Morning, ladies and gentlemen, and a very warm welcome to KONE's Capital Markets Day 2015. We are very happy to have so many of you here with us in Shanghai today. We also have some people following the webcast. A very warm welcome to you, too. I am Katri Saarenheimer from KONE's Investor Relations.
We will have an exciting day ahead of us. We will start here in Shanghai with 3 presentations in the morning, after which we will have lunch. After this, we will be visiting our factory and production facility in Kunshan, close to Shanghai. During this morning, we will have 3 presentations. We will start with a presentation by our President and CEO, Henrik Anruth, who will discuss our recent developments and the drivers that are shaping our industry.
After this, we will have a short break, and then we will have our Executive Vice President for Greater China, William Johnson, discussing the China market and our development here. The morning's presentations will be concluded by our CFO, Erika Soderstrom, who will discuss our business model and how we manage our financial performance. We will have time for Q and A after each presentation, and we will also have a longer Q and A session and discussion after all three presentations. During the lunch, following the presentations, we will also have our Head of Supply Operations, China, Jan Nekuisma, discuss our production model as well as give an introduction to the Kunshan factory that you will be visiting. So we have quite a busy and full day ahead of us, and we are very excited to have you here.
So I think it's time to get started. Henrik, the stage is all yours.
Thank you, Katri, and good morning, everyone. Also very welcome on my behalf and great to see that so many of you have traveled to China to come and spend this day with us and discuss how we are developing KONE going forward and how we continue to differentiate in this exciting industry. A year ago, in the same session when we were in London, I introduced to you how we intend to accelerate our differentiation in the coming years, in particular in the services business. We all know that we have clearly differentiated from our competition in new equipment in the past years, and now it's our attention to do the same also in services. We operate in a very exciting growth industry, in an industry where dynamics are changing at the moment.
And I think that's great because every time dynamics in an industry change, it gives a new opportunity to differentiate from the competition. And this is what we intend to do again in this phase. What we'll do is we'll build upon the strengths that we have at KONE, and I'll discuss some of them today. And we'll continue to invest quite a lot throughout our business, both in services, new equipment, but quite a lot as well in new technologies. But here, what you also will see is that technology per se is not so important.
When it comes to new technologies, everyone has access to more or less the same technology. The question is what you do with it to provide a better experience to your customers and to users and how you create better quality and productivity in your operations, but I will discuss that. In the past 5 years, KONE has done very well. We have had a great journey. Our sales has grown in the past 5 years at a compound annual growth rate of 9%, and our growth has been very profitable.
Our EBIT margin has improved from 11.9% to 14.1%, so strong growth with margin expansion. And that has, of course, created a lot of value. Our intention in the coming years is to continue this journey. And I will talk about today, 1st of all, what we have done in the past 12 months. But then I will go into the megatrends that are shaping our industry.
And these are familiar to most of you, but I'll go a little bit deeper because I think we have an interesting story to see how we have interesting growth throughout our geographies. And then I'll spend time on how we intend to differentiate, how we take the changing market environment, again, as an opportunity to be able to grow faster in our markets and continue our profitable growth. But let's start with how we've done in the past 12 months. I think this is familiar to all of you, our financial performance for the first half of the year. As you know, we had a good first half of the year.
We continue to grow, very strong orders received, growth of 20% or about 6% in comparable currencies. This despite a challenging environment that we have overall globally. Our order book is at an all time high, very strong growth over the past year, and this gives us a very good opportunity to continue our profitable growth in the future. We have grown our sales and our sales growth has been profitable. So we've been able to improve our EBIT margin in the first half year from 13.5% to 13.8%.
And our cash flow has been very strong. And I think strong cash flow, this is something we've been able to have very consistently over the past years. And that shows that while we're growing, we maintain very healthy fundamentals of our businesses. We have been able to maintain good payment terms. We have managed our inventories, and we have been able to collect our receivables from our customers.
So overall, very healthy underlying fundamentals of our business we can see from our cash flow. So overall, a very good start to the year. If you look a little bit more detail at our orders received, I think we have a great story to tell here. First of all, over the past 5 years, we have had a very strong double digit growth in both our volume business as well as in our major project business, even faster in our major project business. But if we now look at the past 12 months, we have continued a very good performance in a challenging environment.
Our major project orders are slightly down. Reason for this is that we have had in the first half of the year less what I would call mega projects compared to the prior year, but still a very solid and good performance and good development overall in the market. What I'm very pleased about is the good performance we have had in our volume business, a growth of 8%. We have to remember that we all know that the Chinese market has been challenging this year and that historically has been our main growth driver. This year, now the Chinese market has slowed down, we have been able to grow despite the fact that the market has declined slightly.
But at the same time, we have been able to drive a very strong growth in rest of the world. We have continued a very strong growth in North America, United States in particular, where our growth has been well over 20%. And we have accelerated our growth in Europe, Middle East and Africa. So while we've seen a slowdown in Asia Pacific or China in particular, we have been able to accelerate our growth elsewhere. So I think we've shown that also in this environment, we can perform very strongly.
Same story when we look at sales. If you look at by geography, over the past 5 years, we have grown in all geographic regions, but clearly fastest in Asia Pacific, very, very strong growth in Asia Pacific. And this is where we have differentiated in a significant way from anyone else in this industry. If we now look at the 1st 6 months of this year, again, when we have had slightly slower growth in Asia Pacific, but still a good solid growth from a very high level, good performance. At the same time, we've been able to accelerate our growth both in North America to 11% and we have also been able to accelerate our growth in Europe, Middle East and Africa.
And in particularly, in North America, we have a very strong order book. We have grown our orders to see it very significantly over the past 2 years, And we can start to see this coming through now and again been able to drive a good and broad based performance and this I'm very pleased about. And we can see a similar story when we look at sales by business. Here, very strong growth in our new equipment business been compounding at 12% over the past 5 years. And also our service business, very healthy, strong 7% growth.
Think about the maintenance business with a maintenance base to compound that at 7% per annum is very good. And when we look at first half of this year, continued solid growth in new equipment and very good growth in maintenance. Even though the percentage looks a little bit lower than in the previous 5 years, what we actually see underlying is that the organic growth we've been able to accelerate over the past year, 2 years. So we have had less was more impact from acquisition in the if you look at the 5 year period. So also here, when we look at our organic growth, we see that that we've been able to accelerate.
So I think it shows that the actions we are taking that we are on the right path. When it comes to our profitability development, Erika will discuss that a little bit later in her presentation. When we look at our performance, as most of you know, we measure our performance through our 5 strategic targets. That's a very balanced and good way to measure performance because it looks on more broad basis whether we have become a stronger company. And if I review them briefly, I will dive into the first three ones then a little bit more in detail.
But our first strategic target is to have the most loyal customers. And what you will see, we have had a continuous very good performance here. So our customer loyalty and customer satisfaction has continued to strongly increase. So I think we show we can see that we are on the right path here. We want KONE to be a great place to work.
We want to have the most motivated, most engaged and most competent employees in this industry. And we see that also our employee engagement, employee motivation has constantly improved. We still we consider ourselves a challenger in this industry, so we want to grow faster than the markets. This again we have done consistently. But growth without profitability is not valuable.
So therefore, we also need to have, let's say, the best financial development. And here, our growth has been profitable with very good cash flow. So also here, we have had good development. And then the 5th area, sustainability. We all know that this is becoming increasingly important everywhere and it has a very significant positive impact on our business.
And also here, we can see a good development. We know that sustainability is a very broad topic. So what we said is that we want to look at it where we have the biggest impact. And here we know that we are the eco efficiency leader in this industry very clearly. And we have constantly been able to reduce the carbon footprint of our operations.
In fact, if you go back a little bit over 5 years and compare to today, we have reduced the energy consumption of our volume elevators by 70%. And I think that again shows a very significant improvement, and we take this seriously. And it's a great positive growth driver for us. Overall, therefore, I would say good performance towards each of our 5 strategic targets. And when we look at the performance as management, we are only happy if we can see performance towards each of these 5 strategic targets, and that we have done in the past 12 months.
So if we go a little bit more deeper into 1st customer loyalty and customer satisfaction. We know this industry is one where we have a very broad customer base. At KONE, we have over 400,000 customers. What we want to do is to have the most loyal customers in the industry by providing great solutions and great services to them. And we just before the summer, we again completed our annual customer loyalty survey.
More than 30,000 customers globally answered this survey, so a very broad sample. And the improvement was very good. So we can see that we are on the right track. We improved our customer loyalty and customer satisfaction in each of our businesses and good improvement in each of our businesses. You can see from the graph the dark green line the path we have had over the past years.
But what is even more important is if we look at the comments we get from our customers through this survey. So I mentioned it was 30,000 over 30,000 customers answering it. And I just highlight here the 3 most frequently occurring comments, and each of these occur very frequently in this survey. The first one is the strength of our quality. Our customers appreciate that KONE delivers the best quality in the industry.
That's what we hear from our customers. Secondly, that KONE is a reliable partner that delivers on its promises. This is hugely important and tells very much about our culture. And the third point is that we understand the needs of our customers and help them succeed in their businesses. And I said, these are just took the 3 most frequently occurring comments and they occur very frequently, each of them.
So these are very significant strengths that we can build on. I would say if we look at the 2 last ones, being a reliable partner and understanding the needs of our customers, With that culture, I think we can drive significant change and bring new services and new ways of working with our customers. Here, I think we differentiate quite significantly. We have areas to improve that we're working on. One of the areas that we're working quite a lot on, and you will hear about it more when I talk about the service business, how we can improve our customer communication at every touch point.
This is particularly important in a services business. I'll talk about that more. And we have also we are also strengthening our services offering to have better, more relevant services that suit better the needs of our customers and their businesses. But overall, strong performance here. Then our employee satisfaction and employee engagement.
If there's something I must say I'm very proud of working for KONE is our employee engagement survey. We highlighted this in connection with the Q1 results. And as I told you already then that when we did our survey this year, 93% of our 48,000 employees answered this survey. It shows that it matters and it shows that our employees think their feedback matters. And here we continue to improve our employee satisfaction and employee engagement.
And I think again with this culture, we can continue driving very positive growth in this industry. And I think our customers can see the strong motivation and strong engagement and pride of our employees working for KONE. And
how have
we got here? Well, we invest a lot in helping every employee to perform at their best. We want to make sure that every single employee at KONE has an individual development plan and we're getting very close. And we invest a lot in field training, competence development. Field training, that's where most of our people are every day out in the field.
That's where they meet our customers. That's where we deliver our services, installation and solutions to our customers. It's very important. So also great improvement here. And I must say that I benchmark this with quite a few other business leaders and haven't seen anyone else with a company of our size who's got to 93%.
It just again shows that it does matter. So that's our second strategic target. If you go to the third one, faster than market growth. This we have done consistently. Over the past 5 years, we've increased our global market share in the new equipment business from 12% to 19%.
Our orders received has increased from less than 60,000 units to 154,000 units last year. That's more than a 2.5x increase over a 5 year period in new orders volumes. And the good thing is that we have strengthened our market share in each geographic region. Our strategy has been to grow our market share in the fastest growing markets of the world, and that's what we have done. And if we look at again last year, the fastest growing markets last year were United States, North America overall, and China.
And this is where we in both markets, we took clear market share last year again in a profitable way. So last year, our North American market share increased by about 2 percentage points and our Chinese market share increased by close to 1 percentage point and we strengthened our market leading position. So continue faster than market growth. If we look at the same thing from a service business perspective, here we can also see that we have strengthened our position. We remain number 4, but we have grown faster than our markets here as well.
And where we have taken most significant market share has been in the important Chinese market. We know that here that's where the biggest growth in the services business is here. And in a growing market here, we are growing faster than the market. And going from being number 4 player, we believe that we are at the joint number 1 position in this market at the moment. So overall, good development here.
But still, the reason we want to accelerate our differentiation in services is that our growth in compared to our markets has been faster in marketing services, but not as fast much faster as we've done in the new equipment business, and that's what we want to do here as well going forward. So those are our strategic targets. Before I wrap up our performance in the past 12 months, we can look briefly at what's happening in our markets. First, we look at the new equipment markets. Not much new to tell compared to what we said in connection with our Q2 results and what I think all of you have heard.
