you, Carla. And also on my behalf, fantastic to see that so many of you have taken time to come and discuss with us today how we drive KONE going forward. As I think is familiar to you, our performance over the past years has been very strong. We have significantly outgrown our markets, and our growth has been consistently profitable. That's something we're naturally quite proud of.
Now our ambition is that we will continue this strong performance. And that is what we'll be talking about today, how we will do that. And when thinking about how to continue dry performance, it's always good to a little bit look back and say that, hey, what has driven this strong performance for us? And if we look at the main reasons for our performance, I would say the first the most important point is that it's been broad based and good. So we have had profitable growth in each of our businesses.
So that's very important. But then we have, in particular, grown much faster in our markets in the new equipment business and in the key growth markets of the world, Asia Pacific and Middle East to take some examples. And the reason we have been able to outgrow our markets with such a margin in new equipment and the growth markets, I would say there are 2 principal reasons. There are, of course, many reasons to this. But if I take away the principal reasons, I would say it's because we have differentiated strongly in our business.
We have been able to bring more innovative solutions to our customers than others. And then very importantly, our team has executed very well on this growth. So it's not only been about generating growth, but it's been about executing the growth. So I would say very much has been because of the differentiation we have had in new equipment and also very much because of the team we have, both our field operations as well as, I would say, our broader leadership team. When we look forward, we naturally want to build upon these strengths, continue to differentiate the new equipment, continue to build a very strong team.
But we also see that we have a very good opportunity to increase our growth in the services business. And this is what our ambition is now, to also differentiate in the service business as much as we have differentiated in the new equipment business. Because I would frankly argue that in this industry, so far, no one has properly differentiated in the services business. There's been some, but not as much differentiation as we have had in the equipment business. And this is really what we have now set out to do and much what you will hear about today, how we intend to differentiate in services and accelerate our growth in that business.
We're very excited about it. I'm very excited about it. I think we have a good opportunity here. So that's by way of short introduction what much of the theme will be about today. Of course, you will hear also from Larry Walsh about how we're driving growth in North America and from Bill Johnson how we continue to develop our strong operations in Greater China.
Now let me first take a few steps back and review how we have done. 1st of all, our performance, I'll look at that through our 5 strategic targets. I'll then talk about the longer term growth trends in our industry to again explain why we are in a good situation that we operate in an industry with good fundamental long term growth trends. Now talk about a little bit more near term, the specific geographical markets, how they're developing and then finally, perhaps most importantly, how we intend to capture these opportunities that we're talking about. So I hope this is going to be an interesting day and that you're going to be as excited about this as we are as a company.
Let me start very shortly first with our performance in the 1st 6 months. I think very familiar to all of you. We had a good start to the year. Orders received continued to grow, grew at 5.4 percent or 10.1% in comparable currencies. And in the second quarter, we were able to accelerate the growth.
So we had in comparable currencies 15% growth. And a good thing is that we were able to achieve growth in all geographic areas in the Q2. It's a good development. We also have a very strong order book. This gives us a good possibility to continue to develop KONE going forward.
And then sales growth has also been continuing positive 4.1% or 7.9% in comparable currencies. Here also growth in the 2nd quarter was 9%, so we're able to accelerate the growth in the 2nd quarter. Perhaps one of the most important points though is that our growth has been again profitable. So our EBIT has grown by 9.8%, and our relative EBIT margin improved from 12.8% to 13.5%. We've shown that, again, we have continued to grow profitably, and that's important.
We very much focus and we grow. It has to be profitable. And then finally, cash flow has remained strong, not quite at the exceptionally high level of last year when we had a very strong improvement in our working capital. We'll continue to improve our working capital, but not as much this year. But still a very strong cash conversion shows that our growth has also been disciplined, that we've maintained good payment terms, maintained good focus on operations.
So I think we're quite pleased with how first half of this year started. But I think more fundamentally, even we look at our performance, we think about our performance through our five strategic targets. And this is how we measure whether we have improved as a company overall. We have 5 strategic targets. The first one is to have the most loyal customers in this industry.
The second is for KONE to be a great place to work. 3rd, we consider ourselves a challenger in this industry. And therefore, our objective is to continuously grow faster in our markets. And then I talked about profitable growth. That's important.
There we say that our objective is to have the best financial development amongst the key players in the industry. And then finally, to be a leader in sustainability. When I review our performance, I look at it through these 5 strategic targets. And that's how we evaluate ourselves always when we look at whether we progressed as a company. So first, most loyal customers.
We just completed our annual customer loyalty survey, where we surveyed around 30,000 customers around the world. And I'm pleased to say that our customer loyalty continued to improve. We actually had a better improvement than we've seen a stronger improvement than in the past years. And the good thing here is that we improved our customer loyalty in each of our businesses. And this shows that the systematic work we are doing is delivering results.
It was broad based and strong development. And I think what is interesting here is that when we look at what our customers think about us, we naturally look at, hey, what are the comments they give about us. And the key reasons cited for why they choose KONE over the competition. There are 2 reasons that come out more often than anything else. It's the innovativeness and quality of our products.
And secondly, that KONE is a company that delivers upon its promises. So it's about our people. And this is something we think is fundamentally very important in a business like ours that is geographically very broadly spread and more than half of our people out in the field every day. So very strong solutions, and we deliver upon them. This we think is important.
But we think we still have opportunities here to really come to the highest loyalty level that you can have. But progress is good. The second fundamental area where we see we need to progress in order to be able to have a good longer term development is our people. And here we look at our employee engagement and motivation, and we set out to say that KONE needs to be a great place to work. What I think is the most important point here is that when we look at the past 3 years of our employee satisfaction survey, that each of the past 3 years, more than 90% of our people have answered this survey.
And if you think about most of our people out in the field every day. So this is something that we can show that people think it's important and they can see that we take this seriously. And the good thing is that we have been able to improve our employee engagement and motivation. This, we think, is incredibly fundamental and something that lies deep in the culture, how we develop KONE and how we make sure that people are engaged and motivated to continue to drive performance. This is frankly something, I think, difficult for anyone to copy and is really a good fundamental strength.
So that's about our customers and our own people. Then our next strategic target is to grow faster in the market. And I'll start with the new equipment business. Here, as you know, we have continuously been able to strengthen our market share in the new equipment business. In 2005, we were around 10% 2,009, we were about 13% and last year, we were 18.5%.
So continuous improvement in our market share. So we have definitely grown much faster than our market in the new equipment business. And much of this growth, not all of it, but much of this growth has come from good execution of our growth strategies in the key growth markets of the world. That has been our objective, and we have achieved that. So we can see, for example, as you know, that China Restoration Pacific, very material businesses.
So in China since 2009, we've gone from being number 4 player to be the leading player. And in Rest of Asia Pacific, we strengthened our number one position. So I think we can here say that, yes, we have achieved our target of growing faster than our markets, same thing last year. Then if we look at the maintenance business. As you can see, maintenance business has also continued to grow, and the growth in markets in Asia Pacific has been continuously strong and positive.
In the maintenance business, we have also strengthened our position, particularly in Asia Pacific. Because in China, also we've gone from number 4 to number 1 player. So we have outgrown our market also maintenance. But the difference to the overall markets, it's not nearly as high as in new equipment. So this is where we see we have an opportunity to accelerate our growth and achieve better growth relative to our markets than we have done in the past.
So we have grown, but we think we can do better in this area. And then I mentioned that when we grow, important for us that we grow profitably. So since 2,009, our compounded annual growth rate in sales has been around 10%, and our EBIT growth has been over 12%. So we expanded our margin by over a percentage point in this period of time despite the fact that the share of our new equipment business has increased in that period from 47% to 54%. So continuous profitable growth, and we can also see continued strong cash flow.
So this, I think, has been a good achievement. And then our final strategic target is to be the leader in sustainability. As we all know, sustainability is a very broad subject. But we think in this industry, the biggest impact comes through the energy efficiency or eco efficiency of our products and from our operations. So I look at it from that angle most.
And we are in a good position in that we are the leader in energy efficiency in our industry. Between 2,008 2012, we reduced the energy consumption of our volume elevators between 60% to 75%. And then we have to remember that in 2008, we started from a strong basis. There's always been a strength of KONE since the introduction of KONE Monospace. But also, when we look at the carbon footprints from our operations, that we have continuously improved every year and last year, again, by 3.5 percentage points relative to sales.
It's a good performance in overall eco efficiency. I think we are pleased that our efforts are being recognized. So last year, we got in the carbon disclosure project 98 out of 100 points, by far the highest of anyone in our industry. And Newsweek Magazine ranked KONE as the 12th greenest company in the world overall. It's 1 ranking, but I think it shows that our efforts in this area are being recognized.
So I would say good development in the area of sustainability. So if I do summarize our strategic targets, customer loyalty has improved, but I think we have areas still to improve that. Also KONE has become much better place to work all the time. We can still drive that up, very fundamental these 2 for long term development. We have grown faster in market, in particular new equipment business.
We think we have a better opportunity in services going forward. Growth has been profitable. Objective is to continue that and good performance in sustainability. So overall, I could say that we are quite pleased with the performance we have had over the past years, but see continuous good opportunities to improve. So let me then turn to what are the growth trends in our industry.
And I think these are familiar to most of you. I think it's good to remind them and Louis discuss what they mean. And the most fundamental growth driver in our industry is urbanization. And it's expected by end of next year, about 4,000,000,000 people will live in cities. That growth continues to be quite strong.
So over the next 15 years, about 1,000,000,000 more people coming to cities, still very much driven by Asia Pacific overall, including China. But we can see that towards the end of this period, Africa will start to be more important. But what I think is the most important thing when we look at urbanization is that the quality of urbanization is improving. And what do I mean with quality of urbanization? Well, it's I think one key metric of that is the growth in the middle income population.
So it's expected by end of next year, about 2,500,000,000 people will be in the middle income category, and that will more than double over the next 15 years. And why is this so important to quality of urbanization? Well, what we see very clearly in, frankly, every market is that when consumers get wealthier, they demand higher standards out of their living, they want to have bigger apartments, and that is driving both an increase in construction activity and an intensity of elevators and escalators in buildings. So we can see that this has been a very significant driver in China and also many other Asia Pacific markets. So we can see that the majority of this growth increase in the middle income population is coming from Asia Pacific.
2,200,000,000 people is expected. About 35% to 40% of that is China. So I think this is frankly one of the most important growth trends that we are and megatrends that we are experiencing. Then at the same time, population is getting older. And we can see that the population is getting older in all parts of the world, both Europe, North America, but then even more strongly in Asia Pacific.
So it's expected that from next year on for next 15 years, about 500,000,000 more people will be in this age bracket. That's an increase of 50%. Very fundamental impacts on both existing buildings and new buildings and the accessibility requirements for them. So also continues to be an important driver for us. So if I summarize these megatrends, what the implications are for us.
First of all, we look at urbanization. Space is getting limited, and we're seeing urban planning models are requiring cities to build increasingly upwards. Naturally, a very good driver for an elevator escalator company. But we definitely see that built cities are being built increasingly upwards. Then as consumers get wealthier, the demands and standards of the housing is going up consistently, very important.
And aging population, accessibility, very fundamental for society is to be able to provide accessibility for these people and keep them also in their homes as long as possible. So that means that accessibility requirements for both existing buildings as well as new buildings is increasing. And then finally, increasing focus on safety and sustainability. We can see a very strong focus on green buildings in many countries. And as we all know, the focus on safety in society is a very important topic.
And these are all trends that we think are fundamentally very strong and positive to us. So if we look at we've had many of these trends for the past years. So if you look at what have the implications been for our industry. Well, as you know, the biggest implication has been on the new equipment business. So if we look at new equipment markets overall have grown at about 14% compound rate since 2,009 strongest growth in China and what we call rest of Asia Pacific, which is Southeast Asia, India, Australia.
So 21% growth in those markets over that period of time. It's very fundamental. And as you know, we've been very good at capturing that growth. But what is interesting is that this growth is now starting to fuel in a serious way the growth in the installed base. So we can see that 17% growth in the installed base in China, rest of Asia Pacific over this period of time And 17% on a cumulative business is a very good rate.
And we think that this growth is only getting stronger. So increasing amounts of conversions coming in, and that's the big opportunity that we see and we are determined to capture. So that's one implication on this. Another important trend I wanted to address and because this will drive changes in our industry is digitalization. You can say, okay, we all know what digitalization means in our daily lives.
So what will it mean to our industry? Well, 1st of all, it will have an impact on how smart buildings are managed, enables more centralized management of smart buildings. There you see that we last year introduced what we call our People Flow Intelligence offering, how we enable building owners to manage the people flow in a full way from the moment people step into the building by combining destination control with access control, the information for users and monitoring for the building owner, a one complete platform that we can integrate into smart building systems. Secondly, digitalization will have an impact on how service operations are done, the quality, reliability and predictability of them through better use of real time data. So these are I would say, it's only at its start in our industry, but definitely an important trend, and we're putting quite a lot of emphasis on this at the moment.
So many interesting things and also changes happening that we need to address. So overall, I think we are in a good situation that we operate in an industry with good fundamental long term trends and very good and sustainable long term trends. So let's then look at our market developments and the opportunities we have, and I'll address that from our various geographic areas. And let's start with Europe. Europe, we have a few positive situations.
One is that Central and North Europe, in the first half of the year, we saw slight improvement in the markets overall. And we continue to have a few bright spots such as Germany, the U. K. And Sweden, but then some of the markets had been very weak are now seem to be going slightly in the better direction. And with Europe, what you will hear from Ilkomarjema is that we have a very good and strong pent up demand in modernization.
And we're going to talk about how we can capture that pent up demand. The challenges in Europe remain the weakness in South Europe. Both France and Italy continue to decline. Spain continues to be at a low level, although it's now has turned to a better direction, but still at low level. So these weak markets and some other weak markets in Central and North Europe has led to a situation where price competition in services is very intense.
And that's also one of the reasons we said that we need to differentiate better in that market. But then going to a more positive situation, Middle East and Africa. First of all, Middle East, good strong growth in the new equipment business. And the good thing is that over the past year, it has become more broadly based, that it was first more Saudi Arabia. But now we can also see UAE and countries surrounding it growth being much stronger.
And we think that the growth trends that we're seeing there now is much healthier than we have seen in the past. And then if we look longer term, we can also see that urbanization starting to take off in Africa. Still small elevated escalator markets, but longer term good opportunity. If we then look at the challenges in Middle East and Africa, it's the availability of skilled workforce. So again, company who can be best at developing and training their field force will have a strong competitive advantage here.
We've been doing that, and I'll talk about more how we continue doing that. Then North America, I would say, overall, very positive situation. You'll hear from Larry Walsh more about this. The good thing is that when we look at the new equipment business, broad based and strong growth throughout many segments and also modernization business growing at a very good rate. And a good thing in both new equipment and modernization is that pricing has been improving.
So going in the right direction in that market. Challenges is that maintenance continues to be very price competitive. And it's naturally the reason for this is that there was low new equipment volumes over the past years delivered.
So the
new elevators and SKUs coming into the service base overall in the market is quite low, so has driven a high competitiveness there. And then we can see that some of the mega projects continue to be very price competitive even though overall pricing environment has improved. So that's about overall Europe, Middle East and North America. And then we turn to China. I won't dwell too long on China because Bill Johnson will address it in more detail.
But I think the most important thing is that we continue to see a longer term favorable growth trend in China, driven by urbanization, driven by growth in middle income population, driven by building replacements. So long term growth trends remain favorable. And because of the very strong growth we see in new equipment, the maintenance opportunity is significant and is growing, very important. So we continue to be very excited about our China. The challenge is how to improve conversion rates in maintenance.
As you know, it's a very fragmented market, and therefore, conversion rates are lower than rest of the world. We have been able to do, I think, a better job than the rest of the market, but still not at high enough levels. Here also challenge of continuously managing high growth in operations, how to train people, how to make sure that we have the best field force in this industry. Bill Johnson will address that as well. Challenge is naturally, and we all know that there is some short term uncertainties in the market, where we think it is unmanageable.
And then the important point is that long term growth trends remain very favorable. And then finally, Rest of Asia Pacific. As you know, many markets Rest of Asia Pacific, as I mentioned here, we talk about Southeast Asia, India and Australia. In both Southeast Asia and India, many of the markets have been very impacted by lack of liquidity and lack of economic confidence. We can see that this is turning, but liquidity is tight in many markets.
So I would say that if you look at India in particular, very good growth prospects, but markets still burdened by liquidity and the weak situation we saw end of last year and beginning of this year. But the prospects are very strong. And same thing for most Southeast Asian markets. We've also seen a tough liquidity situations, prospects are strong. The challenges, I come back to same theme again.
Growth markets, how do you develop and train all the new people we need to manage the growth given the importance of field operations. Very important and an area where we put a lot of emphasis. And then liquidity, as I discussed. So overall, I would say if you look at our markets, as you can see, we have quite a mixed situation in the world. But the good thing is that we have a lot of positive situations where we see a lot of good opportunities to continue to grow, and we think that even these weaker situations are definitely manageable, such as Europe at the moment.
So I would say, overall, we remain quite positive. So how are we going to capture these opportunities? What are we going to do to fundamentally strengthen KONE to be able to deliver continuous strong profitable growth. Let me first address our current priorities before I go to the most important strategic initiatives that we have. First of all, in Europe, focus a lot on growing our maintenance base.
Here, it's both about making sure we continue to have good conversion rates from new equipment to service. But as you know, we had, particularly last year, a challenge of a negative competition balance. So we lost more units in the market than we won because of the very high price competitiveness. We didn't want to participate in that. We have taken a lot of fundamental actions to improve our situation, and we are improving.
First half of the year, competition balance was still slightly negative, but at a significantly better level than last year. And that's because of the actions we've taken to improve the situation in our maintenance business. Then another important target there we have is to accelerate the growth in our modernization business. Very good significant opportunity. And how can we create that demand better than we have done in the past?
In North America, that's a growing market. As you know, our objective is when there's a growing market, our objective is to that's where we want to take market share. That's what we're doing in North America. We want to continue in both new equipment modernization and maintenance. And then as we are growing at a good rate in the U.
