lastly, on net working capital terms. You said long term, you would like to improve the terms. 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? Thank you.
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. 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. 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.
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. Ambition is definitely there to continue to drive a strong cash flow. On the other hand, I would say that over the past five to six years, the improvement we have had in our working capital each year has been very strong. 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, everyone. All right, good morning, or shall I say [Foreign language] 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. I'm going to talk about some of the individual 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. I will first talk about how certain innovations have played very important role in our growth story. Then we will talk about how elevators have got smarter along the way. 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 that time, 15 years ago. Although there was a speculation already that whether China is going to pass Japan because of the fast urbanization. We couldn't imagine that China would eventually become 15 times larger market than 15 years ago. 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 seven times higher than 15 years ago. We do have well above one million units in our service base. I also checked how many website we had in 2001. We had actually only nine external website in different part of the world.
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. It's really part of normal daily business today. A lot has happened in these times. By the way, you might be wondering why I was in Japan. We were working with our alliance partner, Toshiba Elevator, and we started actually R&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.
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 machine- room-less elevator boom. It was driven by KONE MonoSpace innovation, which was in the full swing in Europe and it was a really fantastic innovation because it was customer-focused innovation. It was creating big value for customer, flexibility, architectural freedom, elimination of machine room. We saw traditional hydraulic elevators market, which was quickly replaced by this new technology. Of course, there was underlying EcoDisc motor technology which was really playing crucial role in this innovation. In the end of the day, it was all about the value for customer. It is amazing to see, and you seldom actually see how market can change so quickly because of the technological disruption.
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. Pretty soon we realized that, and it was partially true, but pretty soon we realized that in fact, the volumes were more in the mid to high-rise residential buildings where a customer build the machine room anyway. 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 machine room elevator, MiniSpace. It was pretty much using the same MonoSpace components, but it was much more energy efficient compared to the traditional elevators. 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 MiniSpace in China. When we launch our new company vision in 2007, which is deliver best People Flow experience, we started to pay more attention to things which are improving user experience, things like ride comfort. In fact, KONE was the first company which started to measure the ride comfort systematically before every single handover of the elevator to a customer. We actually developed 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.
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. That was pretty cool. We did also everything to cut energy efficiency, energy consumption of elevators. We reduced the energy consumption nearly by 88% of MonoSpace, and the MonoSpace which was already game changer in eco-efficiency when it was launched in 1996. 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 design team in R&D. We hire excellent industrial designers and service designers, usability experts, and they started to build a new KONE visual identity. We came with different kind of solutions and again, the reaction from market was really positive.
We actually received many design awards like Red Dot Design Awards, Good Design Awards in a competition against companies like BMW and so on. That was really nice. Our journey towards the sky took a giant leap when we launch UltraRope technology in 2013. This technology it was radical carbon fiber rope technology, which enabled doubling of the elevator travel up to one kilometer compared to the traditional steel ropes. This was really a core innovation, a bit like EcoDisc motor, which enables different kind of elevator applications in the future. The beauty of this innovation lays in the fact that we can actually use this technology in existing product platforms like a MiniSpace 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 the early phase of UltraRope story because we see more opportunities to utilize this technology in the wider range of our product portfolio. We have a good momentum. We have been winning increasingly major project which are based on this UltraRope technology in different part of the world. We are really excited about that. 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 six years in a row as the most innovative companies according to Forbes magazine. Actually, the only elevator company which has been constantly be in that ranking list. Let's face it, world is changing and we also want to change and we want to lead the change to new innovations.
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, long time ago, when microprocessors were introduced for elevators and escalators. Surprise, maybe KONE was the pioneer in this area. We were the company who bring this technology to the elevators and escalators. We were much smaller company than the big players at that time. During this phase of microprocessor, we also came with the first generation remote monitoring solutions, which already start to help our service business. The second phase of this journey was I think we can call it as age of artificial intelligence.
In that phase, 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. 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. That was really helpful for our maintenance business. Where we are today, I decided to use the picture, to give a better idea of what we have already today, currently, let's say, in the end of the second phase.
Let me walk through this slide. This is actually everything is what we are already selling to our customers. If I'm the user who is now entering into this building, of course I will first enter through KONE automatic building door. I will come to this beautiful building, beautiful lobby, which is very well organized. The whole layout is supporting the smooth People Flow thanks to our consultative planning services, which we are offering to our customers. I also see clear guidance and information. 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.
After that, I will go walk through the security turnstiles, which are provided by KONE, which will also automatically create the destination call and guide you to the right elevator. It's really a smooth and hassle-free People Flow journey. If I'm more regular user in this building, I have downloaded remote call application to my mobile phone, I'm making the elevator call using mobile phone because it's even more convenient. This is the experience with what we can offer today already. Smooth journey, minimizing waiting time, things which works. 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.
I guess it's fair to say that most of the innovations which I have been talking so far, they have been about things which are improving inside the elevator shaft. 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. Therefore, we move now to the third phase. Third phase is something where obviously elevators are not only connected as groups, but they're connected to the industrial internet. This is the future we are now living. It's not just about our equipment, but it's about all the other intelligence devices in the building, which are interacting in IoT. We are entering into the age of smart buildings.