Perhaps a couple of highlights. We can see that South Europe, I think, is turning the corner. Spain is back on a recovery path from low volumes, but it's recovering. And I think that the French market has found its bottom. So that's good.
We can start to see that after many, many difficult years, we start to see a slight recovery. We can see that the North American market continues to develop very positively. And if you look at Asia Pacific, we know that the Chinese market has declined slightly this year. We can see that the Indian market is growing not quite as fast as we had predicted beginning of the year, but it's going in the right direction. And the services markets throughout Asia Pacific is growing very nicely.
So pretty much similar picture to what we had in the past in connection with the Q2 result. And if we then look at our market outlook, we are just a little bit specified our market outlook. I won't go through it in detail. The only highlight here would be that we have slightly adjusted the outlook for the Chinese market for the full year. So now we say that the overall Asia Pacific market is expected to decline slightly in 2015 due to a slight decline in the Chinese market.
Previously, we expected the Chinese market to be flat or slightly decline. We have now 2 more months of data. We have about 3, 4 months to go. And now our best estimate is that the market will decline slightly. So within the previous range, we've adjusted slightly.
But otherwise, our outlook is pretty much intact. Our own business outlook for KONE, that's fully intact. What we said in Q2, we are fully committed and a good path delivering on that. And here we expect our sales to grow between 6 percent 8% in comparable currencies, and we expect our EBIT for the full year to be between 1,190,000,000 dollars to $1,250,000,000 And this assumes that translation exchange rates will stay approximately at the level of the first half of 2015. And if that happens, as you remember, we're going to have a positive FX impact of about $100,000,000 to $120,000,000 for the full year, and that's included here.
But the key message here, we expect to have continued solid good performance in 2015. So that's about our about history. Let's look a little bit forward now. And I'll start with our megatrends. And I think the megatrends that we discussed are familiar to you, but I'll go a little bit more deeper into them, what they mean to us and why we see that they're driving growth in each of our geographic areas.
First of all, we know that we have the main megatrends that are driving our growth are urbanization and changing demographics in this urbanization, very much underpinned by an increasing need to care for the environment, for increasing need for safety, quality and also we can see a strong improvement and development in connectivity and digitalization. I will focus now mainly on urbanization and changing demographics, how they are impacting our industry. And here, I want to go a little bit deeper than we discussed in the past. Usually, when we talk about urbanization, we think about people moving from rural areas into cities. And I would say that that's the first stage of urbanization.
That is what has driven the Chinese market growth very strongly over the past 10, 15 years. And what we see happening in many markets, we see accelerating in India, we start to see happening more and more in Africa. Then we have a second stage where the urban people start to get wealthier, so growth in middle income population, very significant impact to market and actually a very positive growth driver. I would call this an improved quality of the urbanization. And then we have the 3rd area, changing patterns of urban living.
This is what we see happening throughout the United States at the moment, throughout Europe at the moment, and also very positive growth driver. So what's interesting is that we have good growth happening in each of these phases of urbanization. So if you look at the first phase, again, very familiar, I think, to everyone. And we know that basic urbanization is a very essential driver to economic growth in emerging markets. It has been very, very strong driver in China.
We see India increasingly driven by this, and we start to see that Africa is then the next. And we see many other Asian countries as well. So over the next 15 years, again, we're going to see more than 1,000,000,000 people moving into cities. And we know that in these areas, there is scarcity of space and of land. So that's why we start to see building higher and higher.
What's interesting to see that we all know that in China, this urbanization has been built quite in high buildings. India so far has been quite a lot of low to mid rise residential construction. But also here, we start to see that buildings will become much higher, which is not a bad thing for someone in our industry. And we see a growing need for affordable housing. So one needs to have good solutions to support affordable housing.
And we know that this is an area where we are very strong as a company overall. The second phase is then a growth in the middle income population. That is what we see, for example, in China very strongly today. We expect that the middle income population of middle income consumers will double over the next 15 years, and the fastest growth will be in Asia Pacific. And what happens when consumers get wealthier?
Well, we see a clear shrinkage in household sizes because not that families are getting smaller, but that many generations no longer live together and each generation want to have their own apartment. So again, a big need for more apartments. We see a big need for upgrading of urban areas and fringe areas of cities and that's something you can see in China happening very actively today. And in all phases of urbanization, particularly here, when you have more people having better jobs, more in urban areas, very big strains on urban infrastructure. So later at that stage, very big need to build out public transport and urban infrastructure, again, a very positive growth driver.
Then an area we haven't discussed so much, which I think is a very interesting driver, and we see it very much happening today in the United States and we see it happening in most big European cities as well. And that is changing preferences from younger generations and also from older people. What we see happening in many parts of the world is later family formation. People stay single for a longer period of time. When they get married and start forming families, they no longer move out to the suburbs.
They want to stay in the cities. And totally different preferences from younger generations. And therefore, we see, for example, United States at the moment, we see many European cities, actually most European cities, a significant shortage for apartments. And the challenge as we can see for most politicians today in Europe and United States is the lack of apartments and the lack of apartments driving prices up. So also here need for more affordable living and that's where we see very positive growth.
Think this is one of the absolutely most important growth drivers in the United States at the moment, but we see it happening in all big cities in Europe, be it Paris, London, Sweden. For example, in Stockholm, the government's plan, they said the only way they can drive economic growth is to double apartment production over the next years. So we can see very positive growth driver. And we can see here, if we look forward about 15 years compared to earlier in year 2000s that we have a very significant increase in single person households. This is both younger people, but also elderly people moving back from the suburbs into the cities to have better services.
So I guess the conclusion here is that we have urbanization at many stages. Each of them is driving growth for us, and that is very exciting. And that's why we see good possibilities to grow our new equipment business in Asia Pacific, Europe as well as in North America. If we look at Asia Pacific and China in particular, it's clear that we see a moderation in the growth. We have had a situation where the Chinese market has grown at about 20% per annum in the past 10 years.
It's evident to all of us that we will not see that going forward. But we can see still overall if you look at Asia Pacific, we can see a positive development, but at more moderate levels. But I think we can see good growth in other parts as well. So I think what's exciting is that we continue to be in a very good growth industry. So if we then look at a little bit at what's happening specifically, that's the overall macro situation.
And if we then look at what's happening specifically in our industry. And how are we going to capitalize and differentiate and drive growth in this environment. I would say that there are 2 main things happening in our industry. First of all, changing growth dynamics. As I mentioned, a moderation in the growth of the new equipment business, still good opportunities, but at more moderate levels, but an increase in the opportunity on the services side, both an acceleration in the maintenance growth and opportunity for new services, hugely exciting.
And we can see digitalization and increased speed of technological change having a very significant impact on our industry. Both of these bringing a lot of new opportunities for us to capitalize on. So how do we intend to do that? Well, let's first of all look at a little bit the industry dynamics. I think this is familiar to all of you.
We have the wheel starting for new equipment. So continued good opportunities despite more moderate growth in Asia Pacific. And we're going to see more opportunities from smart buildings. I'll talk about that a little more, requirements for more ease, convenience and better people flow for users. The relative importance of maintenance will increase over the coming years.
Remember that historically share of maintenance was the bigger share of the overall industry. I think we're going to see that share grow again. And here we can see that technology will impact all of our businesses, but perhaps even more the services business. And then we see a very significant opportunity in modernization. We all know that there is a high pent up demand in most mature markets, both Europe and United States.
United States growing at very good rates. Europe still hampered by weak economic development. But we can see that when economies start to recover, Spain is a great example at the moment that we see a good improvement in the modernization business. And when we look at this base of elevators and escalators is only aging at the moment. So this opportunity is increasing constantly.
And when we look at what does it mean, I think this is one of the most exciting overall pictures, at least I get excited when I look at it. Over the next 15 years, we expect that the overall installed base of elevators and escalators in the world can more than double. And that is, I think, a hugely exciting prospect. First of all, there are lots of new equipment to be delivered to get there. Secondly, this base will age a lot during the time, a lot of modernization opportunities.
Bill Johnson will talk about how modernization opportunities are also shaping up in China, and then a much, much larger base of units in maintenance. And why I'm so excited about this? Well, if you look at our performance, again, if you look here on this chart, we can see that we have grown clearly faster than anyone else on a global basis in this industry. We are the clear market leader in the fastest growing area, which is Asia Pacific. So we have a better position than anyone else in this industry to capitalize on this growth.
I think this is very, very exciting and something that's why we are putting a lot of effort in developing this. And we can see that still Asia Pacific is growing very fast at a small base, but will be very significant in the coming years. So very positive prospects. And how do we intend to do that? I've talked about how we want to differentiate in the services business.
And differentiating, as I talked also in the Capital Markets Day last year, differentiating in services is totally different than differentiating in a new equipment business. A new equipment business or an equipment business overall, you buy something tangible. You immediately have an opinion of the quality and value you get. In a service business, particularly the type of maintenance that we do, it's often invisible or most of the times invisible to our customers. So we need to show them much better how we create value.
So how are we intending to and how are we differentiating? First of all, we start with and we developed much better processes on how understanding customers' needs based on the data we have on them, based on their businesses to understand how we can support their business in a better way in order to be able to define a better promise and better offering for our customers that is more specific to their need. So more granularity in our offering. Doing that will of course mean more challenging execution of it because all of our field technicians need to know exactly what we promised to each customer. And therefore, we come to the next one, how we deliver on our promises.
And as I told you, we are known in the industry for the company that delivers on its promises. This we will continue doing, so we're investing quite a lot in processes, tools, systems to make sure that our technicians know exactly what we promised to each customer and deliver that in a more proactive and accurate way. And then the 4th area is to show our customers that we have delivered on our promise. And that needs to be very much linked to the promise we made. And I think this is a very important part in this industry to create a better transparency.
And I think if we can get this whole circle right, then we can differentiate. We are investing quite a lot in each of these areas. A lot of technology is going in underneath to support this and there is a lot of technology in place already. But again, that's not relevant because I don't think our customers care what technology we have underlying. What they care about is what services we provide to them and how we can make much more transparent what we do to them.
And talking about technology, I think that's a good segue into the next topic, the increasing speed of technological change and digitalization. You hear about it a lot. We see it all in our daily lives, how that's impacting everything we do. And how does it impact our industry? And I thought I distill it into perhaps the most important matters.
It has, of course, many implications. But what do I think are the main impacts? So first of all, as we know everything mobile and connected. Mobile, our field force, already very mobile, but can in future be even more time spending out in the field, performing our services, installations, serving our customers. And everything is connected, all the information about their what they should be doing, the condition of the equipment of our customers, the background of our customers and our performance at their fingertips.
That's the first area. The second area is that our customers will have full real time transparency of what's happening in their elevators and escalators and other people for solutions that we provide. Also, users will demand much more convenience and efficiency from the people flow. Here we have already interesting solutions with our people flow intelligence. I think we have really been leading or we have been leading the industry here in providing an easier and smoother people flow overall.
And this will needs here will increase and I think again a very good opportunity. And we also start to see that new ecosystems are being built around smart buildings and smart cities. With our position, I think we are in very good position to lead the people flow aspect in smart buildings. So all of these are great opportunities and areas that we put effort into. So what are we doing?
First of all, digitalization enables us to provide new values to our customers, new services to our customers and improved quality and productivity of our operations. That's the basics of it. And it has both a growth aspect for our industry and it has a productivity aspect in our industry. If we start from the growth aspect, we will see new business models growing up in this industry. They can be lifetime pricing models.
We're probably going to see pricing also based on usage. And I think again when we have a clear transparency to our customers, we can price them in a much more accurate way and see that how we support their business in the best way. Not much happening in our industry at the moment here, but we will start testing new methods soon to see what are the best solutions here. We will see a lot of new services and solutions go up. There will be new value add we can provide to our customers and our users.
As I mentioned, the first ones we have already in the market are Peopleflow Intelligence Solutions. We have applications for users to provide them how they can call elevators from their smartphones and that knows exactly where they can go, where they have access and again, providing a more convenient Peopleflow experience for them. Here we will see much more happening on this side. With all the information we have of our customers, now we have everything in one system. I think I don't know many other companies that would have as we have that we have we're using Salesforce Salesforce has come throughout our business and we have all the information about our customers in 1 central database and that helps us give our good mobility for our sales people to be out in the field servicing our customers with all the information at their fingertips.