S, putting a lot of emphasis on operations to make sure that when we deliver this growth, we deliver it in a profitable and good way. So that's more Europe and North America, the current priorities. If you then look at Asia Pacific, all of Asia Pacific, both China and the rest, a lot of focus on growing our maintenance base. Very attractive business, good growth prospects. But then as important, we will and we continue to grow faster in the market in new equipment, very fundamental to us.
We have to grow faster than a market in new equipment to create a good base to continue growing the services. Sort of emphasis here as well. You will not hear much about new equipment business today, but that doesn't mean that we are not continuously focused on driving that forward as well. And then the Middle East, very much about capitalizing on the strong growth opportunity in new equipment. We're doing that, and we're going to continue to do that.
And then we are gradually expanding our presence in Africa. As you probably saw, we during the summer announced that we acquired a former distributor in Kenya and Uganda. So now we have a strong hub in the Eastern part of Africa. So this was, I would say, a first step in our strategy to expand our presence in on that continent. But let me go to a little more the fundamental initiatives that we have, how we're developing KONE strategic going forward.
I think this holistic picture, many of you have seen it. It's something that we think is very important for every Kone employee to understand as it explains what the megatrends are, why we are in a growth industry, the strategic targets, where we what our objectives are, I talked about that, our vision, having the best people flow experience. And it's about our development programs through which we develop our competitive assets and our differentiation and then our high priority areas, safety and quality, and then basing everything on KONE's values and KONE way. So I would say that beginning of this year, when we had Kone announced leadership change, we made a few important decisions. First one is that our strategy will remain intact.
We have a clear strategy and a good clear direction. Secondly, we decided the way we develop our competitiveness remains intact, which is that we have our 5 development programs, we think through that we run for 3 years. Within 3 years is long enough a period to get permanent change, but also requires us to renew ourselves at constant intervals. So when we then looked at what development programs we are in this new phase going to have, there you can see a shift in focus, and I'll talk about those. And then we clarified our strategic targets.
So strategic targets, we align with how we measure our business to provide a better clarity internally at what are important points for us when we look at when we develop. So when we look at our development programs, there are a few things we continued with. 1, a very strong focus on how we develop our customer loyalty. As I said, the objective that we need to be 1st in customer loyalty, full stop. Secondly, continued consistent investment in our people, and I'll talk about that, but now much more focused on field operations.
We had a lot of leadership development previously. Now we focus a lot of our field operations. And we continue to develop our new equipment offering to make sure we have the most innovative solutions in the market. But then what's perhaps different is that we put much more emphasis on how we develop our services businesses, both maintenance and modernization. Here, as I mentioned, objective is to differentiate in a much stronger way than we've done in the past.
So if I address this a little bit in turn and start with our program of 1st in customer loyalty. Here, the first thing we are doing is strengthening our customer service culture by introducing continuous feedback from our customers, not only annual surveys, but continuous feedback to make sure that our field people can learn immediately from what they have been working on. This is very important in an industry where you can remember we have about 450,000 customers at KONE. Very important to have a consistent and good customer service culture and way of developing. It's also about how we communicate better with our customers and end users, very important in service business to provide clarity of what we've been doing.
And then we're putting even more emphasis on understanding the targets and needs of our customers so that we can serve them better. So this is how we continue to become better in serving our customers and increase their loyalty. Then I talked about developing our people. And here, I think the heading of this program already says everything, a winning team of true professionals. And the first thing we're doing is we set out to say that what we want to do and what we have to do is to make sure that we can help every KONE employee to perform at their best.
So what does this mean? Putting more emphasis on training and development, training paths for our people, how you advance your competency and skills, but also making sure that every employee has regular feedback sessions with their manager. And we set out a target that 100% of our employees need to have an individual development plan, very fundamental to make sure our people develop and go forward. And it's also very important motivating people. They can see that, hey, I can progress throughout my career.
Then it's about developing our field competencies systematically. Our services are delivered in the field to our customers. As Thomas Yetto will discuss, the phase of KONE to most of our customers is our field operations. And then we put a lot of emphasis that when we take people from the outside, a lot of emphasis on attracting top talent, very important. And that's very much about making sure we have a strong and good employer brand.
So these are 2, I'd say, fundamental ones that are needed for long term good development. So we continue to invest a lot in both how we make sure we have more loyal customers and in our people. Then we say we have next time we say most competitive people flow solutions. This is continuing to build on the strong basis we have. We have a broad based and strong competitiveness in new equipment, elevators and escalators.
Continue to build on that and invest in that area. Objective is to remain very strong there. Then we are also putting a lot of emphasis on solutions for smart buildings. As I mentioned, we launched last year what we call People Flow Intelligence, where we combine destination control with access control, information for users and monitoring for building owners all in one platform. And this year, we also announced our KONE KERNSTYLE solution to make sure that it's also an integrated part of how we manage people flow from moment people step into buildings, very important.
And then I say here improving quality and productivity, again, very much about our field. That's where so much in this industry happens. Elevators are put up in the field in shafts. Services happen in the field. This is continuing to improve our quality and productivity of our field operations.
Then I mentioned a couple of time already that our objective is to differentiate more in services. And here, our first program is called preferred maintenance partner. Objective is to grow our maintenance base profitably and faster than our competition. I mentioned already that this is a business with a very spread out customer base. A lot of customers, a lot of smaller customers.
So in the maintenance business, we have over 300,000 customers. Very important to understand what kind of sales processes and competencies we have to address these customers, many with quite different needs. This is something we started already last year, but we're putting more emphasis on it. We're also looking at strengthening what services we provide to our customers to better meet their needs, more specific to their specific needs. Tomas Gieto will talk about that as well.
And then here, a lot of focus again on field quality and productivity. That's the face of our company to most of our customers. So we think with these actions, we can become even stronger also in this business. And then our last program is to be the top modernization provider. Ilpo Mariamma will be talking about that in more detail.
But in summary, here also we're putting a lot of emphasis on our sales processes and competencies, very important in a business where we need to generate more of the demand. How do we target our customers? What are the solutions we provide to them? Very important. But also here, like a new equipment business, we put in a lot of emphasis on what products and solutions we're selling to our customers, continue to strengthening that offering.
And then last one, we say improving our end to end modernization process. Process modernization is a very process driven business. Course, the equipment out in the market is very heterogeneous. So how you create a process to address them in efficient way and as Ilkop will talk about how you industrial that business is very much down to processes. So we think that there is a lot of good potential here.
So in summary, if we look at what are most important things we want to achieve now, It's to continue to improve our customer loyalty to reach the highest level here. We want to reach a level that no one else has had in this industry before. It's about helping our people perform at their best to make sure that we continue to differentiate through our people in front of our customers. And also when we bring in people, we attract the best talent. Focus on growing our service businesses through accelerated differentiation, both in maintenance and modernization.
And then that we continue to execute in a solid and consistent way we have done. So I would say these are in summary most important things we focus on where we want to improve as a business. And as a summary, I would say that when I travel around the world, visit our businesses, and actually, my new role, I've been doing that a lot, quite a lot before that as well. What makes me most positive and convinced that we can capture these opportunities is the motivation, enthusiasm and commitment of our people to continue to drive it forward. It is something I must say that every time I visit any of our units, that's what I'm faced with.
Motivation, enthusiasm, willing to drive business going forward. I think that's difficult for many to beat. So with that, I think very enthusiastic and very positive that we have a good opportunity to capture the growth opportunities that this industry is presenting at this point in time. Thank you. I think we have time for a few questions.
We do.
Should we yes, we have microphones coming here.
Good morning. It's Guillermoquelin from UBS. Thanks, Hendrik. Thanks, Carla. A question regarding acquisitions.
You haven't mentioned a single word on acquisitions going forward. Is something less of a focus? Or is the same focus as before when you're looking for the same end markets? Could you also comment how much firepower do you have? And which end markets are more attractive to you?
So acquisitions continue to be on our focus definitely. And as you know, in the past years, we have focused a lot on acquiring service companies in many of the mature markets, but also we have acquired several distributors that have been distributing KONE equipment in the past years. Latest one was this Kenya and Uganda, and that will continue. So definitely, we continue to have a high focus. We think that there continues to be a lot of good opportunities out there, both smaller and midsized service companies.
So definitely, it's a focus area. It's one of these things that when you want to buy something, someone else needs to sell 1st want to sell 1st. And perhaps there hasn't been quite enough willingness to sell so far. But no, definitely, same way we have been driving in the past, very interested. And yes, we do have firepower if needed.
And if a bigger opportunity would become available, definitely would be interesting to us.
Over there Ben.
Yes. Hi, Henrik. It's Ben Masson from Bank of America. Firstly, you talked about developing the smart building solution. And I guess that will expand your footprint into new areas.
Can you give us a sense of maybe which industries or which companies you'll be competing with, which you'll partner with to develop those solutions? And then just following up on the M and A point, do you think you can do that organically? Or would you need to buy adjacent technologies to kind of push that concept?
I think that's a good question. I mean, first of all, we're going to remain focused in the area of people flow. That's important. We are not intending to go beyond that scope. But as smart buildings develop, the concept of people flow may change a little bit.
So that's why, for example, we have introduced how we combine now access control with destination control. And it's evident that we are not the strongest player in all of this. So we can either do it by partnering. We can do it by smaller specific acquisitions, but we are not intending to acquire, let's say, new business. We want to be in the People Flow business, but we may acquire some technologies to improve here.
So what we think is that where we think we can have a strong offering and continue to provide good solution to customers to have an integrated platform to how you integrate the smart buildings, how you manage all the people flow in a building. And that's why I said our people flow intelligence solutions, that's the first step in that.
Hello. It's Alastair Anderson from IV Advisory. I'm fairly new to Kone. And looking back over the last 5 to 6 years, I really don't understand the development of your EBIT margin. If I take the view that the maintenance margin is going to be significantly higher than the new equipment margin, if you look at the increasing proportion of new equipment sales in your overall revenues, again, I don't understand how EBIT margin could have increased to the extent that it has done.
Could you comment on the relevant margins relative margins between the two business areas and then how they have developed over the last 5 to 6 years? Thank you.
Well, first of all, we don't disclose margin by business because we think this is truly a life cycle business. So we have one margin. But yes, maintenance would be higher than the rest. But I think what you can see is an important thing is that we have been able to grow profitably in each of our businesses. So we have been able to expand margin in each of our business and as a result been able to develop our EBIT margin in a positive way.
I think the important point is that each of our businesses are good and profitable businesses. So also new equipment business, we have good profitability there. So by increasing all of them despite, as you said, mix has been from an EBIT margin perspective going in the other direction, we've been able to slightly expand our margins. Yes?
It's Andre from Credit Suisse. A couple of questions, please. One on the focus on service. It sounds like quite a long term continuous project. Could you give us some idea on maybe some milestones when we can expect results or things that we can track on this?
We have not set out any specific milestones or targets. Actually, internally, we have quite ambitious target setting. But I think you're right that the service business is something that there's quite a lot of fundamental development happening. And I think also, I mean, when you look at this, we are putting a lot of more emphasis on it. It's a target setting.
So you can get some improvement also shorter term. And then kind of this through strategic programs, that's more kind of longer term strength in your competitiveness. So we have not set any more specific targets for that business.
And given what you've just said and that you've been at it now for a year, you said you started already last year, should we expect meaningful results already as early as 2015, 2016?
So what I mentioned when we started already last year was this improvement in our sales processes and setups. And that we focused first on and Tomas Herto can talk about that more, focused more on mature markets in Europe and North America to address this challenge of competition balance. And I said that area, we have made progress. So that's specific. And then it's more fundamental long term things we are we have now kicked off during this year.
Great. And then just a quick follow-up on China. I guess I have
to ask that question.
The statement you made is very clear on long term opportunities, but almost sounded like near term you've become a bit less sure. Is this trying to read too much into your water language?
I would say what you should read into it what we said and what Bill will be saying and Erika will be saying, we continue to expect about 10% growth for this year. It's a solid development. Then we continue to see a longer term good positive development. As you know, we don't give outlook for 2015 before the year starts. Too early to give an exact number, but we don't see any significant changes in the market next year.
But it's too early to say exactly a rate to where we think it's going to develop.
Thanks very much.
Hi. This is Thomas Skomer from Handelsbanken. I realize the theme of the seminar is more on the service side. But when you look at the margin development for Kona compared to the key peers over the last 12 months, you have been much better. And I wonder whether the reason is what you presented 3 years of the seminar, the new elevator product more?
Or is it just that you've been so careful on pricing and service you have walked away from something. Or how would you rank these things? And how do you see the benefits of the rollout of the new product?
I mean, I wouldn't just put it to one area. But I wouldn't say that we are careful on pricing. I think we have high focus on pricing, developing our competencies, developing our processes so that we can have a good pricing development even in weaker markets. And I think that's where we have had a high focus. And what we see is that in growing markets, you can have good focus on pricing if you have a competitiveness, your people that side in order.
You can continue to grow faster in your markets. That's what we have done. So I think it's very much, again, how we have executed our growth strategies and made sure that when we grow, we grow profitably. You're also right that when it comes to the service business, the reason why we had a negative competition balance last year was, in many cases, we were not willing to participate in the tough price competition. And we said the answer to competition balance is not to participate, it's to fundamentally improve.
If you just focus then on this new global modular product, Are the benefits and is it how competitive is it now when it's fully rolled out? And we have seen that your order development has also been better than for PeerStatus. Could you open a bit just as it's not a theme of the seminar, but to get an update
and feeling for its proceeding?
Okay. So we refer to the Mono 500 N Mini and Mono series that we launched a couple of years ago. So as you know, we are still in a ramp up phase delivery wise, and that's we are starting to be now at quite high volumes. I would say that we have good progress there. If you look at Europe, we are definitely at targets for that.
If you look at Asia Pacific, most countries, yes. Perhaps in China, we have other segments that grow a little bit faster. But overall, the important thing is that we have a product offering that is strong on a broad basis. So it's both that and other specific products, for example, the China market that have performed well. But let's remember that always product offering is only one piece of the puzzle in this industry.
I think we have time for one more perhaps at this stage. Okay, we have
It's Andrew from
Henderson. I was just
very much struck by the slide that showed the very
slow growth in the installed base in the U. S. And Europe. And I was wondering, I mean, given that's the big historic profit pool of the company, what and I know that you prefer to the need to increase differentiated service. But if the installed base continues to grow at such a low level, what you can't change that because that's external forces.
So I mean that must be quite a headwind.
But you have to remember that why is it growing at a low rate because you have to remember it's a cumulative business that every year or in the beginning of the year you have a big level you start from. So you have a very big service base in if you look at Europe and North America in total. And that's and the low growth in the base is naturally a result of the low new equipment volumes in the market overall over the past years. Now we're seeing a better situation in North America, can a little bit help that. But I think if that market still continues to grow some percentage points, that's okay.
And then the good thing is that, that base is getting increasingly older. So I think the modernization opportunity there is getting all the time higher. So but I think you're right in that sense that, that continues to be a slower growth market. There we need to differentiate more, be more better at meeting specific customer needs to be able to address competitive situations there. And then of course in Asian markets how we capture the growth in a better way.
Thank you. Thank you, Henrik, and thank you for your questions. It's time to move forward. But may I just remind you that if in case you had questions you'd like to ask Henrik, just write them down. We'll have ample time at the end of the presentations for in a separate Q and A session.
Okay.
Good morning, everyone. My name is Thomas Herto and I'm responsible for the global maintenance business in Kone. And I'm really excited to be here. This is my first time ever to be part of the Kone Capital Market Days and it's a whole new experience. We are living in very fascinating times in maintenance business.
We have our preferred maintenance partner development program. And in that there are many exciting initiatives and the speed of our development is really picking up. So today I would like to tell you a story about our growth, the market opportunities and then how we are making KONE maintenance business more customer centric, more competitive through differentiation and improvement of quality and productivity. But before I start that, I would just like to say that, I think it's fair to say that our maintenance business today is already a well managed business. However, those of us who are very close to the business, we know that there is still so much to improve.
So pretty much everywhere you look you see improvement potential and that's great. Okay. So we have come a long way. On the left side was our maintenance fleet some years ago. We had a few dozen equipment in maintenance and some service technicians.
And today we have a worldwide operation. We have over 300,000 customers worldwide and most of them small customers. We have about 20,000 service professionals. Most of them are field technicians. And those people really are Kone's face to our customers.
So it's not me, it's these people who are the face to the customers. And that's the important thing to understand. We maintain over 950,000 units. And the 1,000,000 unit milestone is getting closer and closer. And when we get there in a true Kone style, we will celebrate that for about 5 minutes and then we think about the 2nd 1,000,000 units.
So our sales has grown steadily in the past 5 years, despite the fact that in many markets we have had challenging times after the financial crisis. The maintenance sales is consisting of contract sales as well as repair sales. And all this time this has been profitable growth. Now Carla has told me that the next slide contains a graph that you have not seen before, so should be interesting. We see here our maintenance base structure 2,009 and then 2013.
And you can make at least 3 observations here. Number 1, we have grown slightly faster than the market. If you remember in Henrik's presentation, the market growth was slightly more than 5%. So that's point number 1. Point number 2 is that, if we look at the markets in Europe, Middle East and Africa as well as North America, the growth has been on average 4%.
So the question now is that good or is that bad? Well, considering that there have been challenging markets in these areas, it's okay. But we set our ambition level higher. The 3rd point we have here is the growth of Asia Pacific. And the share of Asia Pacific equipment in our maintenance base has increased from about 10% in 2,009 to about 20% 2013.
And the relative profitability of our maintenance business in Asia Pacific is at the same level as in rest of the world. And overall, our profitability has developed well during this time. Now this graph you have seen before, it's a little bit complicated. But I want to use it because it helps me to explain the components of our growth. The main point here is that conversions and acquisitions have driven our growth in the past years.
Now let me explain main components one at a time. Let's first talk about the conversions. The conversions have supported our growth both in mature markets and also in emerging markets. Outside of China, our global conversion rate is about 80%. However, in many markets in Europe and Asia Pacific, we have higher conversion rates 90%, 95%.