Digitalization 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, where you usually go, and know what kind of information, what kind of news you are interested to read from the media screens during the elevator ride. That's something personal. The cognitive IoT which we are working with IBM, has a huge opportunity and potential to enrich personalized People Flow experience. There will be things which is difficult to imagine even today. Finally, we come to the third important point in the third phase, which is the age of smart building. 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. 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. There is a lot of opportunities there. We are living really exciting times, and I'm really lucky to be the part of this journey in KONE right now. This journey will make KONE also much more open in the way how we innovate. 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.
Before going to the changes, I still want to give a little better idea that what is the starting point we have here looking 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. 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. Reason is that we have more than 400,000 customers and we are serving more than 1 billion users every day.
The amount is big, most importantly, we are in the lifetime business. Our customer relationships can last decades, and that will create a very long digital footprint. That's why we have so much data already today in our hands. When we connect more and more equipment to the industrial internet, like Henrik already referred, the data will grow exponentially. That is really good news for KONE. It's good news also for many of our partners who can help us to create new digital services to our customers. One of the first change what we did in our innovation setup, was what we announced a year ago, was the setup of a new KONE technology and innovation function where we actually relocated R&D and IT under the 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&D people need to work together much more closely. We assigned 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. I, myself, I'm representing technology innovation function in executive board. I have been then maintaining very close dialogue with the senior management, and also making sure that we make decisions without any delay. I think one of my role has been also to bring people together from different parts of the organization really to improve the collaboration. These all are helping us to gain speed.
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&D locations and innovation centers needs to be very close to the key markets. 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. Empowerment will also create speed. We still have the largest R&D entity in Finland, but we are really expanding our R&D network in different parts of the world, really widening our innovation potential also in the future, and making sure that we are really having close dialogue with our customers, with the partners, which is really where innovations are happening.
Here are some of the latest expansions and development in our R&D network. I will explain some of them. 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&D activity in the largest elevator market in the world. In the mid of 2016, we expanded our R&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&D facility investments in Tuusula, Finland, which really upgrades our capabilities to develop super high-rise elevator technology. These are all important and necessary when we move forward and structural change is also important. 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 the 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&D. Well, it is important because 99.99% of the innovations are happening outside KONE. 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.
Based on our strategy, we have selected four partnership development categories and areas where we are focusing on. First area is technology partners, second is startups, third is 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. 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 widely and there's a lot of people from IBM working also in our facilities today. Once we build the platform where we need partners like IBM, then we can actually involve innovative startup companies who can build applications on top of it quickly.
We have already started to organize hackathon events and invite startup companies and I have to say that they're 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 the same customers we have. They're operating in the same smart building. Good example is Kaba. Kaba is a Swiss access control company, important partner for us. They have been helping us to develop KONE Access solutions, really enriching the People Flow experience. Finally, of course, the most important partner is the customer. Customers are facing digital transformation like we are facing and our role is to really help and participate in this journey.
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. 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. This is the last slide. I've been working now about less than one 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, we have many customer co-creation projects and pilots going on right now in different parts of the world. I think we are on the right track. If I summarize now briefly what were the key points of my presentation. 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. Then we are, let's say, moving out from the elevator shaft and looking at all the opportunities what we can find during the whole People Flow journey. 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. 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 are we seen by customers. How we are different compared to the rest. This is something I keep telling to R&D people all the time, and what is really the thing? What is really the value what we are creating for our customers? This is what we offer, and this will make KONE always as a challenger in the market. Thank you.
Thank you, Tomio. We now have time for maybe one or two questions and more then 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?
Yeah. 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 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. Obviously we are looking at all the opportunities, and we are building this capability where we are able to work with the partners, with being more open in the way how we innovate and be able to then come with the good innovations to the market.
There's 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 used 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 case 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. 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 some of the things, and how we can serve a customer better. This is one of the example where 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 pushouts on service or less service, that they actually get more control over the maintenance spend they make with you?
Yeah. I think one of the thing where I believe we have a great opportunity is actually that we are able to create better transparency to our customers. Actually we can demonstrate the value what we are already delivering. One of the big problem in the service business actually is that customer doesn't know what we are doing. 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.
Hi, it's Guillermo from UBS. Maybe a different way of asking kind of the same question, 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? What kind of metrics do you actually use to see whether that actually innovation is driving growth and profitability?
Yeah. 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 decisions. It is helping customers to make right decisions, the way how they manage the assets. We believe that there are many angles, many values what we have not even found yet. Yeah, I think it is too early to say that what is the relationship with the certain conversion rate and analytics. 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. Please be back here latest 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. I'm looking forward to presenting you today some of the progress that we've made over the last 12 months. 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. We're going to look at the growing opportunity in our service market, very exciting. 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.
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 600,000th unit from our factories in China. That would mean cumulatively from 1996 when we started our operation in China to the beginning of this year, we shipped more than 600,000 units of elevators and escalators. Very exciting milestone. I've got to tell you, we've got great velocity going forward, and I look forward to updating you when we hit the seven-figure milestone sometime in the near future. Trust me, I'll let you know.