So again, much better experience for our customers and much better time with our customers to drive growth. So much higher sales efficiency. And here, as you know, we've been investing quite a lot in this over the past years. And then what I think is the absolutely most clear case that is happening in our industry and everywhere else is field operations productivity. By having much better information about our equipment, being able to do maintenance in a predictable way and also the mobility not only of our maintenance technicians, but also service supervisors.
Here we have very good solutions how we have them mobile and all the information at their fingertips all the time. So we see opportunities both on the growth side and quality and productivity side. And as I mentioned, the importance here is what we provide to our customers and how we provide it. Technology in itself is not so important, but all of this will be we need strong technology platforms underlying here. We have many of them, but we have also a lot that we are upgrading and investing in at the moment.
Everything is also based on a basic customer and user engagement and experience, what they expect from the KONE brand, what we can provide specific services for users. And here we are leading the industry in taking an end user based perspective in all of our development. And then what's also underlying this is what we would call a digital way of working and culture. This means that we are working much more with partners, not developing everything ourselves and also then co creating with customers, testing many more services and solutions and see how they work. And we have started piloting first solutions already with some customers in limited areas to see how they perceive that and what value we can bring and a lot of co creation with leading customers in this area.
So hugely exciting experience, and I think over the coming years, you will continue to see how this area evolves. And to be able to accelerate by change in this area, as you saw last week, we announced that we are strengthening our organization and creating a better ability to accelerate our development and speed of change here. So we have formed a new technology and innovation unit. This unit consists of what we had we have currently in our research and development and our IT. With new connected technologies, the biggest challenge is to find people with strong product R and D knowledge with an IT knowledge.
Here we're bringing very good knowledge within the company together to be able to accelerate our development. And I'm hugely excited about how we do this and we can see when we announced it internally, very good energy. People say, hey, now we can further accelerate our development here. And to do that, we have appointed Tomio Pichkala as our Chief Technology Officer to lead this. I must say that I can't see a better person than Tomio leading this unit.
Tomio has for the past 2 years been an Executive Board member, Head of our Operations Development. He's been responsible in that for our installation, safety, quality and IT operations. And he has a very strong leadership background within KONE. He has been Head of the Service Business here in China. He has had many leadership roles in our technology function and last now led this KONE Operations Development.
So very solid experience within KONE. And to be Tomio's successor, to again strengthen our Executive Board, we have appointed Mikko Korte to join as the successor for Tomio in Kone Operations Development. And Mikko is currently Head of our North American New Equipment Business, and he also has a very broad leadership experience within KONE. So I'm very happy to strengthen our team with Tomio and Mikko, and I'm convinced that this will help us accelerate our development and change in this area. Everything I talked about is about our big picture.
Our vision is to deliver the best people flow experience. That's what we how we develop everything to get to the best experience for our users and our customers. I talked about the strategic targets. We have very good progress towards each of them. And I talked about the growth drivers that we are in a growth industry.
Our development programs, they contain what I've been discussing about how we develop our company, and I think it gives us a very good clarity on what we need to go, very focused actions to get towards our vision. And again, one of the absolutely biggest strengths we have within the company is our culture, our people, that's our values at the bottom of everything. You can see that we are a company where our employees want to improve. They want to improve themselves, the company and they want to deliver our customers that we see every day. So a very strong basis for continued growth.
And with this, I wanted to wrap up. We are in a good growth industry. Growth dynamics are changing, but that's okay. That's actually good because every change brings new opportunities to differentiate and find new profitable growth. What we're doing, we're accelerating our differentiation in services.
We are increasing our investments here. We are increasing our investments in new technologies to accelerate this very strong opportunity. We are going to further strengthen our leadership position in new equipment. We are very strong in new equipment. We will strengthen this because it provides us with good profitable growth opportunity and again feed the maintenance base.
And as I mentioned, we have a better position than anyone else in this industry to capitalize on the great growth in services going forward. And we are driving new ways of working to be more agile, to work more with partners, more co creation with customers. I think this gives us a very good opportunity going forward. I must say that I personally think that this is a hugely exciting time in our industry. We are in a growth industry.
Things are changing. We've seen many things shaping the industry over the past 20 years. And every time there's been a change, KONE has been able to capitalize on that and again grow faster than the markets overall. First change happened about 20 years ago with KONE Monospace. Past 10 years has been about Asia Pacific growth.
Again, we have been able to capitalize on that better than anyone else. I think now we see a growth in the service business. We're committed to do the same here as well. I think with the strengths we have, I think we have every opportunity to do it. So with that, we have now good time for questions before we have the first break.
So I believe, Katri, there will be microphones for questions.
Yes. And I believe there are a few questions already here in the middle.
Thanks very much. Good morning. Lars Brodsen from Barclays. Henrik, just on the China market outlook, can you talk a little bit about what the incremental change is here since your Q2 results? You've got 2 more months of data, as you said.
Where have the changes come here? And can you talk a little bit about what key levers you have to adjust your cost and capacity, both on your new installations business and services business to what seems to be a challenging market in China for now? That's my first question.
I don't think that much has changed. We know that the market in the first half of the year declined slightly. And what we see expect to see a similar trend for rest of the year. We are talking about a slight decline. I don't think it's dramatic.
We know the market is challenging here. But at the same time, if you look at our performance in the 1st 6 months of the year, we continue to clearly outperform the market. We continue to grow our services business in a very good way. But it's clear in an environment like this, we are looking at all of our costs in a more careful way. As we said in connection with the Q2 results that the market is challenging, it's very competitive, but we have had a very good development in our overall product cost competitiveness, our overall competitiveness.
So we have been able to keep a pretty stable margin for our orders received. And as I said, we have been able to grow that. So also in challenging environment, we have had a good performance. So I think that the change we make here is a little bit of adjustment within what we said previously.
Second question, if I could. Just a final one. It's interesting, of course, that your CMB today focuses on service offering and differentiation as it did last year. The last 3 years prior to that, we've talked primarily about your new equipment business. I guess the theme today is partly a function of the market in China and indeed your own product portfolio.
You're 3 years into the product rollout on N Monospace and Minispace. Other OEMs are ramping up on their volume offerings, notably Schindler with the 3,600. Can you talk a little bit about what incremental improvements you're doing to your product portfolio and how you think about sustaining competitive advances and cost lead on your volume offering?
So again, as we discussed many times, in this industry, competitiveness comes from many aspects. One is product competitiveness, but that's only one aspect of competitiveness. But here, we have continued to strengthen our product competitiveness this year. We launched earlier this year, we launched the new I Monospace for the Indian market, a product that's very specific for India, very well received by the customers. We just launched a new product here in China, the Z Minispace, sorry, that again is for the affordable housing sector or for more affordable commercial housing as well in China to strengthen our competitiveness.
And we have continued a major project side launched and broaden our People Flow Intelligence solutions. So I think we have had a good continuous development there. However, you have to remember that in a new equipment business, your product competence is one thing. One of the most important things is that is the delivery of the new equipment. It's the quality and productivity of our field.
Do you continue to deliver on your promises in the field? That's how we can support our customers in best way to do their business. So competitiveness, it's so much about what solutions you have, how you deliver the amount of people you have. And I think here, we have an overall very, very strong competitiveness, and we continue to invest a lot in competence and field development of our people. So I must say that I think overall, our competitiveness in new equipment, I think, has strengthened over the past year.
Please.
Thank you. It's Andre from Credit Suisse. I'll start with a question just on a broader level or high level. You've downplayed the significance of technology and new equipment, as Lars mentioned, and the installed base growth forecast kind of implies flat new equipment market on average for the next 15 years and then focus on service and differentiation in that. With this information of the new unit, is this beginning of a phase where you need to invest in a very different skill set within KONI or into more along the lines of maybe IT and code writing as opposed to good old machine room less elevators and carbon ropes?
So first of all, I don't think I downplay the important technology in new equipment. I think technology is hugely important everywhere, but the importance of technology is what it means, what performance we deliver to our customers. You calculate it very accurately the scenario of what it means from the maintenance base. Don't take that exactly. That's kind of a very rough picture of what it could look like and there's definitely an authentication where we expect the new equipment markets to be, but it just shows that even what you mentioned that we're going to have very significant development there.
But I think you're right, the skills and competencies from a technology perspective to continue succeeding and winning in this environment are changing. And that's why we have also changed our approach to innovation and bringing our traditional R and D and IT closer together and working much more with partners, co creating with customers to be able to have increased speed in this area. But again, it's not the first time things change. And again, I would claim that when things have changed, we have been able to capitalize on that very well. That's what we intend to do here again.
Yes, there will be a lot of new competency skills that we need, but we are committed to invest in that.
Got it. Thank you. And second question is, you talked about our growing end markets and the areas where particularly end markets where you target to outgrow by a large margin. Could you share with us which are the end markets going forward over the next couple of years where you think you can outgrow the most geographically or by that?
I think our strategy is that we grow faster than our competition in the key growth markets of the world. There you can do it if you have your competitors in order, you can grow profitably. And we have to see which markets are. I think it looks like at the moment that United States at the moment has the best momentum and some of the Asian markets. So all of these are areas we'll continue to invest, but I can't say exactly which market will be in 3 years' time.
And that's what we need to keep an agility all the time to see that we find them, we all the time stay a little bit ahead of the ball to find those growth opportunities. If you look on a longer term, of course, Africa will be there as well. I think the message is that we continue to do that in new equipment. Now we want to do the same also in services.
Right. And just lastly, I think last year, you very helpfully shared your thoughts on China the year ahead and more in sort of color of an outlook or guidance. Could you talk to us what you think about China outlook in sort of order volumes for 2016?
Well, you will hear quite a lot about China from Bill. But first of all, as you know, we give also last year, we didn't give an exact prediction this year because we always give our guidance at the beginning of the year when we have good data and good prediction. What it looks like at the moment that for next year, we probably expect to see similar trend continue to this year, not a significant change overall in the market. But again, it's early to say and we will give our specific and formal outlook in January on this.
Thank you very much.
We have now 2 people with questions here on the right side of the room. So let's take first the second row, please.
Hi. It's Phil Wilson from Redburn. You talked about accelerating maintenance growth. I know you don't disclose your maintenance profitability. But when you look over the next 2 to 3 years, do you see scope to lift your maintenance EBIT margins?
And if so, can you comment which regions you think that can be achieved and perhaps give some scale as to the potential there? Thank you.
Well, I would say that when we achieve growth, then we achieve leverage in our business, and that's what we intend to do here. We have a good profitability in our maintenance business. We have very good profitability also in our new equipment business. So that's what we've been able to grow our margins over the years. I wouldn't give any specific areas, but I think if we can accelerate our growth, we can continue to grow profitably.
Okay. And then the first row, please.
Hi, it's Guillermo Pinha from UBS. Maybe two questions. 1 on China market share, which has been outstanding from 10% to 19%. What is the aspiration here? And at what point actually you create friction either with authorities or actually with your competitors just becoming even more aggressive as they see how they how you grow?
Thank you.
First of all, you have to remember this is we have 2 brands that this is spread over. And I think what we see is that if you are competitive, if you deliver to your customers what they need in a competitive way, you can continue to grow. And that's our ambition. That's why we have 2 brands, depend a little bit on the market circumstance. At some point, one is growing faster than the other.
And that's really the strategy we have had and the strategy we go forward. We don't set an exact target. And if you remember, when we became market leader in China, we hadn't set a target to become market leader. Because our objective is, yes, we want to grow faster in market, but the growth has also to be profitable. If you start to set the target that we have to get to a certain market share, then you very easily forget the profitability of your business.
So we want to do this in a balanced and good way and create leverage out of that growth.
And then the second question is regarding the services opportunity in China. He is underrepresented in the revenues at the moment because of the nature of the business. It doesn't make sense to start to consolidate the market through acquisitions in an aggressive way. So actually that service revenue becomes a little bit disproportionate to the size of the equipment opportunity or is something that you will not look in the future?