And then if we look at China, the conversion rate is about 50%. And for the Kone brand, it's 60%. So still potential to improve. So while conversions have been good then like Henrik said, we have had challenges in competition balance, which is the difference between the ones and the losses from our base. And we have had slightly negative competition balance recently.
And of course, we don't like that. It's not good. The reason has been like already was said that there has been tough price competition in some of the markets for example in South Europe and we didn't want to participate in that. Now this has of course slowed down our overall growth. Good news is that we are taking this very seriously and we have actively been improving our own ability in the marketplace.
And this year competition balance is already clearly better and it's still negative, but we are going now to the right direction. Then we have acquisitions and our acquisitions have been mainly from North America and Europe. Let's then look at the market opportunities. So here's the big picture. North America 1,200,000 units overall market size Europe, Middle East and Africa 5,600,000 units, which is mainly in Europe And then Asia Pacific, including now those markets where Kone is present 3,500,000 units.
And then under the bar, you can see the percentage, which is the average growth rate of new equipment market during the period of 2,009 to 2013. And maybe two main points here are that the Western markets, North America and Europe are significant markets, a big market. However, the growth is very limited, but important market for us. And then in the Asia Pacific, the market is growing fast. And the annual increment to the maintenance base is significant.
Just last year, the new equipment market in those areas where KONE is operating was about 560,000 units. So with some delay that will come then as a chunk to the maintenance base. So the annual increments in the maintenance base in Asia Pacific are significant. And that's good, very good. Let me then characterize the 2 types of market a bit more in detail.
And let's first look at the Asia Pacific. So like I said and like you know, the new equipment market in Asia Pacific has grown fast for many years now. And as you know, Kone is in number one position in many of those markets, which means that we have a great opportunity now to grow our maintenance base through conversions. Most of the equipment in Asia Pacific is quite young. So the installed base is young.
And for us, it means that because we have grown and continue to grow mainly through conversions of our own equipment and because the maintenance base is young, it means that it's easier for us to build up our service capability, which is important. So to train our technicians, the base is more homogeneous for us. And this is important so that we can keep up with the fast growth of the market and continue to give good service quality to our customers. Now then I would like you to pay attention to the lowest row in this slide where we have the market shares of the OEM companies, China, India and Southeast Asia. And let's look at the China there.
It says that the OEM companies have about 25% market share. That's extraordinarily low looking at the whole world. In other words, over 70% of the market is maintained by small local maintenance companies. Now, if you combine that with the fact that the safety and quality awareness in China is continuously increasing, it means that well established companies like KONE have a good look going forward to increase their share of the market. This is a positive trend.
So now I've said many good things exciting things about the Asia Pacific market, which is growing fast and it's a great opportunity for us. But I don't want to leave the impression that Western markets wouldn't be exciting and interesting for us. They are very interesting and important markets for us. Big markets. Conversion rates typically high and the equipment base is clearly older and it's aging fast, which means that there's a lot of potential for repair and modernization.
And I think Ilpko will talk more about those things later. Markets are clearly more consolidated and competition is in several areas tougher. But we are like I said earlier, we are constantly also getting ourselves into better shape to be successful there. So let me summarize. As a response to these market trends, we have clear priorities.
And for Europe and North America, priority number 1 is to improve our competition balance. Negative even slightly negative is not good, positive is good. We still can improve conversions with the mentality that every unit counts. So until it's 100%, it's not good enough. That's the way we need to think about.
And then of course, we continuously need to strengthen our pricing competencies. Then for Asia Pacific, there we need to capture the growth opportunity through conversions. And we need to take the success we have in new equipment business to service business. And also there of course pricing is in a continuous attention and we want to strengthen our competence in that area. So those would be our regional priorities.
Well, let's then talk how we are going to strengthen Kone's differentiation and quality productivity. And I must say that I'm very pleased that from maintenance business point of view KONE's development programs are giving a lot of new say tools and strengthening our business. And I will now comment a couple of those in more detail. And let's start with the first in customer loyalty development program. So one initiative there is that we will create a continuous feedback from our customers to Kone.
The feedback needs to be granular and it goes to local level for teams that have names. And this means that we can create more consistency in our service execution and we can accelerate our development. It's very fundamentally important thing, so very important. Second thing is the 2nd development program winning team of true professionals. So we have said already many times today that our field people are Konez face to our customers.
And to add to that many years ago a very experienced person told me that Thomas you need to remember that in maintenance we need to maintain the equipment and we need to maintain the customer. And if you just do one of these it's not going to be good enough. So this program includes both of these. We are strengthening our people's customer service skills as well as technical skills. And that's a great source for differentiation in our business and not so easy to copy.
Then I would go to the maintenance development program and I'll say more about that. The name is Preferred Maintenance Partner. And the name is actually very important because we want that our customers will think of Kone as the preferred maintenance partner. And when that happens, good things will follow. We drive our profitable growth in maintenance, but it all starts with the customer.
So we have 2 areas where we are working at. 1 is focusing in differentiation and the other one is improving our quality and productivity in the field. And I will first talk about quality and productivity. You have seen this earlier in previous CMD sessions. I will not go through this again.
It's quite tiring slide if I would do that. But the point is that there are different cost elements in our field costs and we are actively working on each of those. There are good costs and bad costs and we know how to do better. And what we want to do is to gain leverage in our field costs as we increase our maintenance base. And that's what bringing us then to productivity.
It's quite simple. So when we are improving our field operation, the better we manage our field operation. More often than not, it means at the same time that we improve the quality we give to our customers. So there's a great win win here. Here are the main areas where we are working at to improve.
And let me explain now 2 of those. And first, let's talk about optimized field operations. So what we want to do is that for every single equipment we have in our maintenance, we have just the right maintenance profile and program. We don't want to maintain too much. That's waste and that's not giving anything for our customers and also not too little because then we have quality problems.
So we need to get better and better in making just the right maintenance for every equipment we have. The second dimension here is our field technicians, where our objective is that we can provide a full day of schedule of customer service tasks for every single field technician every single day. And we don't want them to work harder. We want to work smarter. And that's a different thing.
And this we do by improving our route optimization, reducing travel time and by creating smarter algorithms for how we dispatch jobs for our people based on their location or based on their competence, these sort of things. And this is a continuous opportunity for optimization and getting better and better. This is actually quite exciting things this field operations. The more you get into details the more you see that there's potential. So then other area here is better use of data.
Maintenance business is about a lot of small things. And we make millions of tasks every year, millions. And we get a lot of data back from what we have done. And it's obvious that the better we can analyze and use that data, the better we can develop our customer service, our quality, our productivity by getting insights from there. Now one example could be call out reduction.
Our customers don't like call outs. We don't like call outs. We think that we are pretty good compared to competition in call outs, but there's still a lot of improvement potential in Kona in this area. So what we can see from the data, the historical data is that where are the obvious big improvement opportunities in terms of people, products, processes. And then we can prioritize our actions and move forward and take the low hanging fruits one at a time.
So that is one way to use data, the use of historical data. The other way is then real time data. Real time data we get with remote monitoring. So there needs to be a remote monitoring device in the elevator or escalator that sends us information. And with that information, we can become more proactive.
We can prevent breakdowns before they occur. We can increase the availability of the equipment for our customer. And we can shorten the downtime because we can give more insights now for the technician that where the probable root cause is, where should you go and look for, so that you can fix the elevator and put it back to use. It's very fascinating. We have a big number of KONE equipment in our maintenance, which is enabled for remote monitoring.
And we are doing it in a number of markets. I think it's fair to say that we are still in the early phase of this like the industry is in the early phase, but we are putting a lot of focus in that and we are learning fast. And it's a very fascinating area going forward. I don't think that we will ever replace the need of a competent service person who works at site. But we need to work on both of these of course always.
Okay. So quality and productivity, lots of improvement potential there. And let's then look at the differentiation. Now differentiation happens in the minds of our customers. They will decide who is differentiating.
If I simplify the feedback from our customers about KONE maintenance, then we have two strengths. One is that it's our people, the service mindedness and technical skills of our people. Already today that's a strength. And second one is the quality we deliver in the field. And when we go forward and improve our differentiation, we want to strengthen those two areas.
We want to work with our existing strengths and become even better. So that's the framework. And this graph here is telling sort of opening and explaining how we built the maintenance differentiation in general. And I will just briefly now explain the elements here. But it all starts from understanding very well our customer needs.
And of course, we know already quite a lot about our customer needs, but our customers are also changing. And we need to have a constant focus in our customers and make sure that we understand their needs better and better. So it starts from understanding who is the customer, what is the need, what is important for the customer, why is it important for the customer, How does the customer want that we fulfill that need? All those things. And there are different types of customers.
So based on that, we are then improving our services going forward. Then there is the delivery part. So one thing is to make promises. The other thing is to keep the promises. And execution in service business is extremely important.
And like I talked a little bit about the quality and productivity, but this is a very important focus area for us, so that we can create great execution, consistency every day the same service delivery from KONE. And then last, very important is to show our customers that we have actually delivered on our promise. And especially in service business, this is important because quite often our customers don't see what we have done. So we need to become better and better in communication in all different ways. So on those areas we are working on as we then go forward and build our strengthen our differentiation, all starting from customer understanding customers better.
Now I think I got a little bit carried away in the previous slide and I'm repeating now something here, but nevertheless, let's do that. So here are the good examples of what we are doing to differentiate. So first, we are developing our services, starting from clear understanding of customer needs. And that will mean, for example, that we need to become more flexible in many areas. For example, the maintenance contracts represent an opportunity.
Secondly, strengthening our maintenance sales. So like it was said earlier already, this has been one important way for us to improve our competition balance simply working internally, making sure that we have a focused and competent sales force that is able to address all types of customers all of the time. Then we are working very actively on improving our sales management and also pricing competencies. So when we strengthen our sales at the same time what happens is that our interactions with our customers will increase. It means that we are the voice of the customer becomes much stronger in Kone and we can align ourselves better in sales and operations and other functions to serve our customers better and better.
So that's the other side of this strengthening the sales, better care of customers. And the 3rd area here is then to give great high quality execution day in day out. And that consists of building our customer service culture through the company in all levels as well as then providing this uniform execution and great experience for our customers. So if I now summarize, we have talked about the markets and what Kona is doing. So our actions address our regional priorities and with those actions, we are going to go forward and continue our profitable growth in maintenance business.
We are focused on in mature markets in Europe and North America to improve our competition balance. We want to continue to work on our conversions with the mindset that every unit counts and we continue to work with the pricing becoming better and better in pricing competencies. Then in Asia Pacific market is growing fast. The base is growing fast. We want to capture the opportunity through conversions.
We want to take the success from new equipment business have it also in service business And pricing, pricing is always very important. And we will do this by continuously developing our people and our execution. Those are the important fundamentals. And that will allow us to give a great service experience for our customers better than the rest. And we work on our differentiation, building on our strengths and we continuously work on the quality and productivity.
So we are very committed and excited. We will become our customers' prepared maintenance partner globally. It's a very inspiring objective for us. And we will deliver our customer a superior service excellence and peace of mind. Thank you.
Carla?
Yes. I think we have time for 1 or 2 questions to Thomas at this stage. So let's start with Phil over here. Thank you.
Hi, it's Phil Wilson from Redburn. Two questions please on the maintenance. You mentioned Asia Pacific maintenance profitability was in line with the group average. Can you perhaps comment on where China is specifically and how that profitability has been trending? 2nd, one of the key challenges is increasing the conversion rate in China.
Can you give some expectations to where you think this 50% is or 60% for the Kona brand is going to move over the next sort of 5 years in the context of Western levels of 80%? And actually one third question please. I'm sure you finished much yourselves. I'll leave the third question.
Yes. Thank you.
So China profitability is in the same level as the rest of the world. We don't disclose I think individual countries profitability figures. For the conversions, that's a great question as well. And when we think about the conversions going forward, we need to look at external and internal. Now externally, like I said, the environment is favorable for us to grow through conversions, because the increasing attention in all stakeholders to safety and quality.
So basically all well established companies like KONE have a favorable future in China in that sense. And the second thing is what we do internally. And we have a strong focus in developing our sales. And it's about proactiveness, especially in conversion sales. It's about building up the sales skills in our people, building up the value argumentation.
It's about the professional sales management that helps and coaches our people to reach higher results, all those things. And with those, I think, we go forward in the conversion spread.
I believe we had another question at this end of the room.
Yes, good morning. Congrats on Pektoy. I have a question. I mean, you mentioned conversion rates, but on your installed population globally, what's the percentage of maintenance that you do for your own brand, KONE and for non KONE brand? The second question related to that is, I apologize my ignorance here, but how do you manage actually service contracts or new service contracts that are non KONE equipment, but let's say older equipment of brands where you maybe not even get any more spare parts, etcetera, so an increased risk profile probably?
And the third question is actually indirectly related to the first one. It's on your Slide 6. You showed the wins and losses of contracts. Could you give us there a little bit an insight if does that happen largely within the Kone brand or within service contracts outside the Kone brand?
Okay. It's very smart. So everyone has sort of list of questions. Well, once you get the opportunity then of course. So the first question was our maintenance base and KONE brand, non KONE brand.
And that's roughly fifty-fifty. And I think in many markets the customers decide what they want us to maintain and we are fine with that. No problem. We maintain of course then all sorts of brands and equipment from all ages, age groups. And I think that is one of Kone's strengths really that we can do that.
And we have a very strong, let's say, non Kone equipment spares capability, technical capability and competence development capability. So that's fine. Check. 3rd one was about competition balance. And I don't think I want to sort of go into that detail here that but I think yeah, maybe I skipped that one.
So whether it comes from whether the losses come from KONE or where. But I don't see a particular issue there really also there. You didn't lose much.
Thank you, Thomas. It's time to move forward now. But in case you had questions in mind, please write them down. And again, we can come back to those at the end of the presentations when we have our separate Q and A session. Thank you very much.
Thank you, Karl.
Thanks. Okay. So as Carla mentioned earlier, this is also the first time for me to be sort of able to address this forum. And I'm actually extremely happy about this sort of opportunity because I of course, working in the modernization business, I sort of truly see the opportunities in the business and the development possibilities in the business. And I hope to be able to convey some of these sort of insights why I think so also to you.
So we'll start with a quick glance at why to modernize and when you modernize, how to modernize. Then we move on to look at the market development in cobalt level and then also look at some key insights from the different areas. And then lastly, we'll sort of cover our activities what are we doing to better sort of capture this opportunity that we see. So why to modernize? If you think about most of the equipment we today own and especially all equipment with most of that stuff it is impossible to bring them up to the current sort of standards and expectations we have regarding performance, safety and so on.
But as you know, with elevators and escalators, this can be done. And if you look at sort of elevators and escalators as a product group, they actually by current standards they are pretty long lasting sort of pieces of equipment. But if you think of sort of as a rule of thumb, we think that when an elevator or an escalator comes to an age of 20 plus years, then it is actually very beneficial for the customer to do something to improve the sort of condition of the equipment. However, equipment maintenance we do, this equipment will not last forever without sort of upgrades. And the drivers for upgrades, of course, can be the need to improve the safety of the equipment.
A lot of this stuff is from a very older age and far away from the current standard we are expecting. Need to improve the reliability or need to improve the accessibility or traffic handling capacity of the equipment. And then there is the opportunity to improve the energy efficiency of the equipment. So whichever sort of a driver drives modernization, at the end of that modernization, the value of the surrounding assets have increased. So when you do this work, you also increase the value of your building.
Then looking at how can you sort of address the aging equipment when you decide to do that? In simplest form, we can perform component upgrades, which typically mean that we sort of replace a very particular component of the elevator system, upgrade its performance and typically to improve either reliability or the safety of that component. Component upgrades are done typically in as need basis, so they are relatively reactive. The problem arises, we take care of the problem and that's it. But then when we sort of move on to bigger things, we talk about modernization packages.
And when we talk about modernization packages, we actually mean that we are replacing a component or entire sort of a subsystem of an elevator or an escalator. An example could be the controlling system or electrification system for an escalator or a hoisting system for an elevator. Now the important thing is that with this is that you can actually plan your sort of capital management plan for your equipment by sort of modernizing your equipment with these packages fully over the course of few years. These packages they complement each other. And if you sort of continue with that you have at the end of the day a fully sort of a renewed elevator.
And these packages are rather large. So when we think about doing this kind of modernization, we typically talk about a proactive action. So we educate the customer what can be done. Typically these plans go into the budgeting plans or sort of capital investment plans for the BEP. And then the biggest sort of or largest way of addressing the equipment is to fully modernize them or fully replace them, which means that we take a totally new elevator or totally new escalator and put that into the place of the old one.
Now depending on the market, there are different behaviors. And if you look at, for example, now Europe, we can see that in Southern Europe, the focus clearly has been on the upgrades and modernization packages, whereas in the northern part of Europe, we have been seeing a to
the
So here is an example of the benefits that you can sort of get by modernizing. This case is from Singapore, where we modernized 24 elevators of a third party manufacturer. Elevators were geared. Elevators, we put in new Konec controllers, DLS MX machines and regenerative drives. And on top of these sort of, let's say, normal improvements that you would expect, improved ride comfort, reduced noise level, better leveling and so on.
In this case also, there was sort of a significant savings in the energy consumption. So in practice, we cut the energy consumption for those 24 elevators in half. And for the customer that meant about €25,000 savings per annum. Another example is the sort of recently introduced new elevator system called Nanospace. This elevator was introduced for European markets earlier this year.
It's an elevator, which is sort of a fully designed for the full replacement market. And it delivers on all of the previous customer values of safety, reliability and so on. But in addition to that because it is designed for this market, we also have paid a lot of attention to the downtime. Downtime meaning how long is the elevator out of commission for the customer when we do this full replacement. With this product, we have been able to sort of cut the downtime to very short level.
And this, of course, is a great benefit for the customer during the modernization or full replacement. Now then looking at the markets, starting with the numbers. So these graphs show the elevators and escalators in operation in different parts of the world. Here you can see that Europe, of course, is clearly the biggest market we have. So 5,300,000 units in operation and more than half of them are sort of past this 20 year mark.
And then if you look at the U. S. Or let's say Americas, U. S. Is the biggest market in Americas of course with and U.