When we look at 2015, our total share of KONE'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 two brands. As Henrik said earlier today, since 2010, we've had one point share gain each year, but he was too modest to say that last year, we also added 1.5. We did pretty well in 2015. In 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.
Just recently, I'm sure most of you have seen the announcement, we took the final share of GiantKONE, and now we have two wholly owned companies, two 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. We had it before, but we're going to continue it as two wholly owned shares. Let's take a look, though, at how we did in the first half of 2016. 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 first quarter, it was down 8%.
Our performance was slightly below that, roughly around 10%. By Q2, we moved back up in par with the market decline. 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, et cetera. So we've been really active in that regard. For the first half of 2016, our services business has continued to grow very, very nicely. We're very encouraged by that. We also reached a very interesting milestone, which is by the end of first 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. 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. I picked just a few of some of the ones that we think are indicative or interesting to take a look at. 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 inflected and started really going up quite rapidly, all the way to where it is today, and it's gone very nicely.
We're also seeing that the 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 matched 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. There was an earlier question about why haven't we seen, with all this real estate construction starting and things like that, why haven't we quite seen it? 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 and their direction back towards tier 1 and tier 2 cities.
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 they have a lot of capital, but they're sort of watching to see how the economy's going to go. In that way, I think there's still a little bit of caution on the part of developers. Of course, the numbers I just gave you are for all of China. How is it really looking across the different markets? 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. By the way, tier 1 cities are those cities with 10 million population or higher.
In 2005, you can see that they were roughly 25% of all the market. 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. 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. We're seeing in tier 2, some of the hotter markets as well are a little bit under pressure. The government has imposed also purchase restrictions to cool those markets a bit.
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. We see kind of, as I said, this sort of more cautious approach taking place by the development community. Looking forward or looking to where we have grown from over the last 15 years, you can see that the market has rapidly grown. While it was growing at double digits since about 2002, 2003, 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%-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. 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. For us, we're seeing that the days of sort of double-digit growth are probably past us, and there's going to be a moderating trend. 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. 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 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. What are the reasons why? Oops, excuse me.
To repeat a little bit what Henrik said and then add on to that, urbanization is clearly one of the big Us that we call that, the three big Us, urbanization, upgrading, which is the growth of the middle class, and of course, urban renewal. 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. 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 one-tenth the size. This is a very significant market for us. Still a lot of opportunity, still a lot of growth. Why is urbanization a big issue? 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. Over the next 10 years, it's going to grow to slightly more than 65% urbanized. That means, in China terms, about 160 million 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. 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 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. 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, or 5. 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 on the map said about six, identified six to talk about. On the Yangtze River Delta, that's where we're located, our headquarters in Shanghai. That's 150 million people. You go down south towards Shenzhen, Guangzhou, Hong Kong area, that's 90 million people. That's about, yeah, 60 million 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 million people. A huge one that is actually a fantastic market for us is taking place what's called the central region, Wuhan, Changsha, Nanchang. 170 million people. Phenomenal growth there. Also in the Central Plains area. 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 Yangtze 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. 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 six or seven 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. Along that way are multiple train stops where these are 3rd-tier and 4th-tier cities, and they're developing very rapidly along these train stops. What's happening is people can work in a high-income city but live in a low-cost place. This is the kind of transition that is taking place all across China today. It's actually quite exciting to see.
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 U 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 billion 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. We're saying in the next 10 years, we're going to add an additional 380 million people to this already large group. When they move into the cities, their wealth increases. They want to buy property. 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. 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.
You can even see that has already started to take place, and it's a wave that's continuing today, and it's going to take place across all these major tier 2 cities in China. By the way, there are about 35 or so tier 2 cities, and then there are over 100 tier 3 cities. 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. We say that the era of fast growth while in new equipment, while 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. 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 industry going forward. Now, that's new equipment. New equipment leads to service. Service is, 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. Clearly, it's already now surpassed other markets. When you see the installed base now in China of over 4 million units, it is now larger than the next 4 largest installed markets combined. It's going to double, at least double, in the next 10 years. We see this as where the next wave of opportunity is going to come for us. Now, KONE's maintenance base in China by units is already larger than our next largest installed market or service market, which is Italy. 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, we believe this also is an opportunity for us to grow forward as we add these services that we want to then charge for. This is, we believe, good opportunities here. Modernization. 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 15-20 years, and they're going to be concentrated in four cities: Beijing, Shanghai, Guangzhou, Shenzhen, where they modernized, and they've advanced much more quickly than the other cities. They're about to take off.
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 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. We're seeing that the trend is definitely moving in the right direction. 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, our users, they expect reliable and high comfort ride equipment.
This is, for them, a sign of the quality of the equipment, the quality of the building they're in. People walk into a building in China, when they look at the elevator, they judge the quality of the building that they're in by the brand that they're riding. We're finding that 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 KONE is one. 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's not working, this can be a big problem. In Beijing alone, more than 10 million 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. People are recognizing, the government is recognizing reliable equipment, reliable suppliers is not just a need, it's a requirement. That plays good for us. How are we going to lead, continue to lead in this new market environment? 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 one, 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%. 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 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, 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. 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. Once people start to see these services, they're not going to really want to work with smaller companies. We believe this is going to be generally a very positive step for us. 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 four China OEMs, 50% of the business. By 2015, when the market had almost or about doubled in size over that same period, the top four China OEMs were 55%.