We can get there in the future. I would say that the organic growth is very strong for us in the services business at the moment. And when we grow a business like this, the same way we grow the new equipment business, one of the biggest challenges is that have to hire a lot of new service technicians, supervisors and experts all the time and training them. So what is the most important thing for us when we grow our business and we do it in a quality way and we continue to deliver great services to our customers. So I think we have very good organic growth here.
We want to stay focused on delivering that because in the end, that's the most attractive growth we have. At some point in the future, I think it can become very relevant what you say and start to consolidate the sector, but we're not quite there yet.
Thank you.
Okay. There is a question here on the right side.
Over there.
Yes. Thanks, Henrik. Ben Moulson from Morgan Stanley. Just coming back to your comments on Europe, as ever, it was a fairly uncertain summer. So has the recovery that you've noted in the Q2 carried on over the last few months?
And is that being driven by any specific countries or is it fairly broad based?
I think as I mentioned, it's very much same as we saw in the summer. But if we look at South Europe, Spain is going in the right direction. As I mentioned, I think France has probably found its bottom. So pretty much the same. But remember, these are markets that have been declining for many years, and they still have a lot of need, particularly in bigger cities, for more apartments.
That's why I think that we're probably going to see a better development there overall in the coming years despite a overall quite challenging economy.
And then on the competitive environment, I mean, you've outperformed very clearly over the last few years. A number of your competitors have said that they need to accelerate, reaccelerate their own growth agenda and maybe would sacrifice some short term margin in order to do that. I mean, what risk do you see that particularly as the China market slows that we have a much tougher period for the industry now in terms of pricing? Have you seen any signs of that? And how do you mitigate it?
Thanks.
I think we see as we have communicated earlier, I think we see a very competitive market overall most parts of the world, and that's why we have to continuously strengthen our competitiveness to be able to grow profitably in this market. And we've shown again in the first half of the year and last year that we can do it. The competition for market share in China and elsewhere is high. And but we still see it's a very big market with good opportunities. And we have to continuously strengthen our competitiveness so we can grow in a good way here.
That's the nature of the game. And I think still even the market here is slightly down, you have to remember it's a very big market with very significant opportunities that one shouldn't forget. But you're right, competition is tough and you have to live with that and then develop your competitiveness, so you can develop well there. We can't impact what our competitors do.
Thanks.
Okay. Many thanks for your questions and thank you for the presentation, Henrik. Now it's time for our break of this morning. But before we go to the break, please let me share a few practical details about this today's schedule still. So I would like to take this opportunity to remind you that after the two presentations following the break, we will continue and have lunch immediately after the presentations And we will leave at 12:15 to the Kunshan factory.
So please take this break as an opportunity to check out of your room if you haven't done so. And you can leave your bags with the concierge 1 floor down just next to the escalator exiting from this area. So with this, I think we're ready to start the break, and we will continue with the presentations at 9:30. Thank you very much.
Okay. No one will see it from the back. I saw a headache. Yes, okay. Is this working well?
Okay. Welcome back, everybody. Now it's time for our next presentation, will be on a market that is very relevant for KONE today. I am very happy to welcome on stage our Head of Greater China, Bill Johnson.
Thank you, everyone, and good morning. Welcome to KONE's Capital Market Day here in China. On behalf of my Chinese colleagues, we're honored to have this opportunity to host KONE's 1st Capital Markets Day here in China. And I think you'll find it if you have any issues, please talk to our team here. This afternoon's visit to the Kinshan facility, I think, will be particularly interesting.
It's really a magnificent facility out there, and I think you're going to enjoy that visit very much. Today, we're going to review a little bit more in detail the China market and what we've been doing up till now and what we see our situation going forward. Let me first go right into where we see the market today. Now I earlier just welcomed you to China, but let me put a little different spin on that. Welcome to the world's largest elevator and escalator market.
And this is not just by a little bit. You can see we're nearly 70% of the global market for new equipment. We've seen that this growth rate has been tremendous over the past few years. And I'd like to pause here to think that what this really actually represents. This represents a transformation of the Chinese urban landscape.
And it's really quite significant to see this. I've been honored to be here for the past 10 years here with KONE and be even just a small part of this transformation. It's really quite significant when you think about it. But what's interesting about the China market is that not only is it the world's largest market, but that it's by a factor of 10 larger than the 2nd largest market. So this is very significant for us.
And really to be a top elevator global supplier, you have to do very well in this market. In addition to the new equipment market and the growth we've seen over the past several years, we're also seeing a tremendous growth in the aftermarket business. As you can see, we have added more than 2,600,000 units in the past 10 years. That's more than almost 3 times, I should say, more than double what Europe and North Europe and Middle East has done in the past 10 years and more than 10 times what North America has done. This we see as a very significant business and not just an add on business.
This is not just supporting our new equipment growth, but we see this as a very fundamental business to us and a very profitable one as well, growing in its profitability for us. 10 years ago, I sat down with the senior management of KONE and we looked at the China market. And we realized early on that if we were going to be a significant global player, we had to become very strong here in China. And every year we've looked at this situation and we've come to the same conclusion. This is a key market for us.
And we plan to continue in the future to make this one of our key markets to increase our competitiveness and make sure we're performing at the best we can here in this market. Before I go to the next slide, I just want to mention here by the way that this is a rendering of an actual building now under construction in Beijing. This is called the China Zun. It will be Beijing's tallest building over 5 20 meters tall. It has 140 2 KONE elevators and escalators.
It will also have within this building more than 20 double deck elevators running at 10 meters per second. When finished, it's going to be a really outstanding showcase for us. Let's take a look at the market in the present situation and what we see are the long term trends. Most of these figures here, I'm sure, are very familiar to all of you. You look at these continuously.
Namely, we've seen that the growth rate in manufacturing has softened significantly over the last 5 years or so. We're also seeing that real estate investment, the growth rate has also dropped continuously for the last 5 years. And these are figures that we watch very carefully and see how they're going to impact our business. At the same time, we've also seen that inflation has moderated and that the PPI has come down significantly as well. And these figures are important to us because particularly on inflation when we see that, we see that as an opportunity for the government really to make significant monetary and fiscal changes without the fear of inflation really taking off.
And the PPI is something we look at because it indicates how we can work with the market to reduce our raw material and component costs. But generally, we can see that these indicators are indicating that in the first half of twenty fifteen and probably going forward for a little bit, a general softening of the market. Another key figure that we look at is the new construction starts. As you can see, since 2011, there's been a real whipsaw of the construction starts. But since the last 2 years, construction starts growth rate, we want to make that clear, growth rate has dropped twice, 1st in 2014 2015.
However, that doesn't mean construction starts have come to a stop. It means that they are redeploying and looking at the larger developers are seeing where their opportunities are. Many are reducing their starts in Tier 5, 4 and 3 cities and redeploying them in Tier 2 and 1. We're also seeing that the work in progress or WIP as we call it, the work in progress of the construction industry remains very, very large. Approximately about 6 years' worth of construction is now underway right now.
The advantage of having this whip though, this work in progress, is that as developers see opportunities, they can ramp up or ramp down depending on their situation to take advantage of changes in the marketplace. I just mentioned about Chinese government looking at monetary and fiscal levers and tools to stimulate the economy. And again, you're all very familiar with the recent rate cuts and interest rate cuts that the government has instituted. You're also familiar with the fiscal stimulus. The government continues to put money into infrastructure growth and to support local governments.
But an area that we particularly watch is the policies towards the property market. In the last few months, the government has begun to soften a number of property policies that they had put in place a number of years ago to cool down the market. Now they're beginning to reduce those or pull those back. For example, they're allowing people now to buy more than one apartment. They're allowing people to buy apartments not just in the cities where they have resident permits, but in other cities.
They're even allowing foreigners like myself to buy apartments. And in addition, they're reducing the down payment that is required. So this is a big plus. I also heard yesterday that not only is the down payment being reduced, but you can now pay the down payment over a period of time as well. So the government really is making it easier for people to buy houses.
When we
look at those changes in monetary policy, fiscal stimulus, the policies towards housing, make those changes, we're beginning to see that they're perhaps having an impact already on the situation here in China. In terms of sales growth area, we're starting to see the sales begin to pick up across China. And we're also seeing property prices, which had come down significantly since 14 through 2015, now begin to inflect back up. We know it's still early. We know this is we're watching this very carefully, but we see that this is already very positive signs for our market.
Still we know it's going to be a challenge. And why do we know that? Well, because although these figures are positive, they're taking looking at China as a total. And I think what we need to do is break it down a little bit more granular to see where investment is going on. In the Northeast and Northwest of China, clearly they're facing a lot more challenges.
Investment has come way down in those areas. They got a bit ahead of themselves, built a lot of inventory up there. And they've also been hit by industrial softening as well as the mining industry has softened. So that's going to be an area where investment is going to pull back for the foreseeable future. But we continue to see good investment along the East Coast and Central part of China where the majority of the population is.
And when we look on a province by province basis, we're seeing that there is also great variations within that. 1st tier, 2nd tier cities are doing well. 3rd and 4th tier and 5th tier cities, investment is being pulled back a bit. But in some cases, there are opportunities even in those cities. Year to date, we're seeing that investment real estate investment has continued to climb, albeit much more slowly.
And if you look at the residential, it has certainly pulled back from its heights of a number of years ago. And so far this year, the growth is only about 2%. However, backing up this will be what we're seeing is continued strong investment in the Commercial segment. And if you add infrastructure in that, it would be even slightly higher. So we see that the market certainly has changed.
It's softened a bit. But we also think that there are still opportunities for those who have a finer understanding of the market and can take their organizations and deploy them more effectively across China. As Hendrik mentioned a little bit earlier, we see a slight softening year over year for the entire market. But let's take a look at the segment. I think the segments will give us a finer understanding of where the market is going.
We're seeing that the largest segment, of course, 2 thirds remains about residential. And that is coming down a bit, particularly in what we call the commercial residential segment. That's excluding affordable housing. And that's developing in line with the market which is in slight decline. We're seeing affordable housing, however, to remain reasonably stable this year with 7,400,000 starts planned for the full year.
In addition, we're seeing continued urban renewal and reconstruction of shantytowns as a lot of these larger cities have begun to envelop smaller regions around them or townships. These are still these areas are very ripe for our redevelopment. And we're seeing generally positive growth in the commercial segment. We know that the retail segment, shopping centers have come down a little bit. E commerce has exploded here in China as you know and a lot of developers are trying to understand the impact of this.
So we see some of the retail shopping centers, the plans are being adjusted and they're looking at their model and see how best to cope this growth in e commerce. But we're seeing still strong growth in the office segment. In some cases, in some cities, it's improving. And we're seeing, of course, very strong growth in infrastructure, airports, subways, train stations, high speed train, things like this. That's doing very well.
However, in the market today, there certainly are some headwinds, challenges for us, but there's also some positives, some tailwinds for us too. When you look at the challenges facing us, certainly the overall market is growing slower than it has in the past. And that's putting a certain amount of pressure on the entire system. There's no question about that. Price competition is intense, and we see that remaining intense.
A question earlier from someone to Hendrik was a competitor said that they're willing to give up a bit of pricing for market share. I'm reminded what a colleague said during one meeting when we were reviewing that kind of scenario. And her comment was, well, join the party. It's already been very price competitive. One more player wanting to join the price competition really won't add that much more to the present situation.
It's already extremely price competitive. And so we're going to look at other ways, if not just price, to keep our competition going forward. Another headwind for us challenge is the increase in labor cost. That has gone up significantly, but that's gone up for all of us. The trick now is how do we make sure that while the labor costs are up, we improve our productivity.
And this is a very exciting area for us. On the positives, the tailwinds for us going forward, we're seeing large developers gaining share. And the large developers are our customers, both KONE brand and Giant KONE brand. We go after specifically the deals with the largest top 100 developers in this country. And they're the ones who are doing generally very well.
We also see among the developers and their end users an increased interest and focus on quality and safety. Again, that works in our favor because of our reliability and high quality products. And overall, that helps our costing. We're seeing much more favorable raw material prices. This helps us because, of course, we use a lot of steel, copper and our component manufacturers get better costing themselves.