S. Has about 1,000,000 units in operation. And again, more than half of them are sort of past the 20 year birthday. And then as you know, Asia Pacific has been the place for new equipment activity over the several last years. So that means that in a way the equipment base in there is relatively young.
But of course, as we can see, it will be a very interesting opportunity for us down the road. Then looking a little bit more in detail, the market development in these areas starting from Europe. So up until the financial crisis, we saw very good growth in the European market. Then the growth tapered off, first in South and then also in North Europe. The growth in the earlier times was also partially fueled by the application of the Snell norm in a few places, big markets like, for example, France.
And then part of this tapering off that we have seen in last couple of years is also due to the fact that some of these countries, which were applying this SNEL law, the demand from that source is winding down. Then looking at the North America, again, the same story in a way good growth in the market until the turmoil then growth tapered off slightly. And now when the economy is picking up, we see a sort of a very rapid sort of return to the growth path in Americas. I guess, Larry will talk about that a little bit more later. And then as you know, the Asia Pacific markets, good development overall.
But as said, the market is still relatively young. Now then looking at some of the sort of characteristics of the different markets. Europe being the biggest base and most probably also the most complex because if you look at the sort of a number of equipment coming from different vintages from many, many different manufacturers, it is a relatively complex market compared to the others. Now a European elevator in South Europe is pretty basic. It's fitted into a small shaft, whereas when you go more up north, you will see sort of a more sophisticated equipment and maybe also slightly larger shafts.
Now regarding this Snell, we talked about that already. It did boost the demand a few years back. Now it is winding down. And going forward, we don't see it to be a sort of a big element in the market for us. But despite Snell sort of a winding down, because of the sort of characteristics of the European base, we do see that safety and the demographics Henrik was talking about earlier, they will drive the sort of need for safer equipment and also for sort of a more accessible equipment.
So there will be this sort of drive going through. And then specifically in the escalator part of the modernization, we see a lot of the public transportation systems, especially metros, sort of, are starting to invest to this field. Their equipment is getting really old. Now moving on to U. S.
Or North America. Again, a large base in U. S. Alone 1,000,000 units in operation. In this space, we have sort of a couple of sort of big chunks of equipment.
1 is hydraulic elevators and the other one is mid rise or high rise geared elevators. And both of these by current standards are actually very energy consuming. So we see that sort of energy consumption saving energy will drive part of this market. The other drive will come from sort of a big base of office buildings, which are now coming to an age to be replaced or renovated. And as you can see from the graph below, if you look at the new construction, the number of units built since 1990s early 1990s has been going up.
And this naturally will feed directly into modernization base. Asia Pacific, so mentioned a couple of times already that the sort of existing base is relatively young. But we have already seen in few of these, let's say, more mature economies like Australia, Singapore and Malaysia, very good activity in modernization and it is picking up. The elevators in Asia Pacific, they are typically of higher rise than what we see in Europe, for example, and they do see a lot of use. So if you look at, for example, sort of a residential elevator in Hong Kong, they typically get more than 1,000,000 starts per year going up and down.
And when you look at the similar sort of residential building in Europe, in that building, the traffic is at the level of 100,000 maximum 200,000. And because of this heavy use, we also believe that there may be a sort of tendency that when the European units have to sort of turn 20 before they require addressing maybe the APAC units will have to turn 15 or 18. And China mentioned a few times already huge growth in the base, which will come in a way our way in modernization around the corner. And then a particular view of the global market is this high rise segment. So here you can see the number of high rise buildings in those different areas.
The key point here principally is this blue parts of the graphs where you can see that North America and China are actually the places where high rise buildings are built. And these blue parts in a way, again, highlight the number of units coming to an age to be modernized. Now for us, clearly, North American demand is going to be much more solid, because we think that a good portion of the old Chinese high rise buildings actually may be demolished because of the fact that currently sort of better standards are required for those buildings. So a quick recap on the market. So in Europe and in the U.
S, there's a large base already existing of old equipment that require modernizing. And actually when you look at the way the mathematics, let's say that if this turning 20 is a sort of a cornerstone, every year more units will turn 20 years old than previous year in these markets. And we know that there is a pent up demand from some of the market reasons. So in our view, this base is not addressed fast enough for in a way the customers to retain the value and functionality. And like discussed earlier, demographics, a great trend, which is sort of a driving modernization, accessibility, safety and so on.
And then Asia, sort of a great opportunity for us down the road. So then looking at what are we doing to sort of get more of this opportunity coming our way. Starting off by looking at the recent performance of ours, so it's a twofold picture, kind of like good growth before the financial turmoil boosted by the Snell also in our case. And then after that more moderate growth because of the European markets, Asia and North America, like I said earlier, doing well. But nevertheless, we do believe that going forward, we have opportunities because of what I showed and also because we believe that we are able to generate some of this demand ourselves, which brings us to the top modernization provider development program.
Like Thomas, actually the modernization team in Kona is very excited to be sort of let's say, to be raised to the status of importance, gives us tough targets, but also gives us resources to sort of get things done. So it's a great energizer for us as such. Program is divided into 3 streams. The first one is about how do we approach the market? How do we sort of spend our resources in the right places?
And how do we improve our sales processes and competencies to release some of this pent up demand? The second part is about offering. How do we improve our sort of the competitiveness of our offering and also the sort of value we can add to our customers to our offering? And then the last one is about productivity in the end to end process. Henrik mentioned something about that and we'll go deeper into that in a second.
So starting from the first three, in this picture now it is divided into 3 different sections. Now if you think about creating demand and sort of identifying opportunities, the key thing for us is to really understand our market well, understand our customers well and then steer our workforce to the right places. Now we have been using CRM for a number of years now and the data in CRM globally now is at the level in our company that we know from the modernization business point of view with which product, which segment, which customer we have sort of a better track record in regards of hit rates or the profitabilities. So we do get a very granular view of what we are doing today. And this we are using to help to steer our sort of sales force.
So I can say that never before have we been able to point our sort of teams to the right direction so clearly as today. The second one is about educating the market. So if we point our people to the right places, they also have to be then able to in a way educate the customers on the benefits of the modernization, what are the solutions and so on to be able to sort of realize some of this pent up demand. And in here, we have been working already a while on value selling programs, which are actually directly directed to improve this. And then the last one on this screen is this service technician.
So like Thomas said earlier, our service technicians are out there every day taking care of the units of the customers and also talking with the customers. And they know the most intimately the shape, the condition and this modernization needs for the units that they maintain. And our plan is to tap into that knowledge better and through that create opportunities that are more solid that will lead into tenders and also orders down the road. Then looking into the offering. So from my point of view, the key message or the key focus in the offering is that if you look at Kone solution development roadmap today and you compare it to maybe a couple of years ago, there is much more directly modernization and full replacement sort of focused projects on that roadmap.
So we are getting a good share of that roadmap, which is, I guess, a privilege of being in this top monetization provider status. Now if you look at the recent releases, we talk already about the Nano space, which was released or introduced to European markets earlier this year and it is now off to a good start. But then you also have heard about the People Flow offering and also this Ultra rope offering, most probably primarily through the new equipment communications. But these are also very, very important offerings for us. And if you look at Ultra rope, for example, the first customer delivery of AltaRope actually was done through a modernization in the Marina Bay Sands Resort Hotel in Singapore.
So very, very important offering for us. And then the last stream in the program is this end to end process and productivity. So now if you think about modernization, I hear many times the sort of comments that this is the most complex business we have and it's tough to do modernization. And in part, it is true because when we modernize, we deal with a lot of different equipments, like I said, a lot of different vintages. And we also then mix new technology with old.
And sometimes this can be pretty sort of complex. So in a way, it is tough to get economies of scale in this business unless you are really sort of focused and clever on how you run the business. And I think we have been fortunate in a sense that we have 2 things to draw from when we improve here. First one is the fact that KONE has been developing modular modernization offering already since early 1990s. I was a young factory manager for KONE in Hovindka when I saw the first sort of modernization packages going out the door in early 1990s.
Why it is important to have this package solution? Packaging actually the solution is a prerequisite for us to be able to sort of industrialize the products down the road. And the other sort of a good sort of draw from this is our new equipment business. As many of you know, we have very standardized, very well sort of documented and optimized processes for our new equipment business. And now lately, we have been combining these two strengths to be able to increase the productivity and speed for modernization.
And going forward, we have another gear to put on, which is that we are going to be integrating and simplifying the progress even further because our progress starts from the original site survey to the handover to customer. There are many, many steps. Today, they are sort of islands or isolated steps. Tomorrow, there will be a seamless flow of process. So this action actually is going to be very, very crucial in speeding up the modernization process for the customer and then also to pump productivity out of the whole chain and by doing that increasing the profitability of the business.
So to summarize the whole presentation, we do believe that we have a sort of a growth market, huge base in Europe and North America, which is more and more units are getting older every year. You saw the high rise numbers is going to be a very interesting opportunity for us. And then down the road, of course, Asia Pacific will come online with already some bright spots seen today. And then we do believe that we have a very clear set of actions to capture more of this opportunity. So you saw we will become more focused in the marketplace.
We will be more proactive to release this pent up demand. We will deliver this sort of better solutions for our customer and also more competitive solutions. And then we will simplify our end to end processes to increase the productivity and speed of the operation. So like I said, I am very sort of excited about this opportunity in this business and also very confident that the actions we have in place will bring good results. Thank you.
Thank you very much, Ilbo. And now we have time for your questions to Ilbo please. Let's start with Maxim over here.
Hello. Max Kaniko from Wolterscot. One of the interesting charts that you showed is that modernization revenue slowed down substantially following the global financial crisis obviously for the economical reasons. I was wondering, if you look at the profile of aging installed base, at what rate do you think revenues should have grown in order to keep up with the aging installed base in your view?
Well, we have not made a calculation of what would be the sort of a right growth projection, if you will. A few times in a few markets, we have taken a look at the base in that market and tried to sort of illustrate to ourselves that with this speed, how long would it take to modernize the equipment that is today older than 20 years. And it's always in the few cases that I have seen, it's always sort of between 5 to 10 years. And at the same time, we remember, of course, that there is more stuff getting old every year. But it's very market specific, so there is no good rule of thumb that I would give.
And just as a reminder, let's please take one question at a time. Easier for the speaker to reply then.
Thanks. It's Amti from Danske Bank. Comparing KONE modernization with KONE maintenance, I'm just looking at the market shares. And I always wonder why modernization market share, which is I guess it's about 17% or so value terms globally, is so much higher than maintenance market share, which is about 8%. Why is there such a difference?
Yes. There is a simple reason to that because we perform modernization to our own maintenance base, but we also provide modernizations to the maintenance base of competitors.
That's what you do with maintenance as well.
Yes. But in the maintenance in a way, in the maintenance, the base is pretty sort of a solid in a way. But in modernization, we do get a lot of work out of the maybe a sort of a bigger share of work out of the maintenance base of others. Okay.
Yes. Thank you. Over here, Ben Mazzon from Bank of America. First question please, just on the structure of the market. Is the kind of when you're competing for modernization business, is it the same as new installations that you're competing with the big OEMs?
Or are there kind of installations that you're competing with the big OEMs? Or are there kind of smaller players, cowboys in that market that offer old wear parts? What's the structure of the market?
I would sort of characterize us being in the middle in a way between maintenance and new equipment. So in maintenance business, there is, of course, there are a lot of local competitors. In modernization business, we also do see those, but not to the extent. Maybe if you remember this upgrades modernization packages and full replacements, the local competitors are more geared towards this upgrade part. But we are not seeing them to the extent of maintenance, But we do see them more than we see in net.
And then maybe a follow-up just on in terms of modernization. Generally, what's the kind of retention rate or loyalty rate to your brand? If I've got a Kona elevator, do I always upgrade it with Kona? Is there a percentage you can give on loyalty or repeat business
on your installed base? No, no, no, no. I mean, you mean equipment based loyalty? Yes. No, no, no.
We haven't even taken a look at that.
Thank you very much, Itt. And thank you, Ilpo and Ann for your questions.
Well, good morning. I'm Larry Walsh, and I'm the Area Director for the Americas. And I'd like to first start with saying thank you for providing me the opportunity to spend some time with you today and provide you a briefing on our North America business. Let's look at how we're going to spend the next 30 to 40 minutes together. We'll start by 1st getting grounded in the emerging North America market opportunity.
Then second, I'm going to dive deep into our progress in North America over the last couple of years since I've joined the leadership team there. And then 3rd, we'll spend some time on how we're going to manage the business going forward and what our key priorities are. Let's start with looking at an overview of the North America marketplace. And obviously, United States is the most significant portion of that market. If you look in the left part of this slide, you'll see that there's about 1,200,000 units in operation in North America.
And that represents about 10% of the total units in operation globally. There's around 23,000 units shipping into North America is the estimate in 2013 and that represents about 3% of the total worldwide shipments. Let's take a little closer look about how KONE North America fits into global KONE. We represent about 16% of the total sales in 2013 and we represent also about 13% of the total employees. So as I move to the right part of the slide, it should be no surprise that United States represents 80% of our €1,100,000,000 in sales in 2013, with Canada and Mexico being the remainder.
Now, as you're aware, the market and the industry suffered a severe crash in 2,007 or 2,009 time period. But now we're starting to see many fundamentals, positive construction growth and also positive GDP growth that is fundamental to a good recovery. And we're seeing that recovery progress very well. If you look at the right, we see that we're almost at 65% of the peak unit volumes in 2013, and that's even greater in 2014. Let me illustrate that in a little bit more depth.
In the first half of twenty fourteen, the new equipment market grew at 10% over prior year, but the monetary value grew at 20%. So very, very healthy progress as you move a little bit more to the right off the chart into 2014. So we have some very good positive economic indicators occurring in the United States. We're seeing good real GDP growth and we're also seeing strong construction growth year over year, coupled with good unemployment rates, bodes very well for the recovery that's occurring in the U. S.
Some of the market trends that are happening, we're seeing growth in commercial development, including offices and hotels, but we're also seeing a new emerging trend where we're seeing growth in multifamily rental segments. That bodes very well for our MRO offering at KONE, where it's a sweet spot for us. As Opel mentioned in the prior presentation, there's a pent up demand of deferred capital for upgrades and maintenance. So we're seeing investments in existing building upgrades and we're also seeing steady investments in airport and transit facilities to upgrade aging infrastructure. I will illustrate in more depth later on what those type of projects look like, so you can get a feel for the nature of the projects we're engaged with in the United States.
Why don't we take a look at something much closer to home, which is the architecture billing index. And this provides us with a good forward looking indicator with respect to architectural billings and design services. This typically is a leading indicator and it leads about 9 to 12 months ahead of construction spend. So it's a good 9 to 12 month leading indicator of what's going to occur in the marketplace. And the slide is broken up into 2 segments.
The first is the residential area is the most positive sector, but we're also seeing all sectors showing growth. You'll see this index above 50, which means that over the last 3 months, we continue to see growth. Anything above 50 is a very positive trend with a rolling 3 month average. And we're seeing that both in residential, commercial and also in institutional. But the other important thing is that we're seeing this across all regions or territories.
We're seeing it not just in the strong Northwest and Midwest, but we're seeing the West and the South also. So we're seeing all regions performing well. So when you summarize this slide, we're seeing very strong growth and very broad growth in the United States. Here's a couple other key facts about the marketplace. 2 thirds of the market volumes in the U.
S. Come from commercial segments and then 1 third come from residential segments. But there also is an emerging trend, which I just highlighted. The fastest growing segment is actually multifamily residential. And when you start thinking about why is that occurring, we're seeing a shift in the demographics in the United States where younger people are staying married longer, but they're not having kids as early.
We're also seeing a lot of college debt with young kids coming out of college. So there is a shift to more rental as opposed to immediately buying your first home. And since multifamily residential or apartment buildings, townhomes are small to midsize landings, that positions us very, very well in that marketplace. There's another important trend I'd like to share with you today that's been occurring. And that shift started in 2,007.
If you look at 2,007, over 70% of the market was hydraulic elevators versus machine room less and machine room traction elevators. But you can see a steady progression of growth and a shift in mix. We're now entered 2013 or 2014 with greater than 50% of the mix now being traction or machine room less and machine room elevators. That is where we are a market leader in machine room less and so positions us very, very well for growth. If you look at the segments in a little bit more detail, small to midsize office buildings and multifamily residential are the fastest growing segments right now in the United States.
But we're also seeing growth in entertainment, in hotels, stadiums and casinos. The other part of the market that was described earlier by Thomas deals with the consolidated maintenance market in the United States. It's a fairly large market. There's approximately 1,000,000 units in service. Installed base has been relatively stable during the past years as we've discussed with very little growth, single digit growth and monetary value growth has been fairly flat too.
When you look at the nature of competition, greater than 2 thirds or greater than 70% depending on the estimates are actually done by companies like KONE. So the maintenance business is described as consolidated and the competition for the existing base is tight. And we also have the other dimension that there's a large public sector segment, which tends to churn contracts fairly earlier than longer term private sector contracts and those are more focused on price. So as a result, price competition in maintenance has remained intense. But I think you'll see from the earlier conversations and the themes you'll hear today, that means that we have to execute, we have to keep our promises and we have to also demonstrate to our customers that we've kept those promises.
That's the name of the game in service. The modernization business then with that large installed base in aging buildings is a very attractive market for us, and we've seen very positive development both in our performance and also in the market trends. If you look at the left, you'll see that there's about 1,000,000 installed base of units in the United States, but over 50% of them are over 20 years old. So very, very good mechanics here for us to capitalize on.
And I thought today I'd
go into one segment a little bit deeper to see also that there's some more attractive sub segments as we segment the market. So there's also a very high number of aging high rise buildings. This is a very interesting chart when I saw it first. And that is, if you look at it, I call it the 20 five-twenty 5 rule. And that is there are buildings that are greater than 25 floors and they're greater than 25 years old.
There's over 2,000 of them. So in the high rise modernization, that provides a very good opportunity for us for modernization in addition to residential segments and also hotels are very attractive segment for us right now because of demand of upgrading them for a good customer experience like we're in this hotel today. So that gives you a feel for the market opportunity in North America. And as you can see from many different dimensions, it's very, very positive and encouraging. Let's talk a little bit now about how we're participating in that growth market and how we progressed over the last several years.