We're seeing this trend taking place, and we see that technology, and we believe it will really accelerate this trend going forward. On the services side, in 2010, the top four OEM or the top 10 OEMs, excuse me, were only 25%. 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 KONE brand, it's about 60%. On the GK brand, it's a bit lower. 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. 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 two 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. 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. 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. 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 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.
Finally, we want to continue to service our customers for 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 KONE equipment. Earlier this year, we got a couple of accolades. Some local web employment companies rated us the number 1 employer in China. It was a great honor for us to receive this. 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 KONE. Why? We're the number 1 company. They have helped vote us the number 1 employer in China.
In 2015, we hired 1,800 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 an exciting and very important trend for us to keep going. By the end of 2015, more than 7,000 of our field workers, by the way, were using mobile learning devices, communicating to them what we expect in terms of or how to install better, how to install more safely, how to install more effectively. This is another area I think Tomio, we got to spread this word a lot more that this is also a very important part of our technology, not just what the customer sees directly, but what they're going to see indirectly through this.
Of course, our people see it, and they like it. 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 KONE 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. If I understand correctly, what you are seeing is falling urbanization flow, and then you are seeing increasing average space per urban capita. 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. 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. I think Oh, right here. Excuse me. Sorry. Yes. You're still seeing a very high average number of people moving to cities. Yes, it spiked in 2010, but it's still at a very high level when you see it historically.
Which of these two drivers, the falling flow or increasing space per capita, is more important, as you said?
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. That kind of ties in with what Henrik said about the phenomena of people sort of in housing sort of degenerating. The generational effect, you're finding generations now living separately than they used to in the past.
Okay. My second question. I miss your construction estimates in this year's presentation. Last year, you said they will have to construct the 21 billion sq m 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 we need to back off on that figure. I think it's still at probably very close to that number, at least. Yeah. 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. We're still seeing that there's still a huge amount of demand going in there. 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.
Thank you.
Let's take from there. Tomi.
Tomi Railo, SEB. Can you just give an update perhaps on the market conditions as we speak, 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, any update on that, please?
Well, we still believe very much in our forecast for 2016, which is the market will decline 5%-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. We've talked about the five-five-five effect. The market generally being under this kind of pressure. We're still very much in that regard.
Yes, let's take from the front.
Manu with Nordea Markets. Can you help me to understand how do you think about the growth in the maintenance? There should be no doubt about that growing very strongly.
Yes.
Interested in the way you see the margin and the operational leverage, because adding an elevator in Helsinki, for instance, probably doesn't add any cost, so it's pretty much free margin to you. How does that work in China? Because you're still kind of in the development phase. Do you see that you're able to expand those margins, which I think you said are on 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?
Yeah, absolutely. We're now in a number of major cities beginning to see the leverage due to density, particularly Beijing, Shanghai, Shenzhen. These are just a few of the cities. I think we're still growing very quickly. I think there's still a lot of opportunity to add, once we add density, that this will have a great leverage effect. We're still, I think, early in those days. 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 three years or so, two or three years. As they become more proficient and more capable, their productivity increases. We're seeing a mix of density leverage and productivity leverage coming over the years to come.
If I may tempt you, do you expect that you can improve the margin in the China service over the next kind of coming three to five years? Or is it more of a question of maintaining it at this level because these investments are.
It's hard to quantify that. Clearly, that's our ambition. Our ambition is to make the service business as profitable as possible. We have to look at the kind of projects that we're working on, customer base, things like that. It's hard to speculate, our effort is to continue to make it a very solid business.
Okay, let's take one from the back now.
Hi there. It's Matthew Spurr 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. Did I get it right that you said there's 4 million installed base in China at the moment, you expect it to double over 10 years?
Yes.
If that's 400,000 units a year and we're at, what, 550,000. Longer term, you expect it to decline. Obviously, there could be an offset from sort of replacement installed base, but that's essentially what you're saying.
At least double
There's been 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. Again, it's hard for us to forecast, and 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 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 the installed base will continue and at least double over the next 10 years, possibly more. Again, I'm not forecasting or prognosticating exactly what it will be year by year and what the exact number will be. 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 strong going forward.
Okay, in terms of that net growth that comes from sort of pure new construction growth, 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.
Yes. Hi, it's Chris Mady here from Berenberg. Just a question on your order intake in China. It's been down mid-teens for two consecutive quarters in Q1 and Q2. Given your outlook for 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&L as of Q4 this year. Can you just tell us what are you doing there in China in terms of cost cutting? Have you reduced your number of employees, et cetera?
Henrik, what's the specific guidance we've given on that?
We haven't, of course, given an order to give any specific guidance, but we can talk, of course, about this, what actions we're taking in a more challenging environment.
Well, clearly, we're also looking at the cost structure. 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 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. Yes, we're constantly looking at how to support our margins going forward.
Okay. 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 China KONE brand, did not move up over the next three, four years?
All elevators in China are required to have an elevator maintenance contract. That's required. The point I am trying to make here is that there is a minimum level of service that is being required by the government and by the marketplace. 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. We think that this is really the trend that is happening.