So overall, there's some positives and negatives in the market. But generally, we see that these trends are actually going to favor us and favor the larger OEM providers in this market. We know it's a challenge for us, but we know some of the smaller companies, those that have don't quite have the scale, they're actually facing a very difficult time right now. We get calls weekly about companies seeing if they want if we want to buy their business. We know a number of companies have already gone bankrupt in this market.
So we can see that these challenges are really starting to precipitate the beginnings of a market shakeout for a number of competitors. Remember, there are over 400 OEMs in this market. So there's a lot that can probably will probably not make it through this next wave of economic challenge. Now we've talked about these in the short term as short term challenges. But I want to reiterate what Henrik talked about, what are the long term megatrends that we see for the environment.
But I want to bring it into a China context for you. Big one for us, of course, is urbanization and that's continuing. Day after day, this is happening. You see that in 2015 to 2025, we're expecting more than 160,000,000 people moving into cities. The official figure right now is that there's about 55% urbanization, but a lot of people feel that's still optimistic.
Why? Because while people are working in urban centers, they haven't relocated their families here yet. They haven't really fully integrated into a given urban center, and therefore, there's still a lot more opportunity for this to happen. But this is a key change that will be taking place over the next 10 years. Henrik also mentioned the growth of the middle income consumers, very important for us.
Their expectations rise. They want better services, more convenience, better safety, reliability. And it's not just the consumer themselves. The people who are running the cities, running these townships, their expectation is, hey, I have to deliver to my area, my political area, a stable environment. We need to make sure because if I don't deliver a stable environment, there's going to be people who are going to be unhappy and that's not going to work well for me.
So they're saying, look, their expectations are rising. I need to work and promote companies that are going to deliver good services and good reliable products and support to us. Another one is urban renewal. And we've talked about this in our last CMD in London. There's a lot more detail on this, how we came up with this calculation.
So I encourage you to go back into that data if you want some more granularity on that. But this is a very important trend for us as we see that buildings are being taken out of the market that don't have any elevators and new buildings are put in their place. Let me give you a very specific example, and it's right here where you're sitting today. This picture is Pudong. Those 3 tall towers in the corner over there, we're located just at the base of that.
And this picture is being taken from east side looking west towards the river. And you can see that there's a huge amount of landscape here, urban landscape. And none of that here, by the way, none of these buildings or very, very few of them had elevators. You can see the wave is coming in this direction. And this is Shanghai.
This is a Tier 1 city. It's often referred to as a mature city. The opportunities they say are not here, but I say look, there's still a lot more opportunities here. The service business. We mentioned this is extremely fast growing here in China, but what does it mean to us?
Well, when we look at the from a quantity standpoint of view, from 2014 to 2025, we're expecting this installed base to more than double, probably come close to tripling in the next 10 years. So you can see the new equipment where our expectation is the new equipment is going to continue to feed this market very steadily for the next 10 years. But it's a very fragmented market. OEMs at this point really only maintain about 25% of their installed base. There are over 8,000 licensed service companies in China, but very few if any have more than a regional and none have a national presence.
It's only the OEM companies that do that. We believe that there is now clear trends in place that are going to drive the consolidation of this industry as well, again, towards the OEMs. Why? Because we're seeing regulation, tighter enforcement of regulations that are on the books to make sure that elevators and escalators are well maintained, that if there's any problems, the response rate is very quick to address them. And if anything happens, who's going to be responsible?
Who's going to be accountable? This is increasingly being pushed from the regulatory side. In addition, we're seeing technology coming in. Henrik talked about it earlier, the Internet of Things. This is going to hit our industry very quickly.
And again, it will be the large OEMs that have the capacity to do this. However, I do want to stress that we at KONE probably look at this business maybe slightly differently. We know that, yes, having a strong aftermarket business supports your new equipment business very well. That's good and we agree with that. However, we also want to make money in this business.
We want to make this a profitable business. I have tasked all my branch managers that their target is to make sure that their service business can cover their fixed costs. That's the minimum target I want to see them do that. That's the goal. So as they're growing up, they want to make sure that they develop this service business and make it a profitable one.
Let's take a look at KONI's business so far. Since 2,006 to 2012, Kone has grown double the market growth. 2013 2014, we grew 50% faster than the market. And in the first half of twenty fifteen, well, as my 20 year old daughter would say, hey, dad, not too shabby. For those of you that have teenage daughters, you know that's a pretty good complement.
When it comes to our maintenance space, we continue to grow faster than the market. Since 2006 to 2013, we grew not quite double, but we were close to it. And in 2013, we were almost 50% fast 2014 should mean we're almost 50% faster. We see these as 2 very key businesses for us. One supports the other, but both are great businesses.
So what does that bring us today? Today, we're the largest OEM in new equipment here in China. Remember, the world's largest market. And we're number 1. We call ourselves joint leader in maintenance.
We see that there are 2 other OEMs that we're all about probably fairly close in our estimate. So we call ourselves joint leader in this business. However, outside of these 3 top companies, the market share drops off quite significantly. How have we been able to do this? Four quick reasons, and I'll go into detail in a minute.
Best in class equipment solutions, both on the KONE brand side and on the GK side Strong dual brand strategy to go after these different market segments and geographies. We have a great geographic coverage and I've got the best, most professional workforce in the industry here in China. I say that with great pride. But let's go a little bit more in detail. When you look at the product offering that we have, KONE brand occupies the very high to the upper end of the value segment.
The high end, these would be the major projects. I gave you an earlier example, the China Zun in Beijing.
This is
the area where we excel. And we provide we have the latest technology and we provide this market with fantastic solutions for their high rise challenges. We're also very competitive in the commercial real estate zone and we can touch down into the value segment. And we're on the KONE brand, we're occupying mostly the first, second and third tier markets. When you look at the Giant Koning, they have a very strong offering in the mid range and all the way through to the value segment and they're very strong in 3rd, 4th and 5th tier markets and can sometimes bring a good competition to the 2nd tier as well.
However, having just great products, great hardware is not enough. You've got to really be able to differentiate yourself in this market in delivery. Why is that? I've got to tell you, constructing a building in China here is difficult. It's complicated.
So many trades. So what happens is a developer who considers a company after they look at the equipment and they say, okay, is this supplier going to make it easy for me to do business? And what we like to say is winners make it easy to do business with. Winners deliver on their promises. Winners deliver high quality services to their customers.
And that's what we want to be. We want to be here a winner and we're going to continue to work hard. Geographic coverage. I've said that we have great geographic coverage, probably the best in the industry. But what I want to also stress here is that this is not a static model.
Each and every year, we review every branch, office, service depot to make sure it is in the right place at the right time. We are not over invested. We're not under invested. We're not missing opportunities. We're constantly adjusting this portfolio, if you will, of locations to make sure that we've got the right mix for the right market.
We're not overspending and we're controlling our costs. Our Service Business. We want to really be a leader in this business, and we want to continue to ramp up our volume in this area. As you can see from 2,006 to 2014, we've really grown this business quite rapidly. But what's interesting is when you look at the lighter blue side, this is the equipment that we have installed and is now in what we call 1st maintenance.
By the way, this 1st maintenance is a revenue generator as well. All that is revenue generation. 1st service is the pipeline which will then convert over to long term maintenance. The issue of conversion, very important for us. We take this as a very important KPI for our teams.
We have right now on the KONI brand the best conversion in the industry here in China. GK continuing to work on its conversion capabilities and on its service business. So we see that as a great opportunity going forward. And by the way, I want to say as important as the new equipment businesses, this is very key for our sustainability. This is our legacy that we're leaving for the next generation of people to come in to this market.
A growing opportunity and one that we're developing our capabilities on very quickly is a modernization market. The lifetime of elevators here in China is a lot shorter than in most other industrial cities industrial countries, excuse me. And the reason being is that the usage rates are very high. For many, many years, as they were building buildings, they didn't put in enough elevators. We call that they under elevated a building.
A typical building, let's say, 24 stories might have only 2 elevators. Well, those elevators are going all the time. Today, of course, a typical building that's 24 stories has a minimum of 3, sometimes 4. So you can imagine these elevators that are turning 15 or 20 years old in the next few years, they're tired. They need to be upgraded.
But this is not an easy business to do. It requires a lot of expertise and you're working in occupied buildings. The owner is very nervous. The owner is saying, how can you ensure that my present tenants are not going to be disturbed too much? So they're not going to go out and just talk to anybody.
They're really only going to go to a company they have confidence in that they feel comfortable will be able to treat their tenants well and make it as easy as possible for them to modernize their facility while not stopping people from using the building. Let me give you one example of a typical job that we're doing today in China. This is Plaza 66. It's on the west side of Shanghai, the other CBD district, a modern shopping center. Plaza 66 has world class tenants in there.
And you would recognize the names in luxury goods, in consulting are all office in this building. The customer was unhappy with their present supplier, a competitor of ours. These are not KONI lifts that we're taking out. We're putting in though brand new KONI lifts, taking out the competitor equipment. Did I say this was competitor equipment?
Okay, you got that. So putting taking out competitor equipment and putting in 18 brand new KONI lifts, and we're going to improve the waiting time with very modern algorithms, dispatch technology, better reliability and make it what we call their people flow in the building much better than it was before. We talked about the cost the labor cost increasing. How are we addressing that? Well, the big one is in productivity.
And this is where I believe we're doing an outstanding job. One key area that we've looked at and we've been really rolling out very quickly is providing new installation methods. These installation methods we call scaffoldless. In a typical building, you wait till the building is completely topped off and then the elevator company comes in, builds steel scaffolding in the shaft and then the workers come in and build the elevator. Once it's once they've reached a certain stage, they have to then take the scaffolding out and remove that and go on.
This new technology that we're doing allows us not to have to spend money or take time to build or disassemble a scaffolding in that building. We're able to work more effectively, quickly, get our people on and off the job site, install the elevator higher quality, more safely, and then we can turn the elevator over to the customer more quickly so he can then use that for his trades. Remember what I said, building here is complicated. If you can make your developers' life easier, they'll want you. In addition to hardware or methods like scaffoldless, we're providing our field management, our supervisors, our people, field management tools, mobile tools that allow them to stay out.
One thing that I want to add to Hendrik's comments and this is exciting for us and that is e learning. We now push learning down to mechanics, supervisors, so that in their spare time, they can learn all the techniques. They can receive updates in how the technology is changing, updates in how to manage job sites. This is a very powerful tool for us. And by the way, what we do is we incentivize our service people that as they improve their skill level, they can receive higher pay.
So we can push information and then they pull from us that they want to improve their skill level so they can receive a higher salary. But it's a win win because
we're going to
get more productivity out of them. They're going to go to a job site and be able to solve a problem more quickly and then provide better customer satisfaction. And we have to do a lot of training. Training, training, training. This is where we invest a lot of time and energy.
Let me give you an example of a typical day in the life of KONE China. On any typical day, let's say today, Friday, we're going to book between 46 100 elevator orders. We're going to work on more than 4,000 construction sites. Jani, my colleague, is going to ship through his distribution center more than 9,000 crates and components out to these job sites across China. And our 5,000 service technicians are going to perform more than 22,000 service visits on a typical day.
Today, I'm also going to hire 5 more people. Every day, at least 5 people. What's our way forward? Well, we've talked about this before. We've got great products covering all segments, both in GK and KONE brand.
We've got the 2 brand strategy working for us covering 1st, 2nd, 3rd, 4th, 5th tier markets, all the developers, great geographic coverage, but making sure it's at the right cost level. We're focusing on the service business and not just as an ancillary business to our new equipment, but as a stand alone profit making business. And we're hiring and training the best people in the industry. That's where we start from. Where are we going to go?
We're going to first make sure we keep reminding ourselves, we want to grow profitably in this market and we want to grow faster than the market. And we want to do that by keeping that challenger mentality. Thank you. I'm number 1. Let's move on.
Let's earn that stripe every day. And how are we going to do that? We're going to continue to leverage our scale and our delivery capabilities. We're going to make sure we've got the best field of productivity in the industry, adding those technologies, working with our customers, making their life easier and making our people more effective. And finally, we're going to make sure that we focus on this great service business.