First of all, just to give you a grounding on how we're structured and how we compete on a day to day basis, we have a very broad footprint across North America. We're headquartered in Lisle, Illinois outside of Chicago. We really have 5 regions of how we manage. We have Canada and a leader in Canada. We have 3 regions in the U.
S, which is the North, South and the West with 3 regional presidents, and then we also have a president and regional leader in Mexico. So basically, we have over 18 to 20 districts, 65 to 70 branches and allows us to very quickly mobilize and capitalize on emerging opportunities as this market continues to grow. We're also supported by both global production sites and also local sites. We have sites in Torreon, Mexico and also in Allen, Texas. And as I said before, this year, we're entering the year with over 5,000 employees and we're growing.
And here's some supporting data on our growth. If you look at KONA sales in North America, we've been on a very solid track of growth with greater than with about 5% CAGR growth and we expect that to continue based on what we see in our order book, what we see in our markets, that will position us well for continued growth as we enter into 2015. The other thing that I'll highlight here is that when we when I joined KONE in 2012, the senior leadership team of KONE had foresight to see this type of growth and we've been constantly investing and hiring for the last 2 years. So every month we have increased headcount in critical areas for us to capitalize on this market opportunity. Let's take a look then on how those investments have been paying off.
Our order book is growing, but more importantly, its margin is also improving. You're seeing double digit order book growth in the United States and you've seen that since 2011. And then you'll also see that trend be very positive and continue as we move forward. But there's also a very important distinction I would like to share with you and that is the quality of our order book has substantially improved. And what do we mean by quality of order book?
So one, the nature of what we're putting in is getting price. So not only are we growing at double digit rates, but we're also expanding margin. 2nd, the quality is better because we've substantially improved from 2012 through 2014 our cost estimating capability. So we have more robust cost estimates going into the order book. And then second, obviously, we have pricing excellence.
And the combination of the 2 have created a very high quality order book where our delivered margin is exceeding what we've put into our order book, which means that bodes very, very well for us to create leverage in the business as we produce projects that exit out of the book over the next couple of years. So we're very pleased with how that's developed and has demonstrated this year very, very good delivered margins are now coming out of the book also. Earlier, Henrik introduced several of you to our strategic targets. So I thought it'd be appropriate to take that down to North America and tell you how we're doing against those strategic targets. If you look at the left, which is our most loyal customers, which we always start with, I'd like to share with you that over the last 2 years, we have continued to improve our customer loyalty year over year.
And it's even more important about how we've done that. In other words, we have significantly improved our most satisfied customers, that has improved, and we've also reduced our most dissatisfied. So our tails have improved in our customer loyalty. The second area which I'm most passionate about is making KONE America a great place to work. And over the last 2 years now, we have improved employee engagement scores.
So we have more highly engaged employees. Our retention is very, very high and our attrition is very low in the single digits. So we've now have a great place to work. We're attracting talent and we're retaining it. And they're highly engaged.
We're a challenger. Henrik has shared with you our strategy that when we're a challenger in a growth market, we will grow faster than the market. And I'm pleased to say that in both our equipment business, we've grown faster than the market and have gained share. And also in our modernization business, we've grown faster than the market and have gained share. But also and more importantly, we've done that with margin expansion.
We've delivered good financial development through improved productivity and pricing excellence. That provides a model for us to create very strong leverage year over year with respect to profit growth over sales. We've also improved productivity across 3 of our core businesses. We've improved productivity in how we could install and that's through improved training, through improved packaging, through improved site readiness. And we've also improved our technician productivity or productivity per technician operative.
And those are very, very healthy. And then last, we've introduced Lean 6 Sigma techniques and some of our most critical processes to lean those out and make them more efficient so that we can work smarter, not just work harder. And then last, we made a strategic decision, which was the correct one several years ago, participate in the MRL machine room, this elevator segment, which is traction and not participate in the hydraulic segment area. I'm going to ask you to remember this picture because one of the areas I'm going to dive into deeply is going to be how we make this a great place to work. And to be honest with you, I use this chart as a recruiting tool to say why this is a great time to join Kona.
So let's talk a little bit more about smart growth. We're growing our business profitably in all businesses, but let's go into a little bit more detail and look at it by each segment. So in the U. S, I shared with you that we've gained market share. We've done that over prior year in very good shape.
Then second, we've done that with margin expansion. So how do we do that? We've really focused on pricing excellence and pricing excellence is in a nutshell what we do in the United States. We've developed competencies on understanding what the market price is. We use market based pricing.
We do it by geography. We do it by building segment and we look at a history of offers and wins and losses. And so we know where price elasticity is in the marketplace, where we're advantaged where price doesn't matter. So we've done we've become very, very good at understanding our customers. And we've done well in midsize office projects, but also we've done well in getting margin expansion in small to medium sized major projects and these are multi $1,000,000 projects in the $5,000,000 to
$15,000,000
range. The maintenance business, we have gained share, although it's been slight and we have been able to hold or expand margins over the last couple of years in a very competitive environment. And we've done that through operational excellence and also targeting the right customers. Very tough environment, one that we continue to focus on with respect to competitive balance or competition balance, but one that we are performing in. The modernization market is one that I'm extremely excited about.
It's a business where we're performing well. In the first half of twenty fourteen, we the market grew approximately 6% when it's adjusted for one big project we'll talk about, and we grew substantially faster than the market, and we were also a premium price leader in that market segment. And we'll talk about how we're doing that and why we're well positioned to continue to do well in the modernization business going forward. So to summarize, smart growth has been achieved and we've done it with a focus on pricing excellence in all of our businesses and its core of how we run our business. Let's talk also about how we're strengthening our participation in major projects in North America.
This is a critical part of participating in the new equipment business because roughly the new equipment business is 50% volume and 50% major projects, good rule of thumb. So you have to actively participate in both if you're going to be in the business as a leader and taking share. This is a good part of the presentation for me because I'm in an investors conference. I don't have to talk numbers. I can talk about customers.
And this is where I really spend most of my time. So I picked 2 projects for you to get a feel for how we do business in the United States and how we work with our customers in North America. The one on the left is new construction and the one on the right is modernization. The one on the left is one of our biggest wins in Canada in recent years and it's 1 Bloor Toronto, Canada. 1 Bloor is the address and is one of the most coveted residential address in Toronto.
It's a 75 storey residential building with some mixed use on the lower floors. And this project represents basically what KONE is all about. It collectively uses all of our competencies in one project. We're delivering elevators. We're delivering escalators.
We were very proactive in design of the people flow of the building. We're introducing destination control systems that also integrate with access control. But not only is it about the customer, we've also introduced a significant innovation for the general contractor. We're changing how buildings are being built in North America. This is going to be the first site where we've introduced jump lift into the construction site.
And to make a long story short, we'll go into a little more detail, but jump lift is essentially instead of using an outside slow rickety external hoist to bring up hundreds of crews a day and then material, we use the internal hoist of the elevators that are going to be used for the building and we put a mobile machine roomless control system on top of it. And every time a new floor is laid with concrete, we move the mobile control room up. And so we jump up to the next floor. And people are expensive. I mean, the most expensive thing in the United States is labor.
And so if we can move hundreds of construction crews quicker to their site and save 30 minutes a day or 40 minutes a day, that's 100 of 1,000 of dollars over the course of a month and 1,000,000 of dollars over the course of a project. And so just think about that, you can move them outside in the weather at 200 meters a second or 400 or 800 outside, I'm sorry, feet per second. So it's typically 4 times the rate and provides a very effective way and safe way to mobilize crews and get them working more effectively in a very cost labor intensive environment. Great project and we're actually hosting a big customer event there next week with more general contractors because this building could not be built with the schedule and the cost goals without using Jumplift. Now Washington Mass Transit Authority, which is called LaMata, is in Washington, D.
C. And it's in the heart and the capital of the United States. This is a project of modernizing 37 stations and you're getting a picture on the right of that station. Basically, it's a huge tunnel going down. And what we're going to do there is we're going to modernize over 37 stations over the course of 7 years.
And that order includes the modernization of over 128 escalators, but these escalators are mega heavy duty escalators. They're 80 meters to 100 meters long. So, you got to get your head around that. How do we even move those and get them there? But that's what we're good at.
Let me and this is one we're particularly proud of because it leverages all of our strengths and this is the largest order in the United States in the history of the industry, not just the history of KONE. So over $151,000,000 order that we secured in the Q1 of 2013. This is a really interesting project to show how KONE is well positioned. So let's take a little deeper look at what we're actually doing. I like the title because it's talking about it's a very significant win.
You may be asking yourself, why did we win this project? And we have other great competitors. And we won this project for three reasons. 1 is superior products. They viewed it as more reliable.
2nd, we had a demonstrated track record of other projects there. So we met our deliverables consistently on other projects. And 3rd, we had a very good service reputation. So these businesses are co mingled. You won't win new construction unless you have a good service business.
And so this was the reason why we won that project. And because of that, we won it at a premium. So this is an example of building strong companies and capabilities that you can win projects at a premium because they were looking for value at this project. Now let's talk about the excitement that we won the project, but then all of a sudden, oh my God, we won this project. Now we have to deliver.
This is a very, very demanding customer. And it's not that the customer is unfair. They're in a very tough situation because they're moving thousands of passengers a day or of people a day through these stations. And a lot of them are either congressmen, lobbyists, lawyers. They're very high maintenance group, very demanding group, I would say.
And so they're under a lot of pressure also. And also it takes an act of Congress to shut down a station for us to now start the modernization project. So imagine if we shut down a station in Bethesda, Maryland, very critical entrance. It takes an act of Congress to approve it and then we don't deliver. We've been about 2 years into this project and we're excelling at project execution.
We've delivered these projects, the first 8 stations ahead of time and safely despite multiple juggling of regulatory agencies. We're very, very pleased. And we've done that through extensive cooperation with all stakeholders, excelling at project management, and we've done cooperation with all stakeholders, excelling at project management with a focus on productivity. And then last, executive sponsorship. I'm leaving this conference this weekend and I'm meeting Monday with the Head of the Washington Mass Transit Authority.
We meet quarterly to set objectives, to make sure we're delivering on our projects and to set the collaborative tone of how our teams work together. So very exciting project for us and one that will be are very proud of and are positioning ourselves for next year 2015.
So that gives you
a feel for our progress in North America and as a leadership team, my team is very pleased with our progress, but obviously great potential in several other areas to improve it. So today, let's talk about and shift gears into where we are heading and then where we're going to focus as a leadership team. One of the most important things that we're focused on is aligning our global development programs and mapping those into actionable programs in the region to take advantage of the leverage that we get out of those being a global company. So I thought we would dive into these in a little bit more detail. Let's first talk about being first in customer loyalty.
And we're focused on that both in our service, new equipment and modernization business. But we have put in place through our customer care center, real time, high touch communications with our customers that track the entire process of how we're servicing a customer. So we know in real time, are we meeting your needs? Did we solve the problem? Have we closed the loop with you?
And we're doing that and I'll get in more detail. We're doing that through not only our call center, but also through improved technology and handheld devices. In the new equipment business, it's shifting your focus and making sure that you can act like a general contractor. You're on a very complex construction site. So we're spending more time strengthening our project management skills.
2nd, that we're scheduling based on the general contractor schedule and we're improving our installation processes. And then last, it seems fundamental, but it makes a huge difference on projects managing expectations is to have structured and orderly processes on how to communicate your progress and work through issues at job sites. This is one area of the business where I personally spend about 50% of my time, and that is we are investing and actively retaining and developing our people. We're focused on developing and attracting great talent. We're growing, we want to promote from within, and we also want to make sure we attract outside talent that's the best and provide us with diversity of background and thought.
We're investing in learning based management systems. As of we launched this over a year ago, we have over 100 learning specialists in the field. What's a learning specialist do in each district, in each branch, they work on customizing web based solutions or web based training for each individual employee. We've developed over 40 custom web based training programs. What I mean by custom, they're specific to how we manage safety, how we install, how we do first time diagnostics and troubleshooting.
So they're very specialized at that training that raises the competencies of our employees. I'm very pleased to say after the launch, 98% of the employees in North America have used learning.comorkonelearning.com. We have career path and learning paths progressions for all the key roles in our organization. And we have spent, in addition to all the training, we have spent time actively engaging our employees and it's shown in improved engagement results. We're in the field more often.
We're doing listening tours. In addition, we are also training extensively in sales management, leadership development, onboarding of new sales reps so they become more productive. So you can get a feel for that the last 2 years, there's been a core principle of this team. We're investment oriented and we're investing in our people, both in hiring, strengthening our capabilities and then developing our folks. And I'm very pleased to say that we're now at critical mass and we're well positioned entering 2015 to compete and achieve our objectives.
I've spent a good portion of this morning talking about our strengths and pricing excellence. So as we go forward over the next 2 years, we're going to build on that strength in machine roomless segment. We know where we're advantaged. We know the market is shifting more to that space off of hydro and we're going to build on top of that our pricing excellence and we think there's further development there. We have delivered pricing development now for almost 2 straight years or an additional almost 24 months.
We've been able to develop price in the marketplace and we think there are still opportunities to do more going forward. With that as a foundation, we're now going to also focus on enhancing our competitiveness in commercial and high rise buildings. And there's 3 platforms that we're developing to do that. The first one on the left is our People Flow Intelligence platform. And in People Flow Intelligence, we've just recently launched a more enhanced destination control system.
What you're seeing on the screen here is our ADA compliance touchscreen for destination control. That's American Disabilities Act. And it also won a Red Dot Award for Innovation and Design, very, very competitive award. So our destination control systems, which we recently launched are selling very, very well. That touchscreen is selling very well.
That's only part of what we're doing. By having new touchscreens, new turn styles, very good destination control systems and interoperability with access control, we're really redesigning how lobbies look. We're innovating and working early in the design cycle with our developers on what the next generation of a lobby should look like and how the flow of people should go there. We also have remote call technology, so that receptionist with a visitor will only call that elevator to the floor they're supposed to go to. So the way that elevator or way lobbies are being designed is changing.
And we're doing that both in modernization projects and also in new construction. I shared with you earlier the opportunity in High Rise and Henrik also mentioned that it's a very price competitive area. We focused on this as soon as our leadership team got together in 2013, and we now have harmonized our North America platform with our global mini space platform. And so we have a much more competitive platform entering the market in 2015. But we're also going to leverage UltraRope in the United States as the next innovation.
And we're currently working with on several projects to introduce UltraRope, which will allow us to substantially reduce the amount of high grade cable, steel cable that we use and we'll go to ultra rope, which is fiber, carbon fiber. And it will also allow us to construct even higher buildings. And that opportunity will exist both in new construction and also in modernization. And then last, I introduced Jumplift earlier as an innovation. We're introducing that right now in Toronto and we have several others in the pipeline.
That's just changing fundamentally the way buildings are built, how we move construction people and crews because they're very expensive and we're basically moving them at 4 times the rate from 200 feet per minute to 800. And we're separating the men from the material, which is also good for safety. That's being done inside the building as opposed to outside. And the labor productivity and schedule savings on the projects for the general contractor
typically will be
in the millions. It's usually 30,000 to 40,000 a day depending on the size of the building. Maintenance is an area that I have a great passion for and I have a long history in maintenance and this is an opportunity for us in many ways. The first thing that we're doing is we're fully leveraging advanced field management systems and remote monitoring technology. That's a lot in that sentence.
But what are we doing fundamentally? We want to have insight into the type of assets that we're maintaining. How are they performing? How risky are they? How troublesome are they?
What's their uptime? And then second, we want to use this technology to make sure that we optimize the utilization of our technicians. That provides productivity and insight, provides us a solid foundation for how we're going to run our service business. Let's talk a little bit about how we're actually developing our service technicians that was shared at a high level earlier. Let's talk about what we're actually doing in North America.
First of all, we recognize that every day you either win or lose on your brand based on how your service technicians treat your customers. That is the face of Koning. So we have an ambassador program that we constantly and continuously train not only our technicians, but our supervisors, our service administrators around how to professionally communicate to your customer, how to solve problems in a professional and expedient manner and how to actually follow-up with them in a professional manner. So communication styles, professionalism, we spend a lot of time in that face to the customer. 2nd, we make sure that our technicians can deliver.
So one of our primary training programs in the last 2 years has been first time fix rate. What are some of the most techniques or most powerful techniques or effective techniques at solving problems the first time you get there, so you don't keep coming back and irritate your customer. It's not just about web training though. We opened in 2013 a technical support center and that technical support center has hands on equipment of both all of KONE equipment and the most popular competitive equipment and they are hands on simulators, so they can actually troubleshoot them and work on all of those platforms. So a combination of good web training, ambassador training, but then really strengthening their hands on competencies for all units that are in our base.
The second area that's very important for differentiation and improved execution is uptime. I have so many customers I visit, they say, Larry, I don't care about anything else but uptime, keep my elevators running and I don't want to see you. That's what they want. They want peace of mind. So we're very proactive in this area.
We mentioned the size of the installed base that we have. We will actively or proactively target 1,000 of our most troublesome units before the customer knows it. We will go out there, we will repair them or we'll say, listen, these are running a little bit outside of what we're capable of repairing. We need to solve the problem collectively with the customer. We also provide data to our customers on how their units are performing and alert them to early problems so that we can work on either repairing them with quarter repair or work on modernizations.
This is also where technology continues to come in and that is we are also remotely monitoring a greater substantial portion of our new units going in and we continue to monitor both Kona units and now we're starting monitoring competitive units. That allows us to be proactive instead of reactive and also introduce predictive maintenance or condition based maintenance or while we're there, we know how the unit is performing. We will also do other repairs so that it can extend when we have to come back to look at that unit. And then last, we've invested a lot in our sales force and in our technology so that we can do more consultative led selling. We focus more on asset management strategies with our customers.
We provide both dispatch solutions, on-site solutions, high availability solutions, but we also integrate into building management systems so that building managers or property managers can see real time how our assets are performing. They can commission them or decommission them and also provide trouble calls to us in a very integrated and interoperable way. And then last, I'd like to talk about the modernization business. I shared with you earlier that we're performing well here, gaining share and being a premium and getting a premium in price. How we're doing that?