Yeah.
Hi, it is Guillermo from UBS.
Hi.
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? 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 when they hand over to, let's say, a building, they are not ready or they are 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. We want to make sure that it is a healthy business, our service business. It pays, the customers have money, and that we can grow with them, and they are the kind of customers that we want to work with.
Okay, let's take two more questions from that side, then we need to move on.
Hi. Rick Ekkenstam with Mizuho Securities. You clearly have a great business in China. If I'll ask about slightly wider in the region, because you seem to have experience 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 size of the nation in terms of population-
maybe faster growth even from a 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.
Yeah. As everyone knows, we see good potential there, good urbanization, market is growing slightly. Definitely, we are putting a lot of effort.
Thank you
later session.
Yes. 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? Separately, you put up 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 that have the right kind of projects. That's what we're going to concentrate our business on because we want to have a really healthy business going for years to come. That's what we want.
With all due respect, that didn't really answer the question. The competitors are very intense.
Yes. Yeah.
What I'm trying to get at is do you have to follow them down or do you give up market share? That's really what I was getting at.
Understood. 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 one. We want to be number one, 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, Billy.
Thanks very much. Thank you.
Well, I'm very pleased to be back here at Capital Markets Day. I think it's been a couple of years since I saw several of you in London. 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, do a deep dive into our business performance, how we've been performing since we've last met.
Also talk in 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. The last area that I'm most passionate about is the way we're running our business. 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, in getting back to perspective, because we were talking about China a little bit before, and we were 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.
First of all, it's about a EUR 1.5 billion business in 2015. The order book has grown very healthy in 2015 at 22%. We've achieved a 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 is 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 four production site centers that allow us to produce effectively out of Mexico.
Also out of Allen, Texas, is 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 Coal Valley operations, which is part of our escalator business. A very good footprint. We've expanded our Moline center, which provides operations for our services business and modernization expansion. 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. Rough numbers, we have about 6,000 employees in North America. That's a good footprint.
Let's talk in a little bit more depth about how the market has been developing. This is a graph of new equipment orders in units. The market has recovered significantly and is at almost a record high level. Given just simple math, it'll probably achieve that record high level again in 2016. That's reached a record level of almost 2008, and the growth will continue as we go into 2017, but at a more moderate pace. 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.
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's been a very stable market for us, and runs a 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. To get grounded, U.S. accounts for about 80% of the new equipment margins in this slide. 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. Obviously, commercial construction starts were very active in our three geographies. I think the thing to point out here is, if you look at 2016, not only is there incredible CAGR growth from 2009, 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, then I'll show you that chart is actually even more attractive to us at KONE. Then commercial construction starts are almost at an all-time high back in 2007. The other leading indicator that we use to plan our business, project our business, invest in our business, is the architectural billing indexes. What we've seen in architectural billing indexes for this year, they're on the graph, they're public knowledge. They're a great leading indicator of what's going to happen 18-24 months later in new construction starts. What we're seeing is very strong architectural billing indexes above 50, and we're seeing that in most geographies. Actually, three out of four geographies are above 50, which means the three-month rolling average is growing at positive growth rates.
Architectural billing indexes being strong all the way into where we're talking today means that will materialize into orders in 2017 and 2018. 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. 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 expected or actually exceeding expectations.
We're entering into 2016 with MRLs now being 65% of the mix. 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%. The math works out the way for the 1.4% CAGR. The market's very competitive, and there's more professional buying, facilities managers, property developers who really look for efficiency, response time.
I think it's a very efficient market, and it's our most competitive. Also, the OEMs have been most successful in that, and we have the significant market share, unlike other geographies. Okay. The independents or non-OEMs probably only have 15% to 16% to 20% share. It's 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 unsat 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. Why is that? Well, there's aging building stock in North America. There's over a million installed base of elevators in North America, and greater than 50% of them are over 20 years old.
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. Modernization demand has developed very positively since 2012. Not only is an aging building stock driving that but competition from new buildings. I just shared with you earlier how the new 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. In essence, new construction drives more modernization for us and feeds on us.
To share with you, our Foundation and 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 modernization proposals to our service base, which is more of an audience that we have greater insight into how their needs are and how we would actually meet those needs. 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's one of the top opportunities and represents almost 25% of the modernization potential we have. That's kind of what's happening in the market. Since I was last here, let's talk about how the business is performing for KONE in North America. We've been on this journey of doing two 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. 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. 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 of 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 three 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. That's not really easy to do, and we've demonstrated we can do that over the last several years. 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. We recognize if 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. What did we do in North America? We reorganized our district and branches to look like what? A contractor. Our contractors are project managers.
We also reorganized our districts to have our projects led by PMs. We look the same, and we hired and supplemented the good project managers we had inside with people from the construction industry. Now we're more capable of meeting our GCs demands of being great project managers, and we're also more equipped to manage through complex situations and manage through risk. 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. 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. Saving a few hours, a few weeks through installation productivity in a very aggressive market provides us with very good margin expansion. 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. 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. 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.
Also, those are some of the things that are most important to our customers. 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. 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 advantage 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. In retail, in malls, you can't do big tear-out projects.