We're in the number one position. Great momentum, best team, outstanding offerings, fast growing service business, all of this in the world's largest new equipment market and service market. I'm excited about the future for Kona here in China. It makes me pumped up. Thank you.
Thank you, Bill, for the very comprehensive update. We have now time again for some questions, and we can start here in the middle of the room.
That's a good sign. Sorry, it's on. Last problem from Barclays. 3. I don't think it's quite working, but I'll give it a go.
You talk about 5 hires a day, 1,000 employees a year or more. Can you talk a little bit about how you are adjusting or how you can adjust your service business to a weaker market? How geographically mobile is your service workforce? And how easily can you redeploy that? That will be my first question.
Generally, our service people, yes, are very local in the business. And but I think the key is not just their mobility, but how we can bring to them more training. And so we're doing that through mobile devices. And we also want to make sure that they're connected with supervisors and leaders within their local geography. We've got certainly enough business to support these people.
I think generally when we talk about redeploying resources, we're talking about within a company. For example, in case we saw in some areas sales we were not happy with, we would move salespeople from perhaps new equipment over to service sales or we would move installers over to the service business. So we would be able we have enough growth in our in both of these markets to allow us to flex the workforce within that given area.
Secondly, can we talk a little bit about pricing dynamics? You and I think Henrik have historically been a bit dismissive of the idea that the aftermarket impacts the OE pricing. I wonder whether you can talk about pricing strategy in China, how that differs to developed markets and how you expect that to transition towards more a service led pricing model, partly, I guess, as the OE part of your business declines and as you ramp up your service business?
I'm sorry, I didn't quite get your question. In other words
How aftermarket and the opportunity in aftermarket, again, we're looking at aftermarket in China, which arguably could in the longer term be very, very attractive, very profitable, high density rates. You would expect as competition increases for that service business, as most of your competitors ramp up their service businesses, how does that affect pricing on your OE business?
Well, they're 2 separate markets. The OEM business has to work on its own and customers will look at that. In the first service period. That's included in the contract. That's part and partial of the new equipment contract.
Then when we convert that over to our service, we're typically not competing necessarily against, let's say, an OEM per se, but we're competing against many of these smaller regional players or even in some cases, a company's own management property management team. But what we try to focus on is the reliability of our service, the professionalism. We're never going to be as we're never going to be as priced as well as these small mom and pop companies, these small independent operators. We'll never have that. So we have to say, look, we're going to offer you something that they can't.
And that's where our value is. I would not even price myself to compete with them.
If I could just ask a third and final question. We've seen new construction starts, as you have said in your presentation, decline since 2014. We've seen more recently house prices and indeed sales improved since April, May. Historically, we've talked about a sort of 6 to 9 months lag between the 2. Do you think we're in a prolonged decoupling period where we see given inventory levels, particularly in Tier 3 to 5 cities, starts to decouple and therefore, in a prolonged downturn as far as construction is concerned and a decoupling from house prices and house sales?
I think you just yourself already mentioned there's between the 3rd, 4th and 5th tier cities, there's a lot of different change going on right there. So that's going to certainly affect how construction starts, start. And I see what's happening now is that developers are shifting their priority away from Tier 3, 4, 5 cities back to the Tier 2, 1 cities. So we're watching that very carefully. But remember, this is still a very large market.
There's still a lot of starts that still happen. But clearly, it's gotten softer over the last few months. So we have to watch it very carefully.
Okay. Let's take the next question from this side of the room.
Thank you. This is Antti from Danske Bank. Understanding about the Chinese new equipment market, you showed the increasing work in progress backlog. Still, the elevator market is declining. How should we read this?
Is it like developers started some buildings past in the history, and now they realize that we actually don't want these buildings completed? Or how should we read this?
Clearly, developers have slowed down some of their projects. But what we've also seen is a developer typically in the past would take down a large reasonably large parcel of land and that maybe have 4 or 5 phases on it. What they're doing is they're moving ahead in the past they would move 3 or 4 or even 5 phases simultaneously. What we're now seeing is they're being a little bit more judicious. They're building 1 phase at a time and seeing how sales go.
So we're seeing they're more cautious, but not necessarily stopping the completion of a building, but more the phases of their construction. Total stopping of jobs, we don't quite see that on a mass level at this point. Individual cases, of course, any circumstances different from the other. But generally, what we're seeing is that's how they're slowing down their business. Instead of building all phases or more phases at the same time, they'll take one phase, see what happens and then go to the next.
And your view, say, in the medium term, do you think that this is kind of a soft patch? Because we have seen some, as you mentioned, leading indicators like pricing and sales data improve slightly in the short term? Or is this something that could last 3 years that developers slow down, slow, slow, slow the conversion?
Well, it's hard to really give you a forecast what it's like. And we sort of want to avoid it. We want to look at things more short term. We've already said that for this year, it's the market has clearly softened. Henrik has also given you a little bit of insight that we feel next year there will be softening in line with what we've seen this year.
But I think beyond that, it's hard to say. I also see some as I mentioned, some positive signs in the market already. How sustainable they are, time will tell.
Thank you.
Okay. And let's take a few questions from the back of the room here in the middle.
Hello. Thank you for taking my questions. I have 2. The first one is, what are the forms of corruption that you're most exposed to? And here I'm talking about where you would benefit and where you could be hurt financially as well as on the OE side and on the service side, particularly because you're growing so quickly.
Could you comment on that and risk control?
I'm sorry, I didn't quite catch that. What was that again, please? Can you speak up?
I will repeat the question. What forms of corruption are you most exposed to both where you would benefit and where you would be hurt financially as well as on the OE side as well and the service side?
Well, you mentioned that, and that's a very serious issue that we also take very seriously. As you know, China is instituting a very strong anti corruption campaign right now. We think this is a very net positive for our industry and the government as well and the country as well. I see that I want to make it very clear that we have 0 tolerance towards corruption. We have very strong code of conduct.
And this applies not just to China, but to our company globally. We spend a lot of time communicating, training. And we would we don't tolerate any form of illegal payments. And this is something that we take very, very seriously.
My other question is on the incremental capture rate. Could you give us some color on the high end? I guess that was always high, but on the mid range and on the entry level, your success at increasing your capture rate?
So you mean the conversion rate?
Conversion rate, sorry.
Conversion rate, sorry.
Well, we've had very strong conversion rate on particularly on our KONI brand because we have focused from the very beginning that with the customers, the end users that we want to not just provide the new equipment, we want to make sure that we get the service. So it's not just a it's a full mindset and organization structure. We have the people in place to be able to provide the quality of services that we expect and that our customers want. But as I say, I can't catch all of it. I'm still at only 60% conversion.
I'm not happy with that. And on our Giant Kony brand, we're not quite the same conversion level. We think we've still got a lot of opportunity there. This market is still rather immature. It needs some time to grow.
OEMs still only account for 25% of the overall conversion of their equipment to their own maintenance. So it's still early days. And I think this market will mature again as regulation becomes more enforced here in China and as customers their expectation for better services, better transparency to what's going on with their equipment takes off.
Let's take a question here from the middle.
The first one, you mentioned that we are seeing a change in the market from Tier 3 to 5 cities to Tier 1 to 2 in terms of the developers. So could you maybe talk a bit more about your position in this Tier 2 and 1? Would this be a beneficial trend for you and also for the other OEMs? Or how should we think about that?
Yes. Well, as I showed on one of the charts that we're our product portfolio and our coverage rates are very strong across the entire product, along the entire range, not just from the high end, mid and value segment. The 2 brands are well positioned to go after any jobs in all these tiers. As though developers move back, let's say, from the lower tiers into the higher tier cities, that's going to generally have a higher probably a higher impact on the KONE brand. So that would be again more towards our brand than the GK brand.
But its business is still developing well. There's still a lot of opportunity for that even in the softer markets of the Tier 3, 4, 5.
If I rephrase the question slightly, so can you say how your growths have developed over the last 5 years in Tier 3 and lower and Tier 1 and Tier 2 in terms of is Tier 3 and 5 a bigger share of the group today than it was, for instance, 5 years ago?
Well, how it's developed is, again, I would say that okay, breaking the brands down a little bit, we have done the KONI brand is targeted Tier 1, 2 and 3. That's done very strongly, very well. In the past few years, Giant Kony has really found its footing in the Tier 3, 4 and 5 markets, also from a share point of view, done very well. I would say that again what I just mentioned that with the softening in these lower tiers, we're going to see certainly a little bit more headwind trying to gain more share in these smaller cities.
Okay. And then my second question would be on the services. So you mentioned that there were 8,000 service companies in China, I think. Yes. So have you how has that number developed over the years?
And are you seeing that, that number is still significantly growing? Or are we starting to see that some of the smaller companies are maybe running out of businesses on the ordinary equipment side?
There's clearly a lot of churn in these small service companies. And license can move back and forth. And in some cases, people will they'll actually pay a fee to someone who has a license to work with them, but they'll be sort of independent. So there's a lot of variation in that level. Think what's important to recognize is that these are all very, very local companies within a given city, sometimes within just a district.
They may have 200 or 300 units under service. We're also seeing that what happens is when a service company tries to go above 500 units, it's really difficult for them. A small service operator typically is an entrepreneur by himself, and he can manage 30 or 40 people at a time perhaps. But once it goes above 500 units, very difficult for them to maintain control over the business. So we don't really see that these companies are growing.
There's a lot of churn. We also see that people, as they're getting older now, they want to leave the business. So there's going to be some opportunity to pick up some of these units as they come on to market.
Okay. Thank you very much for the good discussion and Q and A. And we will have time for more discussions after our last presentation of the morning. But now let's move on. So thank you, Bill.
Thank you.
And welcome on stage, Erika, our financial development.
Thanks, Kandi.
So it's good to be here this morning with you here in Shanghai in our Capital Markets Day. Just a moment. So last year, I was talking to you in our CMD as the new CFO of the company. And I can tell that it's much nicer to be here in the podium this morning when I do recognize several faces already. And I have had the opportunity to meet quite a few of you in the past year.
Am I having a problem with the microphone? Okay, it's breaking up here a bit. All right. So you have heard Henrik discussing today about our recent developments. Also, he talked about the megatrend urbanization.
Microphone.
Erika, maybe you can use this one.
Yes. Now it works. Can you switch this off so we don't get the double impact? All right. I don't know how much you heard from the beginning.
But so you heard in the morning Henrik discussing about our recent developments, and he also discussed about the megatrend of urbanization and how we are addressing the changes that we see in the industry. And Bill was discussing about China. And now I thought that I would share with you thoughts more related to our business model. And what I thought that I would cover there will be these topics that I will shortly come. But first, I need to mention that last year, I already said that I like the business model of KONE as a new CFO.
And after 1 year and having more understanding of the business, I'm very excited about it. And I'm pleased to share with you now why I think we have such an attractive business model. So first of all, we are positioned very well in the industry, and we are a global company in a life cycle business. We have good visibility to our revenue. We have good order book, and we also have recurring revenues coming from our maintenance business.
We have a flexible cost structure, and we can create good cash flow and also high return on capital. So let me dive a bit deeper into the subject and start with this geographic footprint of ours because we really are global. We operate in over 100 countries around the world. In 60 countries, we have our own units. The rest is covered by distributors.
So that really makes us global. And if we look at where we are, so over 40% of our sales is coming from Asia Pacific and about the same from Europe, Middle East and Africa and 15% from North America. As a reminder, we are not present today in South America. And we are in life cycle business. Henrik was already talking about it.
But if you think about it, that we sell equipment, we install it, We maintain the equipment under the first service period. And then we sell the maintenance contracts. And then we have the opportunity to modernize the equipment when they get older. We might start partially modernizing, as an example, like upgrading electrification. And then at the end, we can make a full replacement.
So that's about the life cycle. So we are there present with our service to the customer all the time. And if we look at this new equipment business, so you see that it has been growing fast over the past years. And yes, we have a strong position there. We are joint number 1 in the market.
When we look at the maintenance business, we are a challenger, and we have the opportunity to accelerate the service growth as has been discussed this morning already. And in modernization, we have been growing, but there is more opportunity to capture. And clearly, we can do better in the modernization side. But if we then move a bit and come back actually to Henrik's presentation and you recall him talking about the framework related to the urbanization, the phases of urbanization. 1st phase, people moving from rural areas to urban cities, then the increase of the middle class income and then getting the efficiency in the urban living.