Well, first of all, we're really focused on sales competencies and targeting. But to start targeting, we actually changed the structure of our organization. We've organized now by customer and our sales managers are focused solely on modernization service. We have sales managers just focused on end users and modernization projects. We're very focused on targeting then our most problematic units we see either through service calls, through repairs, through age or usage.
And that allows us to be much more data driven on our targeting as opposed to being reactive. The other thing that we do is the training of our sales people is much more technical in this area. We're focused on application training and understanding the different existing situations that may occur at older buildings. And then we use centralized engineering support to help them engineer these solutions in the field. So our engineering support sees many, many projects daily and that allows us to leverage them.
And then last, systematic follow-up, how do we do that? It's a we do that through coaching, but we also do that through salesforce.com. We use spider strategies and we also use in salesforce.com follow-up strategies. So we know how many leads are being tendered by each salesperson, how many sales visits are being done by each salesperson, how many proactive tenders are being done. So we have a lot of behavioral performance indicators in addition to financials in salesforce.com.
And what's the end result? The end result is that we have shifted how we sell, so we have more proactive selling now versus reactive and that's now greater than 50%. And when we do that, the end result is our win rates either double or triple. They're either 2x to 3x in non reactive sales versus a proactive one where you're going after a customer and developing a solution with them. So that has contributed to our price performance and also contributed to our growth.
So this brings me to a summary of the North America business. And as you can tell from the earlier slides, North America is a very, very attractive market with growth in all segments. We are actively participating though in this market with smart growth and we've demonstrated we're capable of doing so. Our priorities going forward, we have 4 of them. 1 is to be a great place to work.
We're a growing business, but we're building, we're attracting, we're investing and we're developing our talent. 2nd, smart growth is core of how we run our business. We're gaining market share while we're expanding margins. Our third priority is productivity, productivity, productivity. It is the area where we have the greatest opportunities to improve our field operations, our competencies and our customer experience.
And then last, but most important is our customer experience. As you can tell, we have consciously launched many programs to improve customer loyalty. We're doing that by focusing on quality, our responsiveness, our communications, and most important, keeping our promises. So with that, thank you for your time and I appreciate the opportunity to share with you our progress.
Thank you very much, Larry. And now we have time for a couple of questions to Larry, please.
Just a couple of
quick questions. What's your penetration in growth rate of telematics within your maintenance business?
We have 2 different levels of telematics in our service business. 1 is connections, which are basic telephone connections, and those are the majority of our base. And then there are ones that are data connections, where those provide us with great insight and real time data. And that and I could basically say relatively that is very, very high for our Kona units, representing as much as 1 in 4.
Can I then follow on and say if you have telematics in school, does that mean you do less nascent trips a year to early?
That allows us to that's our objective because it allows us while we're there to avoid callouts and our next maintenance, we can be more productive. We won't just do maintenance. We'll actually do repairs that will prevent it and we'll shift out the maintenance period.
And what does that mean for pricing and margin and the sharing of benefits?
It provides an opportunity for improved productivity. And that allows us to continue to deliver productivity that has consistently offset labor inflation in
the U. S. So we use it as
a key driver for productivity in addition to better install or better repair methods.
James Meld from Henson. Is the margin you make in the U. S. On the OE bit and the AM bit, are they higher than the rest of the group? So we heard earlier about the Chinese
opportunity, I just
want to make sure you mentioned in America.
We don't disclose profitability by region. So I'm not actually actually don't even know the answer for the relative profitability compared to the other areas, but we'll take that offline. I will say that we are very pleased with the development of our performance in North America, and we manage it exactly the same way as the other parts of KONE, which is all three businesses are managed separately with their P and Ls, and they have their year over year and quarter over quarter profit improvement goals.
Maybe adding to what Larry said from a global perspective, as we have communicated, our new equipment profitability is the highest in Asia and so higher there than in the developed markets. And but then of course, when you think about North America, we talk about a big part of service business, which is our highest profitability business globally.
It is.
Thank you very much, Larry, and for your questions. It's time to move on. And
Thank you, Carla, and welcome everyone to KONI's Capital Markets Day and our discussion on China. A couple of days ago, I was thinking, well, this is my 4th visit here to the Capital Markets Day. And I came to the conclusion that Carla still is not satisfied with my performance. So she's giving me one more chance to try to get it right. So with your support and indulgence, we'll proceed into today's discussion.
So what we're going to look at is a quick brief look at our performance year to date in 2013 in China. Then we're going to look at the current market situation and some interesting market trends that we see going forward. We're also going to revisit those long term growth goals I'm sorry, growth drivers in our market and we've updated some of the data to give you a little bit better insight into how that's developing. We're also going to look at our growing service business in China. And finally, we'll talk about our priorities for future growth.
When you look at the new equipment portion of our business, you can see that in 2013, we continue to grow faster than the market. The market grew about 15%, a little bit more than 15%. We grew about 23%. By in the first half of twenty fourteen, We continue to grow faster than market. Market was about 10%.
We grew about 15%. That left us at least at the end of 2013, number 1 in the market in new equipment with also an increase in our market share of 1 full percentage point. And one thing I would like to emphasize here is that when you look at the total number of absolute units, we were by far number 1 growth in China. We continue to have a very strong competitive product offering in China, not just MRL, but across the board, high rise for all segments of the business. Escalator is doing performing very well.
And of course, very good price product for the affordable housing market. Our dual brand strategy continues very strongly and we're very pleased to see how that has progressed. And we can talk a little bit more about that in a minute. And finally, we see ourselves very well positioned in terms of supporting the business going forward. We have a brand new factory supporting the KONI brand in Kunshan, which I'm sure some of you have I think some of you have already come to visit.
And we have expanded our operation, our physical operation in at Giant KONI as well to support our growth. Shifting to the aftermarket business. Aftermarket, when you look at the installed base in China since 2006 to the end of 2013, the overall growth has been 21%. We have grown our lists our units in service by 37%. Again, like our new equipment business, our absolute growth in terms of units continues to be the largest in the China market.
And we maintain equipment across all market segments, high rise, residential, infrastructure, schools, airports. So we cover the entire spectrum of customers in China. We continue to have the highest industry conversion rates 50% for combined brands for the KONI brand itself 60% conversion rate, which as I said is the highest in the market. And we continue to expand our network coverage. By the end of this year, we're going to
have
80 new service stations opened in China. I want to spend a little bit time on this slide because this is in a way a very important part of why we have grown so quickly over the last number of years, Not just by physical performance, but by taking a look at we have gone ahead where our customers are going into the markets. And this has given us great reach to support our customers going forward. In addition, we get really good insight into where the opportunities are in the market. So by this, we have more than 400 discrete understandings of where these submarkets are, how they're doing, where the opportunities are, and this allows us to deploy resources very quickly when we see good opportunities.
But in addition, by using 90 branch operations, each with a P and L, that gives us the ability to set KPIs for our teams and incentivize performance and behaviors in a direction that we want to go, growth, customer focus, profitability, responsiveness, all the key metrics that we look at to help drive our business. So I think this has been a very important part of our success up till now and I believe it will be a very key part of our success going forward as well. Let's take a look at the current market and some of the interesting market trends that we see going forward. When you look at the market year to date, we still see this basically 2 thirds, 1 third breakdown on the market. One third being commercial, that can be commercial buildings as well as infrastructure.
And commercial seems to be doing very well this year. We see very good growth in office buildings, where the infrastructure segment is remaining stable and solid. So we're seeing that is still a good segment of the business for us. Residential, we're seeing normal residential doing much better than it had in the past vis a vis the entire residential segment. And you're seeing that it's picking up slightly and it's also shifting from the 3rd and 4th tier cities back to the 2nd and 1st tier cities, which is a very interesting trend and we're watching that very carefully.
Looking at the affordable housing market, which has been a big growth driver for us in the past, we see that starts continue for the 1st 8 months of this year. But what we're expecting is that this segment will begin to gradually decline slightly. And so we're looking at how this is going to develop. We hear that there may be plans for future affordable housing projects in the future, but we're not quite sure. We've only heard some discussion of that.
We're watching that carefully. But what we are seeing is that cities are using this opportunity to rehabilitate certain shanty towns in their larger cities, certain pockets of growth. So what they want to do is rehab those and move people either into new sections of the town or begin to try to upgrade the areas with new construction. 1 of the first trends that we're starting to really see in the market is that investment is becoming much more mixed. It's really becoming a bit more challenging for certain players in the market.
And so what they're doing is we're seeing much more regional variation than we would have in the past. And why that's happening is and we'll go a little bit into that in a minute is so what we're seeing I'm sorry, when we see this though, we see this slide that certainly after several years of very strong growth, we're seeing property sales have started to slow down a bit, certainly come off the last few years of solid growth. And we're seeing construction starts also begin to trail off a bit. However, we're also seeing that since June July, construction growth has started to pick up again. And we're seeing real estate investment continue fairly strong.
So we see a little bit of a mixed picture here and we're trying to we're watching this very carefully and see how that goes. Now of course, when we talk about real estate investment in China, we have to remember China is a very large country. In fact, it's so large that we have to really get down to a much more granular level to really understand how this is taking place. But when we look at it overall, we see that the investment is still continuing to grow. However, in the North and Northeast parts of China, that clearly is now much slower and moving into negative territory.
When you look at the coastal regions though in the center and the Southwest of China, investment continues to take place. Those are good signs. However, what we want to look at is probably a little bit more specifically and this is a good example of how we can see that even in one province, there's a lot of variation in how investment is made. We chose Hunan Province here for our example. It's about 67,000,000 people, 5% of China's overall population.
The urbanization rate is only about 48%. China's average is about 52%, 53%. And the GDP, while only a small portion of China, is growing slightly faster than the rest at 9.3%. Real estate investment up, but less than the average that we've seen of 14%. And when we see new equipment orders, we see that it still accounts for a very mild, small proportion overall, less than 4% of the overall market.
But I think it's a good example to take a look at. The capital city, for example, Changsha. Changsha is clearly a Tier 2 city. Urbanization rate is 71% having grown in the last 5 years from 61%. So it's a very fast growing part of the country.
Investment in residential and infrastructure continues at very solid levels. However, then we take a look at another city, it's a Tier 3, 4 city, Suzhou. They've had very strong investment in the last few years and we believe they sort of gotten ahead of the curve a little bit. Their real estate investment in the first half of this year grew about 5.2%, yet the real estate sales by area have declined 23%. Urbanization rate though still continues, but housing inventories need to be absorbed.
So we're going to see a period of absorption that will have to take place in this area before we see investment rise back up. But then you look at another city, Shaoyang, which is also a Tier 3, 4 city, And we see urbanization is still at an early rate. It's only 38%, but it's experiencing very high investment. The growth rate is 41% year over year and we're seeing very strong sales in 2014. So in a province like Hunan, you have kind of like a Goldilocks story a little bit.
You have a very strong or very solid performer, Changsha, the city. You have Zuzhou, which got a little bit ahead of itself and needs to cool off of it. And then you see Shaoyang, which is still very strong and coming forward. So within one province, very small, you see a lot of variation going on. One of the advantages for us is we have in this one province, we have more than 18 locations.
So we can see very clearly what's happening in the markets and deploy resources quickly to take advantage of opportunities that are present. Another trend that we're seeing is that larger developers are getting larger. Smaller developers are under a lot of pressure. Let's see why. In the past several months, there have been discussions about the liquidity in the market and we're seeing that bank liquidity continues to be very strong.
China has injected in the last few months more than RMB500 1,000,000,000 into the system to continue lending at a fairly strong rate. They have also taken steps to sort of deleverage the shadow banking or non banking segment of the market, which has traditionally been where the smaller developers have gone to gain financing. The larger developers have gone traditionally to the major commercial banks. So what you're seeing here now is commercial banks have money, larger developers have access to that, smaller developers traditionally continue to go to the shadow banking or non banking segment of the market having more difficulty. So you're seeing a real trend here in which the bigger ones have the liquidity, the smaller ones are they are in a much tighter situation.
The result is as you can see this trend from 2011 to 2014, the top 50 developers have increased their overall share of the market quite significantly. And in the first half of twenty fourteen alone, the top 50 developers have increased their growth rate 9% while the overall market has declined 9%. Another trend that we're seeing is an increased emphasis on quality, safety and energy efficiency. In January 1 this year, a law was passed called the Special Equipment Safety Law was released. And this law is very interesting because it requires the OEM to be responsible now for the installation of the equipment.
Not only not you're not just allowed to manufacture, but when that equipment is shipped and put to a job site, you now have responsibility to ensure that it's installed properly and safely. You can authorize someone else to do it, but at the end of the day, you are responsible. So this is a very big change within the industry and I think it bodes well for the OEMs, particularly for us. Another area that's taking is the Chinese code. Chinese code for new elevators and escalators, equipment is adopting more and more the European codes with a focus on safety.
And of course, this is something that we're very familiar with and very comfortable operating in this area because we're we already understand the code, the European code very, very deeply. So again, this is another trend that's going to work in our favor. In addition, we're seeing the government really promoting the notion of energy efficiency. They want greener buildings. And this is very good for us because we have the most energy efficient equipment in the market.
So when a customer looks to how which equipment they want to put in so that they can help meet the standards that are being set by the government, we stand in very good position. And follow on is we're also seeing this is that there are more and more maintenance regulations on a city by city basis taking place. And again, because we want to do maintenance, we've built up a maintenance network, we have the coverage. This is also a very good trend for us. So when we look at these market trends, we look across where we are today.
I see that we're in a very good position. Our strength of wide geographic customer coverage is holding us in very good stead because more of these top developers say, can you help me across the country and we can. We can also get much more understanding of where the market opportunities are and move people, resources quickly into those areas. Our 2 brand strategy, the KONE and Giant KONE brands are doing very well. And in fact, an interesting story to relate, about a month ago, I met with a customer up in Beijing and they have projects in both Tier 1, Tier 2 cities and Tier 3, Tier 4 cities.
They have projects that are differentiated for the high segment and the medium low segment. And this customer wanted to deal with 1 customer, one supplier, excuse me, he wanted to deal with 1 supplier for these different kinds of projects and he chose KONE. He said, with KONE, I can get 2 different brands, 2 different price points, but one point of contact, one standard for installation and you also have the aftermarket service network that I need. So that's why I chose you. And I think there are going to be more of these opportunities coming along.
We often talk about our great team and it holds well also for China. We have a great group of people, high employee engagement and our loyalty customer loyalty as a result of that is also very strong. And these we have very good metrics to discuss about that. In addition, we've got the fastest growing maintenance business in the China market by terms of units. And this is a very exciting future program for us and one that we really place a lot of time on.
And we'll talk about that in a little bit more detail. I wanted now to shift gears a little bit and talk about the longer term drivers that are in this market. Some of you will be familiar with this topic, but there have been some updated data. So let's take a look at that. And we essentially see 2 different sets of drivers, ones that are driving overall volume of space, so space growth.
And we're also seeing the other one, which is what we call the intensity, elevators going into that space, the number is increasing year over year. Looking a little bit more detail, Hendrik has talked about the issue of urbanization. In China alone between 2012 2025, there's an expectation of more than 200,000,000 people moving to the cities. Cities have only one way to go. They have to grow up.
In some cases too, they can go down, but mostly it's up. And their space is quite limited. So this is going to become more and more intense as time goes on. In fact, China has redlined a number that it cannot go beyond because it says we need so much arable land. We cannot go beyond that.
So they know where that number is. And therefore, they're driven to make sure they get the highest level of concentration density in their development going forward. In addition, you have this middle class, rising middle class in China, as you can see from 2000 to 2012, fantastic growth in that and we see that continuing well into 2025. And that's going to have also an impact on the size of apartments and the demand for better services. So this is clearly a very strong trend, again, driving the volume of growth of real estate space.
Then we want to talk about the elevator intensity, the number of units going into that space. As you can see from 2,000, 2005 to this last year, the elevator and escalator intensity has increased by 100%. And in between 20122013, it increased about 5% alone. So we see this as an ongoing trend. And this will this is being this is being improved or being even made more intensive because we have a mix from low rise to mid rise buildings that are being put up.
Another area to look at is urban renewal. We estimate between 2013 2025, 6,000,000,000 square meters of space will be pulled out of the market and more space will be put in. But what's significant about this is that this 6,000,000,000 square meters of space has only about 30 elevators per 1,000,000 square meters, but it's going to be replaced with new buildings with at least 234 elevators per 1000000 square meters going forward. So you have a real qualitative shift. This intensity will be represented in the new floor space being built.
I also just mentioned about the mix and you can see here the mix from low rise to mid rise continues and that's going to continue to take place. But what's interesting is that even the low rise space that is being built now will also have more elevators and escalators in them. And there are new laws and regulations that buildings above 11 storeys need to have at least 2 elevators. So that when one is out or under service, they have access to another one. So again, new regulations, new code requirements are coming in that will support the growth of the industry.
Let's take a look at the growing service opportunity. The overall elevator and escalator market grew from 2,000 grew from about 400,000 units to the end of last year around just under 3,000,000 units, fantastic growth. But it's a very competitive market. OEMs really only account for about 25% of the share of this market. There are many, many small local players and they take over the other 70%.
However, what we're seeing is a couple of trends. 1, smaller players are having a lot of difficulty scaling up. They can't go beyond a certain size and they're under additional pressure to provide certain performance levels, to invest in spare parts, training, safety requirements. For the small service companies, this is just becoming too much. So we're beginning to see some consolidation in its early days, but we're beginning to see some consolidation.
And on top of that, we're seeing the authorities becoming more interested in this huge installed base. And they're saying, look, we need to have minimum safety requirements. We need to have minimum service performance levels in terms of reliability and being able to repair equipment under certain time, we have to meet certain standards and the smaller companies are having more difficulty doing that. So you're seeing a trend here. Installation now being the responsibility of the OEMs, you're seeing the authorities looking at the aftermarket more closely, you're seeing customers as well saying, if I want to buy your equipment, who's going to maintain it?
Can you maintain it? I want someone to that I know and I can trust to maintain your equipment. So we see this as a very good trend going forward. So how are we today in terms of facing that trend? Well, as I mentioned, we have the widest geographic coverage of any service company in China.