You're in the middle of a mall. 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 in more example of that later. 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 U.S., high-end stores throughout the U.S., and we've done extremely well there. We've also implemented new field automation tools and remote monitoring technology to improve our customer experience. 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. 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. 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 on how those assets are performing. Of those 15,000 customers, those are the ones that see a value proposition in remote monitoring, 5,000 of those elevators generated automatically a service need. 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 on your next visit." When you think about that one-third generated service need, that service need went directly to the handle of the technician responsible for that elevator. 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 U.S. is EUR 200-EUR 300. One truck roll off that service need, okay, will save us EUR 300-EUR 400. 5,000 service needs, that's over EUR 1 million of savings per month in productivity. 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. 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 2009.
We've been able to grow at a CAGR of over 13%, our smart growth strategy has been an emphasis on pricing excellence through market segmentation, we've grown faster than the market and have taken share with margin expansion in 2015. The momentum continues, that's our ambition to do so in 2016 also. We're expected to see some growth or continued growth in the net market, we're seeing good growth in the modernization market obviously single-digit growth in the core maintenance business. In modernization, what happened in modernization? How do we capture that type of share? 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.
We have a very strong approach with respect to a dedicated sales force around modernization, dedicated sales management, and an advantage product offering. 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. Sales growth has improved with improved profitability also, and I'll share you a graph of the incremental improvement in profitability. The sales growth as a result of the orders I've talked about have been double 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.
Our order book can be 1.5 to 2 years of good projects in the book to deliver. This kind of demonstrates what's been happening with profitability that has clearly improved in North America over the last several years. I talk in great depth about how we've achieved improvement in new equipment profitability through pricing excellence and a recovery, and also through how we've set up the sales force to focus on price with a balance on gaining share. I've also talked about the investments we made in project management and productivity in our crews. It's really been a multi-year focus on pricing excellence. As a result, by good pricing, better project management, better estimating, and better field productivity, we've created operational leverage in the business.
What I mean by that is that our sales are growing at double digits, our profit is growing at a multitude of sales. We're leveraging very well on sales and profitable growth. That's creating good operational leverage for us. Orders are growing, sales are growing, and then our profit is growing at a multitude of those sales numbers. Last, the technology and process-driven productivity is occurring in all three businesses. We've been investing in productivity through a combination of both field automation tools, but also process tools. We use a lot of lean to make our business more productive. 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.
I'm just telling you that AMA or North America has also been a positive contributor to that growth. 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. We talked about innovation centers, and we have opened an innovation center in Allen that's part of our global network, so we can customize and leverage innovations in North America to meet customer needs. In 2016, that is now open. It's a center of excellence. It's in Allen, Texas. It houses R&D, engineering, manufacturing, logistics, and customer centers to co-develop or collaborate on projects. That'll 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 the field support all together.
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 KONE great. We've been investing in our people now for several years, and we'll continue to do so. Our investments are in a couple areas. Besides the investments that we made in project management, we've been investing in upgrading our people's skill sets and capabilities. In 2016 versus 2015, we'll increase our web-based training by over 30%. 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%.
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 attract talent, we've been able to develop it, and we've been able to retain it. 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 growing.
If you look at that growth, some of it's in high 10s, 15% growth. In addition, even the large cities are also having growth in the 5% area. This 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. We see a balance of trends of demand, from companies moving in to changing living preferences to 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. 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 start. 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. 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 3D modeling with all sorts of other business or building elements together, including schedule, including specifications, drawings. It 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 provide schedule compression, new architectural toolboxes around BIM models. The way that architects are working is fundamentally changing. They're more collaborative, more online, 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. We're seeing smart construction occur also.
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. What I'd like to do is dive into that a little bit deeper before I finish my presentation. We've been on a journey of smart growth over the last several years, and we're going to continue that with high ambition. We're going to do that through both solutions and operations, continue to invest in those areas. In new equipment, we're focused on a broader holistic set of solutions and 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. Last, the core of all this is attracting, investing great employees and making sure we enable digital technologies to help us be more innovative in 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 a lobby next door to a new building. 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 their elevator quickly? We optimize building traffic.
We also do that with improving the user experience. 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. 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? A core to 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. 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 two core businesses, new equipment and services, are both doing 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. Now we're changing how we collaborate earlier with customers to get into more value-added solutions, not only in new construction and major projects, but also in modernization. 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. With that, I'm going to wrap up and thank you for your time, open 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 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 into 2016. We'll see how it plays out, but we entered the market in 2016 very well. 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. Good positive price development in our markets.
Great. 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 zero, 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. There's going to be a class of very low story, one, two, three story buildings that kind of not sure if they really want an elevator, will still have elevators, and that'll probably be a space where it settles at. We can do that calculation, but it's not going to go to zero. There's always going to be a set of small buildings that just need an elevator out of a necessity, not out of a need, just mandatory.