And if we put that into context, actually, it's quite interesting because here, I can identify similar kind of development phases with our current business. These numbers here that you see are our sales per area showing the split between new equipment business and the service business. And let me start from the mature countries like North America and Europe. There you can clearly see that the service is the majority of our sales today, 70%. But still, 30% is sales for new equipment.
And that is like applying there is a need in the Phase 3 in the mature countries to continue building and having opportunities there as well. And when we move to the Middle East, the picture changes quite dramatically. 75% of the sales in Middle East is new equipment, but we already are having service sales and we are growing that business in that market. When we look at China, and that has been discussed already this morning, so less than 10% of our sales today in China comes from services. And we have this huge opportunity in our hands now to capture the growth.
And being the leader in the new equipment side, it gives us a good start. And then Asia Pacific. There, the situation would be like fifty-fifty. But let's remember that, that consists of countries like Singapore in one hand and on the other hand like India or Malaysia. So there is some variation.
But overall, I would describe the rest of Asia, excluding China, as countries where we are having very healthy, good new equipment business and we are growing our services. So what does it mean for us? This means that we have the opportunity to serve our customers and give the right set of products and services that they require. And if we look at this in practical terms, what does this mean to us in our daily life? It means that we can think about each market in a bit different manner.
And I can tell you that whenever the phone call comes in the office, every phone call is different because the needs are so different in these different markets. And let me go through a bit more in detail examples of the focus areas in each market. And starting again from the mature markets of Europe and North America. So in the mature markets, as you know, the labor cost is high compared to the developing areas. So there, the installation productivity is an important cost item to be looked at.
So how can we actually improve the productivity there is valid, both for North America and Europe. And also, it's about pricing capabilities, sales management, but also to have the right competitive products in the marketplace. In Europe, I would say that actually what is specific for that area is the fixed costs. So we need to make sure we have the right level of fixed costs and we get the leverage out from the market that has been low for a long time. While then looking at North America, the situation is different.
We have been performing very strongly in North America in the recent years, and we have a big order book. And there, our focus area is to actually be able to deliver the order book, find the people, train them and have good quality delivery. On the maintenance side, the focus areas would be then more common for these mature markets, talking about the field operations and the productivity there and also about the pricing capabilities. But then moving to the Asia Pacific and the Middle East. And let's start from China.
So here in China, it's very important for us to look at our product competitiveness, also about the installation productivity and also this fact that how do we grow now our service business. These are our focus areas. When we then, on the other hand, move to rest of Asia Pacific and Middle East, we have a high order book, and it's a point of ensuring that we can execute in the quality manner the order book. And also here in Rest of Asia Pacific and Middle East, it is about learning from other countries that we don't have to invent the wheel again. So we know how to do things, especially now in the service side and also expanding the footprint and making sure that we can also grow the service in that area.
So I find this quite fascinating, combining this urbanization story and looking at where we are because it tells that we have different kind of opportunities But let's then move to look at the order book and the recurring revenues and see how what kind of visibility we have towards our revenue and what's the benefit out of that. Naturally, it gives you some time to think, time to plan what needs to be done. So let's start from the order book. So at the end of June, our order book was all time high. It was €8,600,000,000 And as a reminder, so in order book of hours, we include new equipment orders and modernization orders.
So the maintenance contracts are not inside of our order book. And what does this order book, which has been growing over the years, as you can see, give us? It gives us visibility towards the future in the new equipment and modernization side. And how long is this visibility? So these numbers that you see here are now related to the new equipment.
But I could say that roughly in the volume business, it's about a bit more than 1 year and in the major projects, up from 2 to 5 years. And if we look at the bar here on the left, so you see that the major projects represent today about onethree of our order book, and that has been growing over the years. And these major projects have become bigger by size and longer by nature. So that has somewhat slowing impact to our order book rotation. In the volume business side, the rotation, I would say, that has been pretty much the same, maybe just slightly increased.
But in all areas altogether, it has stayed in a good level. And if we then look at the bar on the right hand side, this shows the split by region, the order book by region where you see that the Asia Pacific has approximately have but please note the North America. If you remember pictures where we talk about the market size in unit like in volumes. So North America does not represent such a big share of the new equipment, but the monetary value is higher. It's good business over there And you can see that it's growing now very well.
So order book gives us visibility. Then what about maintenance business? Actually, maintenance business is my favorite and CFO. It is the highest profitability of our businesses as in many other industry as well. But also the fact that maintenance business bring us recurring revenues, which are stable, and they normally go pretty well also through different kind of economic cycles.
Today, our maintenance business is about onethree of our sales, and the growth rate is 5% to 6%. And yes, our plan is to accelerate that sales growth. And you have heard this morning about the ways how we are approaching that. One good thing about maintenance business still is that it's a sticky business. Sticky meaning that the retention rate is pretty high.
So 90% to 95% retention rate globally. And as Erik tells me that it's not enough. We need to improve. And that's why we have the plans that we have been discussing, how to get the customer satisfaction up and improve even further. So then we have been touching now our global position, our visibility revenue.
So then I would like to spend some time to discuss with you about our flexible cost structure. And let's start talking about the sourcing and manufacturing side. So in the sourcing and manufacturing, we have inbuilt flexibility in that way that now in the afternoon, when we go to Kunshan, you will see that our factory is actually a set of assembly lines. It's a set of assembly lines where you see people working in shifts. And we also purchase majority of our components from our supplier network.
And our product platform is very harmonized, which gives us a capability to have pretty standardized components. So that brings us flexibility then also in the sourcing side. And our factory, it's not that expensive. It's no pulp and paper business. So you will see that is a very capital light model that we have when we talk also about our manufacturing.
Another element then related to flexibility is in the installation side, where the subcontracting is being used in many countries, for example, here in China. And then also looking at the service. So we have been discussing about expanding our service business, but that is not tying so much money. It is about people, finding the right people, training these people, getting them to work and sharing with them about the practices that we have learned over the years in other places. So that's about our cost structure.
And I could say that we do have pretty low level of fixed costs compared to the variable costs. But let's then look at the external environment. So there have been both headwinds and tailwinds. And we look at the pricing environment and on the other hand, the cost environment. The price competition has remained intense, but I think Bill was pointing out that yes, well, there has always been competition.
But now it has become even more intense here in China. On the other hand, the good news is that in North America, we have seen improved price environment Oren, for some time. Also in our modernization business, we have seen a healthy environment in pricing, especially in our growing markets. Then on the other hand, the maintenance business, there pricing remains competitive, especially in South Europe. And there is the logic that in those areas where the volumes have been low for new equipment, then the maintenance business has become very competitive.
So in South Europe, we continue to see intense competition. But then we do have also tailwinds. And as Bill was pointing out, that despite the price pressure, we have been able to keep good levels of orders received margins in China. And that has been supported by our product competitiveness, but here, talking about the sourcing cost. So the raw material prices have been helping us somewhat, but I'll come back to the own actions, but that's important as well.
Another favorable trend has been then related to the labor cost inflation because there, like in mature countries, it has stayed in the single digit level. And in the emerging markets, I would say that we have started to see a trending downwards in the labor cost inflation. So this is the environment. But what are we doing about it, I guess, is a key question. So if we think about pricing, so in the pricing side, it is about us making sure that we utilize our sales management processes as we have defined them.
And we have been discussing about this sales excellence and bringing global tools and processes for some time already. And it's to continue working on that. And it's also about bringing the capabilities to be better in analyzing the data to support sales. On the sourcing side, it is a fact that when we're having the volume, it helps. So we need to utilize the economies of scale there continuously and also make sure that we get the benefit from the low raw materials into our component prices.
And they don't come automatically. It requires work, as you can imagine. But the most interesting of these, I would say, is the last topic, these product cost development actions because those are the ones where we go back to the design table. And we start with looking at how does the new product look like or how can we modify the existing product. And there, it's a question that how can we optimize the use of components.
We look at the manufacturing process, try to make sure that we would make it as simple as possible. We also think about the installation guys and how do they work, how could we make it easier for them because each little piece in these processes has a cost tag. And when we can reduce it, it helps us. And one more external factor very familiar to you, but maybe worth reminding is like the our FX exposure. As the title here says, so our FX exposure is mostly limited to translation risk.
And why is that? So the transactional risk is pretty limited because in most of the countries, we sell and purchase in the same currency. And when there is some exposure in a country, it will be hedged according to our corporate policy. The translation exposure then instead is significant for us. And why is that?
Because 70% of our sales comes in other currency than in euro. And when we translate our numbers into home currency in euros, so naturally, it has an impact. This year, we have seen weakening euro, and that has brought positive impact to our EBIT. I think Henrik already mentioned, but I'll repeat that in the current estimate of hours for the full year result, it includes an FX impact of €100,000,000 to €120,000,000 And we I've checked like taking into account also the July, August, early September changes, and this range is still valid. Then on the economic exposure, the comment is that no major implications on competitiveness because according to our understanding, our biggest competitors have pretty much the same kind of footprint as we do.
So let's then move to our strong cash flow. So as you can see here, the chart on the left hand side shows you the quarterly rolling cash flow, which has been developing very positively. And our working capital has been staying at a good level, very good level, I would say, if the level was minus €950,000,000 at the end of June. And cash conversion has been strong. So what's behind this?
Well, it starts from the payment terms where we have upfront model where the customers need to pay us down payment and milestone payments. But then, of course, the working capital management, making sure that we manage our inventories, payables and receivables in a professional manner is part of this. And if I then break down a bit more in detail the working capital. So first, on the left hand side, you see the working capital rotation for inventories, receivables and payables. And the highlight there for you would be that look at the payable curve.
There, we have been able to improve, which means that we are very happy about that. On the right hand side, this is a new picture, maybe it needs some clarification for you. But okay, so the green is our advanced payments and when it's negative in the balance sheet, So now it's minus €2,000,000,000 meaning that our balance for advanced payments at the end of June was €2,000,000,000 That's the amount of money we have received from our customers, and this has been growing because we have been growing. Then on the in the blue line, you see the inventories. And the inventories is the money that is tied up to these projects that the customers have paid for.
And a KPI, which I look at very carefully, is this so called net inventory, deducting from advanced payments the money tied to these projects. So minus 2 or let's say, dollars 2,000,000,000 minus this $1,400,000,000 And there we come to close to negative €600,000,000 of net inventory. And you see that it has also been developing favorably, telling that we are able to hold on to good payment terms and also run our business in a good way. And the blue line there is then the official working capital number. But what about the money we spend?
What about our capital expenditure? It's one of the beauty of the business model. This is capital light business. So we spent a bit more than 1% of our sales in capital expenditure. So what do we have there?
Like what kind of items? So it can be about expanding our production facility or building a new one. It's about R and D facilities. You will see in the afternoon a wonderful test tower in Kunshan. It's quite beautiful.
Then there's also like the IT investments included. And we also have investments related to improving our installation productivity. And this one is not including in our acquisitions, what I'm talking about. But then if we talk about acquisitions. I'm not too proud about the number that you see for the first half because it doesn't tell about the activity that we have all the time.
We continue with our strategy that we are interested in finding opportunities. And sometimes it takes a long time to get these closed. So the number is pretty low there now for the first half, but we will catch up on that we did last year as well. So lately, we have been acquiring small maintenance companies, which bring their maintenance portfolio, which we can combine to hours and get density. Sometimes we are interested in acquiring a distributor, which is giving us access to a new market.
And what kind of companies are we interested in? I would say that the rule of thumb would be related to our ambition of the People Flow experience. And yes, we would be interested also to look at bigger targets. So we keep our eyes open. But I think we need to or I remember always what Henrik says to me, that to be able to buy, you need to have a seller.
So we are continuously looking at different opportunities here. So talking about cash flow. So I'll close the cash flow side now related to dividends. So as you know, we have nice track record of paying dividends. We still do not have a dividend policy, but it is our Board of Directors which considers the situation of the company and then makes a proposal to our Annual General Meeting.