And our focus is on really servicing our units and growing our maintenance base. I can tell you I know where every single one of my elevators that I have sold and installed in China is, every basically every single one. So I'm waiting to bring those back into my portfolio as quickly as I can. We have very strong presence in all segments, in all cities and with customers that really value high quality service. But our challenge, our challenge is very clear.
How do we grow that field force to support this kind of growth? In from 2010 to 2013, we doubled the number of service personnel in our company. And this represents a challenge to us. But we know that if it's a challenge to us, it's a challenge to all the other OEM companies. And I would say that we're at least 2 years, if not 3 years ahead in terms of how we're going about supporting this growth.
We have developed a number of key programs to support this growth. For example, we have a network of regional training centers. And working with our global headquarters, we have developed a systematic approach towards technical training, customer communication training, sales training, operational training. This is really helping us support the growth of our aftermarket business. We're also using a lot of new tools.
Each one of our field technicians has a smartphone so that we can use mobile technology to help boost productivity, understanding where they are, assigning them to jobs, feedback to close out jobs, understand what the situation is. And this is all taking place and we're just beginning in the early stages of this fuel mobility revolution for us. We're also developing the modernization capability. And this is, of course, something that we've talked to Ilpo about because he says, get ready, Bill, it's coming. And I say, okay.
So we're getting our resources ready to make sure we can handle the future modernization opportunities. Going forward, we want to be the best maintenance company in China bar none. We want to be known as the gold standard for service. We have great new equipment business. We want to have great service.
And we want to have a really top notch differentiated maintenance product with superior customer service and customer communication. And we believe we're very close to that right now. We have work to do, but we believe we're moving in very much the right direction. What are our priorities going forward? We've talked about a number of these things.
We've talked about products. We have the best product in the market. But clearly, this is something that we cannot rest on our laurels. We have to work very hard to make sure that we have great products at the right pricing for the right customer segment across all geographic segments, both on the KONI brand and the Giant KONI brand. We're going to look selectively where we are located and continue to pursue opportunities wherever we see them.
We're going to continue to develop our personnel and improve our training, increase our training and then attract even better talent into our company. Our 2 brand strategy is working very well. We want to see if we can enhance those story or increase the number of stories like I just said, where customer wants to buy both our brands. That's a very exciting trend. And we want to build the leading maintenance business in the country.
Our commitment is very clear. Going forward, we want to capitalize on all these market opportunities, both in new equipment and in maintenance. We want to continue to grow faster than the market. And we want to do it in a profitable way. And we want to have the most loyal customers in the country.
Thank you very much. Now it's time for the best part, your questions.
Thank you, Bill. And I think you did very well. And nevertheless, you can still expect to be invited to our future CMDs, I think.
Right.
Okay. Let's start with your questions, Glen.
Please, 5 questions at a time.
No, one question at a time, please.
Hi. It's Glen Liddy from JPMorgan. Your colleagues earlier gave us an indication of the split in the maintenance business between your own products and other people's products. Could you do the same? And is it difficult to maintain some of the local competitors' products if they're relatively primitive?
Good question. We have a vast majority of our equipment is the KONI equipment. We have not actively sought out going after competitor equipment at this time. It's a minor percentage of our overall base. And it usually comes in when a customer says, look, I have a project with KONE equipment, but I want you to handle some of these other projects.
So it usually comes in that way. But generally, we have we focus really on our own maintenance equipment.
Another one is in terms of the customers. You mentioned that the top 50 property developers are growing as a percentage of the pie. Can you give us an idea of your customer concentration? As in your top 50 customers or whatever, what percentage of the revenue would that be?
We haven't broken that out, but I believe we've said the top 100 developers represent roughly about 25% to 30% of our overall customer base, roughly.
Thank you. Okay.
Over
here. Hi, it's Guillermo Biena from UBS. A question regarding intensity. So you mentioned very much related to new equipment installations intensity has been going up and continues to go up. But I just wonder what happens if let's say that your new installation demand starts to go down is intensity cyclical as cyclical as installations?
Or is something that is expected to be related to other factors?
That's interesting. We were talking about this recently, and we looked at what's the breakdown between the growth of new equipment by pure construction growth and what percentage is by this intensity. And we have a breakdown roughly of about 2 thirds of the overall elevator escalator market growth because of construction activity and roughly about 1 third because of this increased intensity. We've seen that increased intensity is really continuing. And so we think this is a trend for at least for some time to come.
But that's roughly the breakdown. And so we see that as one factor, which is going to continue to drive the market going forward.
Then a question regarding the building cycle in China. At what point do you get the call from the developer regarding we want KONE to install the niche in this building?
Sure. There depending on the market, which project we're going after. Let's start with the residential, normal residential. Typically, they'll start construction and then we may get a call anywhere from 6 to 12 months before the building will top off, typically before they top off. When we are looking at a much larger project or an infrastructure project, it can be, let's say, even 18 to 2 years ahead of time, 18 months to 2 years ahead of time before you that they want to place the order and get things moving.
So there are some variations, big office towers, in some cases, you may even be 2.5 to 3 years before the equipment is required.
I so Okay. That's first time.
So I'll
tell you why don't you point
Two questions please. The first one is on the slides that you show. You show that the on one slide the total area of property sold is down, new construction area is down and the real estate investment is down this year. On the other slide, you show that there's actually growth of about 14% in China.
I think that slide shows the real estate investment in the 1st 8 months is up 13%?
Yes, exactly. So just curious how you're reading the overall picture in China at the moment given sort of the mixed messages which you obviously flagged here?
Right. Well, we've talked about 1st 8 months is up 13%. So but the second slide shows the 1st 6 months. So there's a slight cooling off, but we think 2 months is still it's too early to say. I think you can look at overall there's for the first half pretty solid continued investment in the market.
The other thing that's interesting is that how do you look where's the investment going? Is it going into the WIP, into buildings, getting them completed? We've also heard that's one thing. We've also heard that more and more developers are using money to buy land, which is a pretty positive sign going forward. Again, how do we look at where that those investment dollars are going?
It's Tim Shortenlander from JPMorgan. One question. I'm not
very familiar with the industry, but is there something that would stop you from using a proprietary wear part or something that would change your ability to really take hold of the aftermarket opportunity and raise your penetration rates there?
I think you're talking about some kind of technology that would lock out. Is that what I understand perhaps, lock out? We've seen that done in the past. And we don't think it's necessarily the kind of approach that we want to take. But that said, what I think you're seeing is the government putting more code requirements on the machines, making them more complex because of the requirement for safety and reliability.
And that is upping the game anyway technologically. So I think from that standpoint of view, we see that as a more positive trend than trying to go in and do it another way. We think that is actually better for us, better for our customers. And still at the end of the day, we want to have the best offering to attract you as a customer to come and then buy our service, not necessarily force you into a proprietary situation.
Thank you. It's Andre from Credit Suisse. Firstly, Bill, could you tell us how much of your sales right now are direct versus indirect in China?
Well, we have several ways in which we go into the market. We have our own direct sales force and then we use also agents and distributors. Now agents and distributors is a mix of about fifty-fifty. Have we given the split between direct and Not exactly. Not exactly, but
we Roughly.
Well, we have said that the share of direct sales in China is relatively small and the big majority would be this agent and distributor sales.
And between agents and distributors, it's fifty-fifty. About fifty-fifty, yes. So 500 selling points in China and you're selling very different direct. I mean that 500 needs to go to 1,000? So you show in the chart
of your coverage of the country, 500
points across the country, but direct sales are
still a small proportion of your sales.
Right. So across the country, but direct sales are still a small proportion of your sales.
Well, even if you're using, let's say, an agent or a distributor, you need to support them or if you're doing agent, you're still signing a contract with the customer. So you know who the customer is. And an elevator sales is complex enough that you need to work directly with the end user. So they may bring deals to you, but at the end, you're the one closing the deals and signing the contracts unless the distributor
agreement. Okay. Got it. That's useful. And just finally
Maybe just adding to that also, you need to remember that quite a big part of our locations in China are service stations. So we're essentially building out our service network in China. So quite a big part of that supports really the service side of the business.
Great. Thank you. And on maintenance, with all this development regulation and a bit more focus, what are you seeing in pricing for maintenance contracts? It appears to be abnormally low at the moment for us even wage cost adjusted.
We have said that we haven't talked about pricing, we've talked about margin, and margin continues to be at about the global average. Clearly, pricing is very competitive. There are some customers who want a price that we can't accept. Hence, our conversion rate is not 100%. But
we're
at the global level, margin wise, percentage wise, were the same, I guess, about the same. But we haven't disclosed really the pricing actually. But we are able to get increased pricing and part of the driver is because of labor and our customers understand that. And they tend to be open to some modest price increases to cover them. But then we have to work on our productivity.
Thank you.
Thanks. It's Phil Wilson from Redburn. Just on pricing at OE, I think the rate of price declines stayed behind in the Q2. So can you talk a bit about what we've seen more recently? And then as you look out to 2015, what's your expectation for pricing in OE?
In terms of pricing for this year, we it's still under a lot of pressure, that's for sure. We have seen a little bit of pressure on pricing. But generally, overall, it's been pretty solid. Looking forward for the balance of the year, we don't see any significant change for the balance of the year. And looking into 2015, we don't really quite give that far forecast.
But I can tell you that going into 2015, we'll certainly continue to look at pricing very, very carefully. We continue to put a lot of effort on that. That's one of our key performance indicators to our branches, and we insist that they really focus on that part of the equation very carefully.
And so I just want one more question. Just on the given your commentary on the sort of slightly weaker macro environment in China, obviously, you kept your outlook for orders. But have you seen any slowdown in your ability to convert orders into revenues and that's at the completion end of your business?
Have we revealed that information? And we talked about that. I think you
can interchange it. Okay.
We have seen no real slowdown at this point in terms of our deliveries. Deliveries still are strong and keeping up with the order book. So far, it's been good both for the Giant KONI and the KONI brands.
Is the fact that you use the indirect distribution in China, is that one reason why your conversion rate to the aftermarket is quite low compared to the rest of the world? And is that something you can
change? Well, for the KONI brand, not so because we have from the KONI distributors have been sort of trained over time that their objective is to sell, ours is to install and to service. On the Giant Kony brand, it's a little bit more the traditional China model, where they have allowed the distributors to do either some of the installation or and or service. But we're now beginning to really work to change the thinking and change the approach to that. Because we see the regulations, we see the trend in the marketplace moving in that direction.
So we want to push that side of the business further to focus on selling, we'll focus on the installation and aftermarket.
And then the reason why you don't get much higher conversion rates in the Kona brand itself, is that because of just pricing? Or is that because there's also a little bit of the fact that the Maers brothers might have a little service company and he might get it over you type brand envelope? I just wondered why the conversion rate is lower?
It's primarily driven by price. We don't have the our price is too high and some customers simply don't want to pay that much. And they see an alternative, for example, in a number of and it's mostly in the residential. When you look at the mix switch, the mix, the commercial buildings, infrastructure, virtually 100%. When you look at the housing, the residential, that's where you get the variation.
When you look at affordable housing, actually, we get it. When you look at some residential, there's much less conversion potential there or conversion success because of our pricing. Some customers, for example, property management companies, they say we do our own service. We only want you to come occasionally for an inspection, but we'll buy spare parts from you.
Thank you very much.
So good afternoon, everybody. So my name is Erika Soderstrom. And I will be sharing with you some thoughts related to the financial side of KONE. As the new CFO, who started in April, I joined the company 1.5 years ago. And now I would like to share some reflections of mine, how I see the business model of KONE, but also the financial development.
So if I move, it seems Carla, help. Now it goes. I have to push hard. So what I'm planning to discuss with you, and I hope you have some energy left, it's the last presentation, I know. And you are looking forward to getting more questions answered later on.
So how we drive KONE's profitable growth, and I'm also going to talk about our balance sheet and then about our outlook for this year and the long term targets. But I want to start with this picture, which I personally like very much because this picture is about leading a company in a holistic way, running a business with a holistic framework, because it is important that we think about customers, we think about our employees, we think about competition and sustainability in addition to the traditional strong focus on financial development. And so far, I have managed to meet only a handful of you. I see some familiar faces here. And I've already had some good discussions and looking forward to more.
One question that was already raised to me was that what are your first observations when you have been now with KONE? And I gave some thoughts and thought that these are the issues why I like KONE business model. And first of all, we are in global business, which is a life cycle business. We sell equipment. We service the equipment.
We sell repairs, we modernize the equipment and finally, we make a full replacement. So it's a very nice circle and it gives us protection against fluctuations in the market, but also it gives us an opportunity to take care of different customer demands in different parts of the world in the same time. Secondly, things that I really like is that we are good at making cash flow. And how come is that possible? The negative working capital, the fact that in this industry, we are getting advanced payments from our customers, that is not the case in many other industries, as you know.
And this is construction business, so it is here common practice. And the fact that we don't have to invest a lot in our business is another part in supporting the strong cash flow generation. And the 3rd item is then the cost structure. We are quite flexible. We use a lot of subcontracting in installation, but also in our supply chain.
So putting all these things together, so we are capable of creating high return on capital and this is why I like the business model. And turning then to some development pictures here talking about our sales mix. So as most of you know the company very well, our new equipment business and also the Asia Pacific has been growing very strongly in the last years. But let's remember that all business lines have been growing profitably. And talking about the new equipment business, let's remember that last year, 2 thirds of the new equipment market was in China, and we have a strong position there.
So we are happy about it. And having strong growth in our new equipment business supports then building on services. And you have heard today how my colleagues have been talking about how we are planning to grow our maintenance business and also our modernization business. Today, there was already some discussion early on in the morning asking about EBIT and how it has been developing. But maybe I still briefly discuss about it.
So during the past 5 years, so we have been able to improve our EBIT margin from 12% to 14%, but it has been quite stable in the past years. And we have been focusing on creating absolute EBIT and have not been willing to optimize due to the product mix. And the product mix is one very big factor behind our EBIT margin. And if you think about the slide I showed just previously about the sales mix, so 2,009, 47% of our sales came from new equipment business and last year it was 54%. In the same time, our maintenance business has been growing, but the relative share of the total sales has become smaller.
And let's remember that our maintenance business is our most profitable business. Let's then turn and look at some external factors, which are impacting our EBIT, such as the currencies and also the raw material prices. During the first half of this year, we have been impacted by the exchange rates, the translation exchange rates and negatively by about €20,000,000 And the translation risk is significant for us because less than 30% of our sales come in euros. Other currencies, big ones, Chinese renminbi, also USD, sterling, Swedish kronor, Australian dollar, Indian rupee to name a few. So we are operating globally.
We have seen now changes also in the currency market. Of course, we follow it. Nobody knows how they develop, but let's see. On the raw material price side, on the other hand, we have had some tailwinds during the first half of the year, but that impact has been less than the negative that we have seen from the ForEx during the same time. So let's move then from external factors to another external factor, pricing environment.
And today, you have heard many of my colleagues talking about pricing excellence and actions related to pricing. And maybe I'll try to summarize a bit what we mean with that. So first of all, it's a fact that the market is competitive, there is price pressure. And we have been quite good at competing there and offsetting the price pressure. So what do we mean with pricing excellence?
So we want to give to our customers the right products with the right price. To get that, we need to understand the market in a detailed manner and understand what is the right market price for each customer segment. And we also implement our global tools and processes related to pricing, and we train our people. And we need to then add also the target setting, which is a good driver when we talk about pricing excellence. We have implemented the pricing excellence pretty widely already, I would say, and we have seen some results already, but there is still work to be done and opportunity to improve.
Let's move then to order book. And this is something new. You haven't seen this picture before. So I want to point out that this is a new equipment order book that you see here. And looking at the major projects, you see that the share of the major projects in the new equipment order book has been increasing and is today roughly 30%.
Larry was showing you some cases that we have in North America, for example, big major projects. They are typically complex, maybe a bit bigger, and they take longer time from the order to completion, up to 5 years, maybe typically from about 2 years to 5 years, I would say. And then on the volume business side, talking about new equipment. There, we have done some homework, and we have updated our calculations that how much does it take, how long does it take from order to completion. And you see there the latest estimated hours, which are rough estimate.
And it's good to understand that as you see that they differ from one area to area, They also differ from one country to one country. So Asia Pacific without China there 1.5 years to 2.5 years. There on the shorter end, we can see Australia. And in the longer end, we can see India. But maybe this helps you a bit to understand.
So talking about order book and strong growth that we've seen there. So one thing that I forgot to mention in this one before I go to the growth, which is you've seen the growth that we have seen in the order book. But one message that I wanted to deliver is that we have also seen our order book rotation for the new equipment business slightly extending. Due to these factors, first, the share of major projects has been increasing and secondly, the share of North America and Asia Pacific has been increasing. This slide, which is relatively doesn't show the growth, which I was then going to move on when we come here because having a big order book, we need to be able to execute.
We need to deliver those projects. And how do we scale up our operations? So I'm going to say a few words about the operational and financial flexibility. So our manufacturing chain, first of all, has been built as a network with suppliers from whom we buy components. So we don't have to invest heavily in manufacturing ourselves.
And we can also adjust the volumes. And naturally that means that we should be able to deliver quite precise forecast on time for them. Then subcontracting, we do use a lot of subcontracting in installation. And talking about the back office side, so we get scalability from the back office functions by centralizing those. And there I see that we still have an area where we can improve.
So to be able to really execute, we need to make sure we have these capabilities in place, but we need to be flexible. And then moving to another very critical area, which is needed here, which has been under the management radar for a long time, as you know, that we continue to see very important our investments towards process development and IT because that is required to enable our growth. So we do have one common ERP system, which we have implemented in 43 connect countries. There are still some white spots, and we continue with our implementation work. Today, the ERP covers approximately 90% of our revenues.
And what are the benefits now with a common ERP? Well, it's a transparency, the speed, but maybe even more than that, that it brings us capability to deploy other Konevay global solutions to our units. And that way, we can bring the global solutions, which enable then productivity from sales, ordering, installation to the field management. And if I give you one example what this kind of Conaway solution is. So Larry already mentioned the salesforce.com.