If you were to guess, would that be five, 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. That's been great for high-rise buildings and you guys. You point out yourself that we've had six 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 bobbles around, and maybe the U.S. is just having a bit of pre-Trump jitters. Do you see some signs as to where the new order market for equipment is going in 2017 and 2018? I know you have a backlog to deliver revenue. How do you see the new equipment order development going back-
All we said was that the market's going to be a little bit more moderate, which would be mid-single digits. I will say one thing, though, about the market, and it's just a market statement, it's not any forecast. 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. As you start thinking about that, to have a step function change in that would be very difficult. The physics don't work. I don't anticipate that would cause us to have a Trump moment. It's just not going to happen. 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. It's a very broad growth that's occurring. I'm a little bit positive and ambitious that we're going to continue to operate in a good environment.
Two more. I wonder if you could just remind us of the current split of residential versus non-residential versus infrastructure as one question, 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 can't pull that one out. 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 EBIT number.
I think the only thing I can tell you there, because we don't break it out by business, what I will tell you is it's a really unique time at KONE right now that all businesses are actively participating in an EBITDA growth. I can tell you that our percent of growth in North America has been good year-over-year, and it is also a strong contributor to that growth.
In terms of the profitability margin, have you seen a particular development in one of the three areas?
Absolutely. Because 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 in sort of your margins?
I'm back to acceptable margins. I won't tell you what they are.
Okay, thanks.
Yeah, the recovery has been very strong for a multitude of reasons, which I've articulated.
Any more questions? Okay, let's take it from there.
Hello. Ko Henning from MN. I have a question on modernization. You say you're well-positioned within that market in the U.S. I was wondering in general if there are some sort of barriers to switch, if there is an Otis elevator inside or a KONE elevator, is there a barrier to switch to another brand? For example, costs or execution risk. Is there some sort of brand retention percentage in the markets or at KONE?
Retention-
Yeah
of service customers?
Yeah. Within the modernization business.
Well, typically, our best customers are service customers, right? Doing proactively projects that improve their return on investment through modernization increases retention. We see that because we work more cooperatively with them, and we have a higher percentage of customers that'll 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. 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.
I would say that since we've been very successful in modernization and more than half our base is competitive gear, we've demonstrated in the marketplace that we can modernize and work effectively with third party or OEM gears from other companies.
Thank you.
Was there a question in the front? Yes, let's take it from here.
Great.
Thank you. Stephen Mitchell-
Hi, Stephen
Jupiter Asset Management. I just wondered whether you could 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. 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 U.S. and Mexico because of the environment that they're in. They're in low single digit growth rates there. They run a very good business that has a good blend of major projects, service, and also new equipment sales. 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 is a shining star for us. I know I'm using a little colorful terminology there.
As a strategy, we invested three or four years ago seeing these trends. 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. They're doing it very well, practicing smart growth. They're delivering the results, it's not just getting orders. They have accelerated their share position, and they're now a number 1 or number 2 leader, depending on how you look at it. They are a leader in the marketplace in Mexico for us. 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 good cash flow.
There's one on this side.
Thanks. Looking at these construction indicators in the U.S., I think one can say that looking back, the previous peak levels in 2006, 2007 proved to be clearly overheated. Now we are back there. What makes you so confident that the positive development will continue?
Well, I think it's a balance. It's doing two things. One is that it's been in multiple segments and multiple geographies. We'll clearly watch those. We're positive, we're upbeat because we have a strong order book. We're having good order pace this year. Can't say what that is. Tendering activity is good. It's not being that we're going to be totally not watching leading indicators. 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. We'll be flexible as we see when that occurs. 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 years out.
Any more questions for Larry? If not-
Great. Thank you very much.
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.
Rick Ekkenstam from Mizuho Securities. 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 a 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. We run a very good business in new equipment as well. Actually, modernization comes third if you take these three big businesses. That's about the situation.
Okay, there's the next one.
I think, yeah.
Yeah. Hi, Guillermo from UBS. Question to you, Henrik, or to Bill. I wonder about the relationship between wage inflation and maintenance pricing in China.
How 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 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 multi-year contracts, particularly on larger projects, have indexes so that we're able to increase the price over time to cover the increase in labor.
Maybe a follow-up.
Please.
Hence, part of the organic growth you're seeing is just basically that indexation to the wage inflation and not unit-.
Yes. Correct.
growth. Okay, thank you.
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 Tom Skogman. Capital deployment is always interesting in KONE when you have loads of cash, obviously. We have understood you have been very interested in acquiring larger elevator companies the last years. What is new to me here today is you speak so much more about lobbies and Internet of Things and other things. Are you really considering to spend bigger money on acquisitions also outside elevators now than you kind of thought two, three 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 Tomio have showed a little bit is what is the whole People Flow 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. That we've done very well with partners. Are there some areas we may acquire? I don't know. Let's see. 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.
This is what we've done, and I think that will be 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. The smaller ones we do constantly a lot of.
Then I wonder about this IBM cooperation.
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 avoid that the same happens in this industry as in other industries, that the value suddenly disappears to the IT company?
It's not an 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, there are a lot of resources from them working with us, data scientists, experts who can help us because they see it. I would claim they are the leader, if you look at IoT more broadly. They can also help us, what they see in other industries, how we can apply it for us. It's not exclusive. 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 that's something better for them. 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. 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. I'm positive on this, but it's not an exclusive relationship, no.