So then on the high return on capital. I'm quite happy about this picture. And I think quite many of you agree with me that these are healthy numbers. And okay, this is supported by our life capital intensive business and with the growing earnings that we have been able to create. But let's spend some time to discuss now these earnings.
And I look at our EBIT, how that has been developing over the past years. So you see here that we have been growing both on the absolute and also margin wise. This shows the margin picture. And here, the improvement, it starts with the fact that we have been growing our market share. But when we look at the business mix, it's good to know that it has not been favorable because our new equipment business has been actually growing faster than the maintenance business.
But then on the other hand, let's remember that the maintenance business has been growing as well, bringing absolute value there. While we have been growing, we have been seeking for operational efficiency. So we have wanted to make sure that we utilize the best practices. We bring in global tools and processes and harmonize our ways of working. Surely, we have still a lot of work to be done in this area, but we've done already a great lot.
Then on the sourcing side, we have centralized our sourcing activity, and that has helped us. And also the size of hours has helped. And then the fixed cost leverage is something that what I always talk about and what we should focus going forward as well. And I can tell you that in an exciting world of ours, there are a lot of ideas and things that we could do and go into new markets. So always have the balance like how much do we put money then in fixed costs and do the right choices there.
So looking at the long term targets of ours, we have not changed them. They are the same. And I could say that I can tick 2 out of 3 boxes that we have achieved so far, and we have not had a defined deadline for this. So we have grown faster than the market, and we have strong cash flow with improving working capital rotation. The profitability target of ours is 16%, and we are at the level of 14%.
Well, we are not too unhappy about it because we have been able to create absolute growth of EBIT with the support of strong growth in the new equipment business, but also the other items that I mentioned there earlier. But the 16% target is a realistic target, and I'm going to tell you how we are going to approach it. So first of all, we need to continue to grow, and we need to accelerate the service business growth. But also in the new equipment business, our plan is to continue to grow faster than the market. And these smart growth investments relates to what I just said about that there would be a lot of places what we would like to do and increase the cost, but we need to be smart and have that well under control.
About quality. Quality has always a price tag. And quality is a prerequisite for improving productivity. And that's why it's important for us to improve the quality of field operations and also the new products. Then moving to productivity side.
There, we need to continue to drive improved productivity in maintenance and installation and also in the fixed cost side. And then finally, pricing. That is we need to continue this pricing excellence work that we've done, make sure that we have the right processes and tools in place, but also that we balance between growth and profitability in the right manner. And it all starts from understanding the market very well. So these are now the elements of our business model.
And I think it's a pretty attractive business model as such. And listen to the morning discussion about the future and how we are going to address the future with new opportunities, I think this gives us a good standing point to start looking for the future as well. Thank
you.
Thank you very much, Erika. And let's have a few questions for you before we turn to the general Q and A. We have a question for you here in the middle of the second row. Yes, that would be Tom.
Yes. This is Tom Skogman from Handelsbanken. You said you have an appetite also for bigger acquisitions. How would you characterize how much debt you could have with your model and balance sheet?
Well, you know that we have very strong balance sheet, and maybe I'm not willing to state any numbers here. I think there's enough bankers around that you can do your calculations. But still, like there's a lot of flexibility in our balance sheet. And we are not afraid to have net debt if need be.
Okay. Then we have a question here in the front row, the lady in the front row.
Thank you. From Sumit View Capital. In terms of the maintenance business, you just say that we you have like 5% to 6% growth over the past several years. I would like to understand how much is from like organic growth and how much from acquisition? And how much do you pay for those acquisition in general in the past 5 years?
Thank you.
So I would say that, first of all, starting now from the part that for the acquisitions, they are pretty different in different parts for these maintenance companies. But overall, the level is about 1 third that we've had. Is that correct?
From the growth, if that was your question?
Yes. And then your next question was then about the pricing model or well, we haven't answered the question when you have often asked me about the multiples on that side. But overall, I would say that we are able to integrate the maintenance portfolio very quickly to our operation. And so we can then take our processes and tools in use that in that sense, we get the productivity in. And we take the people over from the acquired company.
And most often, we take our brand over, but sometimes we lead them with their own brand. But we use our scale as a help to make it very good and profitable business for us.
Okay. And again here in the front row.
Guillermo Pena from UBS. Maybe a couple of questions regarding, first, advance payments. Can you disclose how much of that is China based?
I need to check, have we disclosed the exact payment terms in China? But I can say in general terms, Guillermo, if that's okay, that about the payment terms in China because that is probably of interest to you, that we have here maybe even more favorable payment terms than in the rest of the world. And now the question would continue probably that have we seen a change there. There has been some pressure from some customers to change the payment terms, but we are pretty conservative and we are not willing to be the 1st at least to do any moves. So we had done some slight changes, maybe removed a milestone payment for some customers.
But overall, I can say that we continue to have very good and strong cash flow from China and there has not been any massive pressure to change the payment terms.
And then a follow-up regarding your business structure when it comes to pricing, raw materials and headcount. Can you give us a little bit of granularity on the current trends? So how much for the group, I guess, pricing is down or what's the number there roughly? And then how much raw materials or components are basically down? And I think you gave some guidance on inflation, but headcount inflation plus organic growth in employee.
Can you give some granularity on that?
It's a difficult question from that perspective. The markets are different. So if we look at the new equipment business that you are referring to and then most likely also related to China, So let me answer to that part. So there, starting from the price side, so we have seen, let's say, 2% to 5% price reduction this year. And we feel that we have been able to compensate that with our product cost.
So our orders received margins have been staying approximately in the same healthy level where they have been in the past. And then as I mentioned, then for the labor cost side, the inflation rate there has been like close like about 8% in the past, but it's coming down now.
And your growth in employee?
Yes. Just to add to what you said, Erika, as we reported in the Q2 results, the margin of order to seat was pretty stable globally in Q2. And I think, Guillermo, if we can switch to the general Q and A, I'm aware of time, but we can certainly continue the discussion over lunch. But let's have a few more general Q and A still if you have questions on any of the other presentations. So I would like to invite Henrik back to the stage.
So, thank you very much.
Okay. Can you yes.
Peter, please, in the front row with the light color shirt.
Hi, Henrik. Peter Lawrence, JPMorgan Asset Management. Three quick questions, please. Firstly, you highlighted the 1% gain in market share last year. 1 of your leading competitors is saying that you're actually losing some market share in Giant at the moment.
Could you comment on that? And if so, why?
Let's take one question at a time. That just makes it easier. First of all, we look at our China market share as a whole. And that's exactly the idea of our dual brand strategy that currently Giant Kone's customer base has a little more challenging environment than what we have in Kone. So now the Kone brand is growing a little bit faster than Giant Kone.
If you go a couple of years back, situation was the reverse. And this is exactly how we have 2 brands and play. And I don't think actually Giant Corner has lost market share. So
The second question ties in with that. With the shift in real estate development back to Tier 1 and Tier 2, I assume that Giant is going to be disproportionately exposed to any slowdown in Tier 3 to Tier 5. So what measures can you implement to mitigate that impact?
Yes. So, first of all, I think the strength of our business here in China is that we have a good competitiveness across segments and across geographies. So if you're growing more now in Tier 1 and Tier 2, that's okay for us. And that means that, okay, we have a little bit lower growth in Tier 3, 4, 5 cities. Of course, we need to look at our cost.
We need to look at our productivity to be able to manage that. But also in GiantConnect, what we are doing there is that we are working hard to be able to ramp up the service business there. And I think we had here from Lars several questions about headcount. It is not such a big issue because the service business is actually much more people intensive. So if you can grow that, you actually we need more people rather than less.
But then we need to look at all the time all the productivity and efficiency we do, everything in operations, what we do back office and so forth. So constantly looking through this to make sure that we remain competitive as we do in a slowing market.
And the third question is on the shift in the market and also your business model more towards service away from OEM. Are you ironically going to be put under some margin pressure because of this because your business model in China has been that you obviously make decent margins on the OEM side and you don't yet have the critical scale on the aftermarket that you do in Europe and North America. So your margins may come under pressure before you really have the economies of scale that you want and also the pricing levels on the aftermarket.
So first of all, our service business in China is profitable, and we have good profitability. We have to remember that we as you saw from the chart that Bill showed, that we've gone from a very small service base to quite a significant one. So we've been ramping up that, and I think we have an opportunity to grow profitably our service business as well, as we have been doing. I think we have Ben there.
Yes. Here, we have one more question here on this side.
Yes, thanks. Ben Madison, Morgan Stanley. Two questions, please. Firstly, Henrik, you talked last year's Capital Markets Day about the negative competition balance you'd had on the maintenance book over the last few years. And you were taking measures to address that.
Maybe you can give us an update on how the competition balance has developed this year and how your measures have progressed and whether that is a drag on your ambition to grow the maintenance business even more quickly?
So the competition balance continues to be a challenge, particularly in Europe and U. S. And I would say, in particular, in Southern Europe where we have had a prolonged weakness in the new equipment market. We continue, unfortunately, to have a negative competition balance. If you compare to last year, we have improved perhaps slightly, but not much.
But where we have been able to improve is to see the overall pricing of our service base. So it's all the time also a little bit of a balance that how many units do you retain and what is the overall pricing of your portfolio. So I think what we have done slightly better this year is the overall pricing of the portfolio, but the competition balance has not improved quite as much as we had planned. But that's something we continue to working on.
Thanks. And then a follow-up on China and the 6 years of work in progress, which is just a massive pipeline of work. Just trying to get my head around how the elevator order process fits into that. So I mean is there any way you can give a figure as how much of that pipeline would have seen the elevator already ordered or where does the elevator order come in that construction cycle basically? Have they pre ordered elevators effectively, need to destock and we're going to see a hiatus of demand whilst they work that pipeline down?
So, first of all, I'll hand over to Bill. But you have to remember that what we said is that our delivery cycles in China are reasonably fast. So it comes at some point during the project. But Bill, how would you explain the kind of order to delivery cycle in China relative to this work in progress?
Typically use this mic. In the order cycle, typically a building will after about 12 to 18 months, it will order the equipment and then from there on, there's another, again, about 6 months or so from order to delivery, and which will bring it in. And then by that time, it's another 12 months or so by the time the project is completely finished. So we're talking about a 3 year product cycle approximately, give or take 6 months or so on either end. So we're still seeing a lot of work coming through because of the large size of the WIP.
Work in progress.
Okay. Thank you very much. And we can certainly continue the discussion over lunch. But to make sure that we will get in time to our Kunshan factory with the heavy traffic in Shanghai, I think it's time to wrap up this part of the presentations. And the final word will be with Henrik, who will discuss the key topics of today.
Okay. So thanks all for your attention. I hope you found had some good insights from our presentations today. I think our key messages that we discussed today are, 1st of all, that we are in an exciting growth industry where growth patterns are changing in this industry. But that is a good thing because change in markets gives opportunities to differentiate again in a new way.
And I think our track record and KONE way of doing things is to benefit from changing markets. If we look at the opportunities that we discussed, a growing acceleration in the service market, changing the types of services we'll provide to our customers, I don't think there's anyone that is better placed to capture that opportunity than us because we are the market leader in the fastest growing area where the services are growing. And I think we have an excellent team. I think we really differentiate from our competition with the strength of our team, the competence, and we see the stability also of the team that we have. And I think that will give us an opportunity to capture this new exciting growth phase that we are in.
So again, very interesting time to be in this industry. Will discussed China. We all know that China is going through a little bit more challenging period right now. It remains the largest market. A lot of opportunities.
I think we have a good momentum in this market. So we can find is that my mic? We can find good opportunities also in this more challenging environment, and we have done that. And we see a great potential and improvement in the service business, something that I think we have every opportunity to capture, again, with the strength in our team and our market position that we have in the new equipment business. We continue to have a very cash generative business model with light low capital intensity in the business gives us high returns for we have a very good return on capital.
So I think overall, we are in a very good model, in a good industry, and we think that we our coming years will be as exciting as our past years have been. So with that, thank you again for your attention and a good time to discuss during lunch, bring Kunshan further.
Thank you very much, and thanks also to everybody who has been following this via the webcast. So now it's time for lunch, and our colleagues will show you the way, and let's continue the discussion over lunch and during the factory visit. Thank you.