So our CRM system, which we have implemented very widely across our sales organizations and we are able to follow the pipeline, how it develops and in an efficient manner have good sales management processes in place.
So
then let's move to look at the balance sheet. And in the beginning, I said that, okay, there are a few things why I like our business model. And looking at the balance sheet, I think we can see how they are in numbers. But before we go there, I would like to comment on a question, which I have already gotten related to our balance sheet structure. The question was that company has had a strong balance sheet historically.
Is there now going to be a change? And the answer is no, I don't think so. We like our strong balance sheet. It gives us flexibility. And at least this statement is for now.
But let's move on then to our balance sheet and look at some items there, working capital issues and cash flow. So our working capital is negative, thanks to those advanced payments, which I was talking about earlier. And combine them with a low level of need for the CapEx and also the good development in EBIT, we have been able to produce nice strong cash flow. On the working capital items, the picture is pretty stable. And I need to say that I think that the rotations are in good levels today.
Of course, we work and try to improve. Don't take me wrong. We try to identify areas where we can improve and those are especially receivables and inventories right now. But then a few words about capital expenditure. As we have been discussing here already several times, this is low capital intensive business.
So in your estimates, like roughly a bit more than 1% of our sales goes to CapEx on annual basis when we don't include acquisitions. That's a separate thing. Here in the picture, however, you see a peak in 2012. What was that? That was our manufacturing site in China, Kunshan.
And we are also in process of building a other new manufacturing site in India, in Chennai. The impact of that you will see in 2016, and it's going to be much smaller, not compared to this one. And Henrik already got questions then also on acquisitions, but maybe I repeat. So we do continue with our strategy with acquisitions. We are interested in finding good opportunities, companies which we could acquire.
Often they are small service companies and we are interested in their maintenance base. But they can also be like distributors of ours who are in a market where we are not present yet. And as an example, I can give you one company that we acquired 2012 called Isralift in Israel, and we have been very pleased with that acquisition. Then looking at this bar, which is specific for first half, like what is happening. There are a couple of explanations.
First, 6 months of the year, And we happened to have very strong Q4 last year. So we ate the pipeline a bit in Q4. We were able to close a lot of these there. But also there hasn't been any bigger good companies available with the right price during this time. But we do continue looking for those.
And as Henrik said that somebody has to sell us well. But we are working on it. This is part of our strategy and there are a lot of activities ongoing all the time. So looking at then the big picture, overall KONE has been able to grow profitably over the years and increase the shareholder value. In this picture, you see the basic dividend that has been paid to shareholders, quite a long trend over there.
And we do not have a dividend policy, as you know. And it is our Board of Directors who make a proposal about the dividends. But if you look at the picture, we have quite a good track record. So then I'd like to end up with talking about long term financial targets and also the outlook for 2014. And I'm sure you have scanned those pages through already knowing that no major changes.
But let me still open up a bit on these long term targets of ours, which remain the same. So we plan to grow faster than the market in a profitable manner. And today, you have heard many presentations telling how we are planning to do it, not covering everything, all the areas, but quite a good picture what we are doing. On the profitability, our target is to achieve EBIT margin of 16%. We are not going to optimize anything.
We plan to grow the absolute EBIT and continue focusing on that, but we have a road map how we get there. And the areas where we are focusing is to continue growing profitably, then also improve our productivity and quality and get leverage out of our cost base. And with these actions, we can then reach the 16%, but we have not set the date. So this is a plan. And for the cash flow, yes, our plan also going forward is to be able to create strong cash flow.
And therefore, our focus areas are receivables and inventories. All right. So then the market outlook, I'm not going to read this because we have not changed it. It's the same, which was shown to you when we came out with our Q2 result in July. And for the business outlook, it is also unchanged.
So our net sales is estimated to grow by 6% to 9% at comparable rates compared to previous year. And our EBIT is expected to be in the range of EUR 1,000,000,000 to EUR 1,050,000,000 assuming that the translation exchange rates do not materially deviate from the situation in the beginning of the year. So with this set of information, I'm willing to now turn to the questions if there are any.
Okay. Just before we go to the questions to Erika, a word on the feedback forms that have been distributed to you. So we would greatly appreciate it if you took a couple of minutes to fill in the feedback form because that enables us to continue to develop our IR operations and services to all of you. So thank you already in advance. We would be very happy if we reached a 100% response rate for our feedback.
Thank you. And now questions to Erik, please.
I have a very simple yesno question. Are you going to pay an extraordinary dividend this year?
Well, extraordinary dividend is extraordinary by nature. That's my answer.
A quick question on your prepayments. Can you give us a rough flavor of what the total amount of prepayments is? And how that changes per region, whether you're able to get more prepayments, let's say, in North America, Europe or China or anything like that?
With the prepayments, the advanced payments, first of all about the structure. So it's not it is not just the first payment that we get in when we get the order. But in this business, so we follow the milestones and we get money as advanced before we make the next step often. However, it is not exactly the same set of payment terms for each customer in each area. In the more or let's say it this way, less mature areas and countries like emerging markets, there we do have more advanced payments in use than in the mature markets.
On the slide you showed the advanced payments versus the inventories. It seemed to me like it was about €400,000,000 to the conclusion I guess sort of about €400,000,000 in prepayments, which seems a bit elevated, but I might be wrong there.
Yes. Approximate that level that you saw there in the picture. And in the picture, we also had other related liabilities, which are shown then when you look at the material. So that explains it a bit further.
I see Ben has a question.
Yes. Hi. Thank you. Thanks for the split of the order book rotation. Just two questions on that.
Firstly, of the 30% major projects, how much of that is actually is in China? Or is most of it in the rest of the world? And I guess related to that, is the length of your order book in China as you look at it, is that also expanding at the moment? Or is that fairly static at
less than
1 year as you put on the slide?
If we start from the China question and on the volume business side. So we haven't seen any significant change in the rotation or the volume equipment volume side, new equipment business order book rotation. And on the major projects, how to split this, I would say that we are getting major projects everywhere. And when you look at our press releases when we tell about those, so you can see that they come from all parts of the world.
And so maybe a follow-up on the prepayments. I mean, if a big deal did come along at the right price and you're interested, what level of financial leverage would you go up to in terms of preserving the credit ratings? And how would the agencies treat those prepayments in working out your ratings?
Well, we are not financing our customers. And we are demanding the customers to pay us the advance payments. And this is something where we have been very good at over the years being able to hold on to these kind of structures when we make the contracts.
So the A and P is treated as your money just paid upfront?
In my view, yes. What would Hendrik say? I can always check with him.
As you know, we don't have a rate deal. So yes, it is our money.
Yes, it is.
Okay. Let's take one more question from Guillermo.
Well, we are now in end of September. And our guidance, we have just said that it remains intact. So that is our best estimate of our understanding today. Well, the range is there. We have not touched the range.
So it's kind of like the rate you talk about what we have seen with exchange rates lately and the impact that we've seen there. So if I now give an answer to how I see it. So if the exchange rates would stay in the level as they are today, we probably would not get any more negative impact. But that's like a rough estimate.
Thank you very much.
Thank you. And thank
you, Erika.
For for for for
Okay. So thank you all for your attention during this half day. During the breaks, I had a few people who came and said that, hey, my takeaways from the day are the following that are they the right ones. And I thought that maybe I share with everyone that what the what I think the key takeaways should be. I think the key takeaways, first of all, we continue to operate in a good and healthy growth industry.
That remains intact. We will continue building on our strengths in the new equipment business, and we have good growth opportunities there. The growth rate in some of the markets, I mean, it goes without saying it's a little bit lower than it has been in the past, but still good growth potential in China and rest of Asia Pacific. But what we are now saying is that we have a good increase in growth opportunity in services that we are determined to capture. And also, we think we can improve our performance.
So we are not reducing our focus at all on new equipment, but we think that the service opportunity is one that is becoming bigger over the coming years. And we think that it's great for us continue to have growth, but the pattern of growth is shifting a bit. But that's okay. I think it's good, and we have continued to have good opportunities. Okay.
I think we have time for a few more questions.
Yes. So now on any of the areas or any of the presentations, let's have more questions.
Thank you. This is Antti. You highlighted the service opportunity very much. I would like to just get some numbers on this. And starting with maintenance, I mean, you have 8% market share now.
And what is your target for, say, next 3 years?
We haven't set market share targets for ourselves in any of our businesses. We have said that our objective is to grow faster than market. So we want to grow clearly faster in our market in maintenance because getting to a certain market position per se is not important. It is important for us to grow and grow profitably. And we think that the service market has a lot of opportunity.
So what we're saying is that our ambition is to accelerate the growth relative to the market that we have and continue to grow profitably. So we haven't set specific numbers on that and what it will mean over the coming years. Now you remember, we talked about strategic initiatives and how they impact us over many years to come.
Okay. And still on the toolbox, I mean, what you said is that you've had a negative competitive balance and you need to improve that. And as I understand how you will have to do this is that you will have to actually lower your prices. And in order to be lowering your prices, you need to improve productivity and cut cost. Is this the way how you do it?
Absolutely not. I think the reason why we have had one of the reasons we have had a negative competition balance has been the tough price competitiveness in South Europe. And we have not been willing to participate in that, and that's not our intention going forward either. I think what Thomas talked about is how we have already worked on our sales setups, sales structures, how we target our customers. And with that, we have already got a fundamental improvement.
What we're saying now is that through better differentiation, having more specific services for what each customer type needs, we can improve it. So it is through a fundamental development that we intend to improve it, what we have done and continue to do. Okay. Thank you.
What is the payment terms of your Chinese service business? Both of your networking caps, but it's obviously benefited from the growth of your Chinese equipment business. But how does that change as your mix changes?
So our China service business doesn't differ from rest of our world service business. So our service businesses tend to be annually, semiannual, quarterly in advance. And China falls within this bracket. So it's also based on advanced payments.
Malheur from P&P Paribas. Would you like
to say something about your strategy related to South America? There seems to be a white spot over there.
It is indeed a white spot. And I think our view on South America remains the same that it's been. It would be an attractive market to get into, but we have to remember that South America is 3% of the world's new equipment market. So we said this strategically, if we're not in South America, it's not going to impact our rest of the world competitiveness. If we will be small in Asia Pacific, it would be difficult to be globally strong.
But having said that, so if we would find an attractive acquisition in South America, we could enter there, but that's the way we would enter. So it's an area that we continue looking at. It would be nice for us to get there, but it's not a must.
Christian Laughlin from Bernstein. I was just wondering if we go back to China for a little bit, if you might comment on the burgeoning services market, if that is sort of feeding into some of the competitive pressures that you're seeing on pricing with new equipment?
No, I don't think so. I think the price competitiveness we see in new equipment, I think that's driven by the fact that there is a broad market and a lot of players with an ambition to strengthen their market position to be a bigger player in the world's biggest market. So I don't think that, that has and I see that Bill is agreeing with me that that doesn't that's not a source of price competitiveness in new equipment.
Okay. Thanks.
I think we have Andre here.
Yes. Thank you. A couple more. Just on new product pipeline, could you share with us what's next for you?
You? I think by definition when it comes to new product introductions and innovations, we will tell about them when they are ready.
It's been a year since Ultra Growth launch. So we usually bring something every year.
I would say that in past couple of years, we have had a very active pipeline of new totally new things. So we had the People Flow Intelligence, Nanospace and Ultra Rope. I think what we're doing a lot now is many of the platforms, so we have new introductions within platforms that may not be as revolutionary. But of course, we continue to have high activity in our research and development overall. So some of them may be more visible, others may be something that is more specifically for certain market.
I think Larry talked about some of the introductions we have for the North American market. In China, we continue to upgrade our product offering constantly. So I would say that activity remains high, and I think we have had quite a good pipeline once we come out with new things.
Great. And can I just ask on remote monitoring? How many units do you have right now that feed data back to you? How has that evolved? Where can it go?
And I think sort of follow-up to a question earlier, is this purely an opportunity to make it less costly for you to do the work and more predictable? Or is there actually maybe a price up or an upsell opportunity in that as well?
So we have certain markets where you have it. And I would say that there are more units that have a telephone connection than a data connection. But what I would say is that this is something that is coming more. It's still not a huge part of our base. But and you have to remember why is that.
When we look at the vast majority of elevators in Europe and North America are very old, and they don't even have the capability of transmitting the information real time. So the base there is quite old, and that's why it will take a time before it really gets feeds into the base. But I think what Thomas talked about is that in order to improve the reliability through data, you don't of course, real time data helps it, and that's the area we're going and putting a lot of quite a lot of emphasis on that. But it's also the data you have already because we collect an enormous amount of data already from the regular service that we do, and that can be utilized better. So what is the benefit here?
Well, it's a benefit for our customers. They get more reliability. We get better quality and predictability and reliability for their elevators. That's good for customer satisfaction. And that enables us to drive productivity in our operations.
So I think it's a true win win when we constantly get better in this area.
And I'll still try to arrive at a number, but maybe
a
small fraction of installed base. But as a proportion of your conversions, is your remote maintenance meaningful? Or is it still time?
I would say commercial applications, it's definitely meaningful. Smaller residential, that's still something that not as high, but definitely capability is there.
So just another question on the dividend again. Is that just linked to the net cash position? And then obviously working backwards that's obviously linked to advances which is linked to China. So I was just wondering how what your sort of inputs are into saying yes or no to the special dividend?
First of all, I think Erik already said it, an external dividend is extraordinary by nature, okay? So it needs to be some kind of trigger that makes you decide on that. So far, we have not made any such decisions. So I would not at a default, you shouldn't be expecting that. But then our Board of Directors have the liberty of thinking of this and proposing to our shareholders if needed.
I think Eric also said that we don't have a dividend policy, but that our Board of Directors look at our capital position, investment needs and outlook when they determine level of dividends with a pretty good track record, I would say. So I think that's clear enough.
Just going back to the Service business. And you've talked a lot about trying to develop that more. I mean, when you look at the growth rates historically of the Service business, I mean, it's been about 8% growth over the last few years. China is obviously growing as a portion of that although you don't just suppose very clearly what the numbers are. But at what point should the China growth push the overall growth rate of service higher?
It's not only China growth, it's also all of Asia Pacific. So that is already pushing our growth rates higher. I think you saw in Thomas' slide of the growth in our service base in the more mature markets versus leased ones. So much of the growth hasn't been growing quite 8%, the service business. I would say it's been growing at roughly 6%.
So definitely, I would say Asia Pacific is already impacting there. That's now 29% of our base in total. And we see in the past years, it's been growing at roughly 20%.
So if you put that together, what's the potential for the gross rate in there?
Well, if you think that it's about a little bit less than 30% of our base today. If it would continue to grow at somewhere 20%, that gives you mathematically about 6 percentage points to our total top line. That's how mathematics in this case work. That doesn't mean that we would say it's going to continue growing 20%, but that you start to see that the weight of it starts to be real.
Just a quick follow-up over there. Just to understand the operating leverage in your Chinese equipment business. If pricing is flat and volumes are, say, 10% or 15%, where and given your outsourced production model there, what are the levers you can pull? What is the inflation you're seeing in operating costs? And how does that all work out?
Because if growth rate slips below much below 10% and it's going to be quite difficult.
Well, I think it's there are a few you need to put it in a few buckets. One is the installation part, then you have component assembly and then you have raw materials. You talked about high labor inflation. That mainly has an impact on the installation side. Here, as China business matures, we have been constantly and we think we will constantly be able to get good improvements in productivity.
And that's something we have to get to offset labor inflation. But also installation pricing has been following, maybe not fully, but has been able to go up with labor cost inflation. Then you have the material costs. And here, like in any industrial business, you need to be able to get cost improvements for like for like products year over year. And think that's what we are getting.
Then what happens to raw material crisis, that's, of course, something we cannot fully control. And raw material crisis have been quite favorable now for the past couple of years.
Sushant Pradhan from Nomura Asset Management. Just two questions. Considering that it is an outsourced manufacturing model and manufacturing plants don't take that much to build relative to other industrial companies. I mean is capacity utilization in manufacturing less of a concern for you guys? Yes.
And next question is how far
So if we start with the first one. Okay. So please always take let's take one question at a time. It's easier to keep clarity then. I would say the answer to that is yes.
That capacity utilization is not such a huge item because the capital tied up in a factory is not that big. So I would say to get productivity, the most important one is that how you manage the whole logistics chain of your suppliers to sites and how you then install it at sites, that's the bigger question than how much capacity utilization will be in factory. That's not a huge issue.
And the next question is with the order book, how secured are they? Is are there cancellations do you see like in regions where there's a construction market slowdown? And if you see such things, how many percent of the total order book do you see if there's a weak market?
I mean, I've been with KONE now for 5.5 years. And since 2009, we have not had cancellations in a single quarter that would have been anything that's minimal. Historically, cancellations have been even during the financial crisis were quite low in this industry. You usually have started in most cases, you have started construction project before you order an elevator. Then you do a down payment.
So as you can see from our difference between our advanced payments and our inventories, we have more advanced payments, which means that we have tied up costs there. So in that sense, we have a good situation. But we have not seen so far any big cancellations even in 2,008, 2009.
Just a follow-up to that. How much is the initial down payment as a percent of the total order value? And if the projects gets canceled, the order gets canceled, you get to keep the down payment?
That's right. So it depends on and it depends a little bit market to market. In some markets, you may have a bigger upfront down payment. But then as Erik also said that the advanced payments is not only about the first down payment, it's also about the milestone payments. So in some countries, you have more milestone payments.
So then the first would be smaller. Others, you have only a few bigger payments, then you have bigger down payment upfront. So it depends market to market. I guess the most important thing is that do we cover the cost of our work in progress with advanced payments? And that's our objective, yes.
And that's, I guess, fundamental risk management for
us. Thank
you. Okay. I think the time has come to thank all of you for joining us today firstly and also for your very active participation. We have really enjoyed today and we hope that you have learned something new and also gain more insights on the topics today. One more small reminder, if I may, about feedback forms.
That's highly important to us. So please take a minute to fill those out before you leave. And after we leave this room, lunch will be served in the right behind the foyer. So basically the same area where we have had our break refreshments. Thank you very much and have a nice weekend.
Thank you.