Finally, you highlighted early on that you have several kind of EBIT burdeners going to next year. Do you have any fast cost cuttings, that you could, if orders would be a bit weak in the second half to secure continued EBIT growth? You have many years of EBIT growth in the history. Do you have anything that you could work quickly on with costs?
We 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. We're still in a difficult market. We've performed well, as I think Bill showed. If you think about all of our other markets, all of our other geographies are actually growing. I don't see a case to start to pull the handbrake here. We are growing our business in a good way in most places, and we see that the reason we are actually accelerating the investment 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&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&L impact you have been referring to. Thank you.
Yeah. As you know, basically at KONE, we capitalize a 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. 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? Whenever there is a region where pricing pressure is on the 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 good 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. Actually, if you look at the China service market, it is growing at very good rates. There is space to grow. 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'll also get more leverage in operation. It's clear, any industrial business, we need to be all the time more productive and 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. As they want to hire maintenance companies, they're willing to find value for the kind of OEM service that we provide. I would say on that regard, 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. Then secondly on, People Flow is also about access 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 or?
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. It again, helps in this when we work on stadiums, for example, we can do the whole People Flow of them. That is where it plays a role. We have quite a focused strategy in that business.
Maybe I can ask about three more markets, if I may?
Yeah.
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.
Yep
which we hear that some of the tendering activity has been a little bit more muted.
Yep
Similarly, I don't know 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. If we look at the U.K. situation at the moment, actually on standard residential construction, it seems to continue at a pretty good rate because United Kingdom has a chronic shortage of apartments. That is something that is needed, and they are the big cities that 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. Clearly the largest market is the residential market, the standard residential market. There, the customers I also have spoken to there are reasonably confident and continue to push forward. That's on the U.K., but I think we have to wait and see.
I don't think anyone else can make a prediction what it really is going to mean. At least we can't. Middle East. Here, you continue to have a pretty good situation in countries such as UAE, Qatar and these countries. Perhaps Saudi, that's a more challenging market at the moment. Overall, markets have remained rather active there. 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. 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. There is perhaps a little bit better momentum.
It's clear that in a situation like one we're seeing 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 Bourdain 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, the same thing. Retention rates in European countries are usually 95-ish%. In some countries, they 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 markets, have been challenged, has been what we call competition balance. That how many units you win and you lose in the market. 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.
That's clearly an important focus area for us. Clearly, retention rates shows a lot also about how your customers view you.
Okay. Maybe time for two more questions. Let's take here first.
Manu Rimpelä, Nordea 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 a tailwind over the last couple of years? How should we think about it going into 2017, and assuming that maybe we see cost inflation going on for many years now?
We haven't quantified it exactly. We have put it in perspective here that, as mentioned, in a highly competitive market, in 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 materials. That tends to then go quite clearly into the price. 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 a raw material perspective, at least for the moment, is over. Actually we see some headwind here.
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. It's clear that if you look just now, then situation is a headwind. It is not huge, but we still talk about something that has an impact.
Okay, a second question. It's just on Europe. You showed the fairly upbeat growth forecast from EUROCONSTRUCT on the construction outlook. I mean, are you seeing anything in your business that would already kind of start indicating towards 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 try to think about it in aggregate levels, has there been a change in the last 12-18 months compared to today, for instance?
I would say the answer is yes. Probably it's about a year ago, we started a bit more positive on the European market. Both second half of last year and this year We've actually grown quite well in our new equipment business in Europe. 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, last one from the back.
Hi, could I ask a question about free cash flow conversion?
Yes.
If we look over the last four 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, 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 operations. First half of the year, we're up year-over-year, and that is good. Our improvement in our working capital wasn't quite as large as it was a year ago. It was something we discussed here earlier, that it is clear that in a model that we have, where we have negative working capital, there growth is important. One, but not the only, one of the drivers of the constant improvement in working capital has been that the difference between advanced payments and work in progress has expanded. Now, why has it expanded? It's expanded because we improved in all geographic areas. 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. It's been both a mix and a fundamental improvement.
The fundamental improvement I think we can continue, this mix clearly is a little bit more challenging right now. Our objective is to continue to drive a good cash flow, therefore we may have to look at some slightly different areas. As said, inventory rotations, you look at your receivables and so forth to continue to drive a good cash flow. I can't give you a forecast on our cash flow, our ambition is to continue to have a good one. I would say that the first half of this year, actually all past 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 driven a good cash flow based on how we manage the business.
In 2009, roughly, we went from about zero to now minus EUR 1 billion. In 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, then we can of course continue discussion over lunch and at the site visit we're going to. 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. That is something that has been very important. It hasn't come to us as a surprise that the very significant and large Chinese market, that is important, a great market for us, that it's clearly more challenging now than it's been in the past years. 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, "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 in the past years. More of the growth will come from services over the coming years and from slightly different geographies. 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.
Because of the changes we see in the market, and also because of the very encouraging results we have from a lot of customer pilots, and some of these I wouldn't call them pilots anymore because we are doing it quite broadly. When we bring our new service concepts, new ways of working 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&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.
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 that 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. 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 will be following this also by webcast. Thank you also for your interest. With this, I close this meeting and happy to continue discussions over lunch. Thank you.