A great pleasure to see so many of you here with us today. We also have people following the webcast. A very warm welcome to you as well. We have an interesting day ahead of us. We will have 6 presentations here in Helsinki, after which we will board buses and go to Kone's elevator factory and showroom in Hvinkai, which is located about 60 kilometers north from here.
During the presentations part of the day, we will be hearing, I said, 6 presentations from our senior management, starting with the presentation by our President and CEO, Matti Allahouston. Matti will be discussing how we are managing our business and developing our competitiveness in the uncertain environment of today. After Matti, we will hear from Pierre Liautaud, Head of our South European Business, and Pierre will be discussing how to manage and develop our business and identify opportunities and capture them in a challenging environment like South Europe today is. After Piers' presentation, we will have a 20 minute break, after which we will continue with a presentation on Asia Pacific and the Middle East by Naud Weger, Head of that region. And Naut will be talking about how we are developing our business in that region and also what kind of market trends we have lately seen.
After now, we will get a China update by William B. Johnson, Head of Greater China. And William will be addressing both what kind of recent market developments we have seen in China as well as our expected longer term view of how the market is going to develop and what kind of dynamics we are expecting to see there. After William's presentation, we will break again for a 20 minute break and come back for the final part of the presentations part of the day. That part will start with a presentation by Heikki Lepponen, the Head of our New Equipment Business globally.
And Heikki will be talking about how we are developing our offering and our supply chain globally. After Heikki's presentation, it's time for the last presentation of the day, which is by our CFO, Henrik Anruth, and Henrik will be discussing how we develop KONE's productivity and profitability. We will have time for questions after each presentation, and I would also like to kindly ask you to wait until the end of each presentation with your questions. Rest assured, there will be time to ask questions because we also have a separate Q and A session at the very end of the presentation as part of the day. Now without any further interruptions, let's get the day going.
And about the practicalities and where to have lunch and when and when to break out for a break, I will come back to all of that. But now let's get the presentations going. So without any further introductions, Matti, the stage is all yours.
Good morning. It is great to see so many familiar faces here. All of you have decided to make a major investment of your time when coming here. Many of you are even joining us to Huwinken. And many more of you are following this through video conference.
The last 5 years have been a very exciting time for us. During that period, the development in different markets in different continents has differed a lot from each other. I will now open the day by telling you about our progress from 2,007 that was the last year before recession to 2012. Then I will tell about our way to develop competitiveness. This approach that we are using systematically in developing our competitiveness has been a major enabler for our progress.
And of course, I will then tell also about our strategic priorities going forward and our outlook for this year as well as about our long term targets. Let's first take a fast look on our 1st year results how has the year started. As you see from here, the growth numbers both in orders, sales, operating income and cash flow are all strong. We have had a very good start for the year. These numbers are familiar to you.
So therefore, I don't spend more time with these. But I think that they demonstrate again quite well that we have been able to align our activities and resources, travel well with the in line with how the opportunities the level of opportunities have developed in different markets. And these changes, they have been really significant. Here you see the big difference of the new vehicle markets globally in 2,007 and 2012. You see that from 2,007, the share of Asia Pacific has grown from 56% to 77%.
At the same time frame, the share of Europe, Middle East and Africa has gone down from 33% to 17% and the share of Americas from 11% to 6. In this 5 year period, KONE's global market share in new equipment has grown from 12% to 18%. The difference is surprisingly significant also in the maintenance markets. From here you see that Europe, Middle East and Africa continues to be almost 50% of the global maintenance space. However, in 2007, it was even it had an even larger share 58%.
In the same time frame, Americas has gone down from 17% to 14%. And also in the maintenance space, the weight of Asia Pacific has been growing fast from 25% to 37%. Conair's maintenance base has been growing slightly faster than the market over this period from 650,000 to more than 900,000. The way how the markets are developing at the moment is a reflection of a 3 speed world. The developments in Europe, North America and Asia Pacific all have their are in their own different phases.
In Europe, in new equipment, the markets in Central and Northern Europe are slightly declining in many countries, although still in most cases, they are declining from rather good levels. Positive exceptions here are Germany, Austria, Switzerland and Russia. In South Europe, the markets continue to decline in France, Italy and Spain. In France, this declining started much than in Italy and Spain. And the positive news here is some kind of positive news is that it seems or it looks like the markets in Spain are finally reaching the bottom level.
Of course, Pierre after me will tell more about these markets. In modernization, in Central and Northern Europe, the markets are slightly declining in many countries. Test development again we see in Germany, Austria and Switzerland. And in South Europe, the markets modernization markets are at a weak level. The economic situation there is preventing the pent up demand from materializing.
In maintenance, the development is positive rather positive in Central and Northern Europe, while the markets are quite flat in South Europe. In North America, the recovery in new equipment in United States is continuing. Also, it is good to mention that still at the moment the market level is about 60% compared to the 2,007 level, which naturally as a comparison point we have to remember was the, let's say, last year of the construction bubble. In Mexico and Canada, the markets are at the moment rather stable. Also in modernization and maintenance, the development in North America is at the moment positive and better than in Europe in general.
Then I have combined here Asia Pacific and Middle East because they in a way, let's say, create this 3rd group of the 3 spirit world. And the overall comment here is that the markets are growing in all businesses in all of these countries and areas at the moment. And of course, Bill and Norde will tell much more about these developments. KONE has had a particularly good development during these 5 years in the growing new vehicle markets in Asia Pacific and Middle East in this especially in the fastest growing emerging markets there. As a result, our business mix has changed quite a lot during these 5 years.
First of all, in the geographical mix, the share of Asia Pacific has gone up from 14% in 2,007 to 35% last year and up to 38% first half of this year. While at the same time, the share of Europe, Middle East and Africa has gone down from 65% to 46% and the share of Americas from 21 to 16. What comes to the business mix, many of you have followed this industry quite a long time and you remember that traditionally the typical mix business mix for a company such as Kone and also in the case of Kone was 40, 16,000,000 new equipment and 16,000,000 in the service business. Already in 2,007, we had 45, 55, then last year fifty-fifty. And this fast sales has been continued this year in the first half where we already had 52% or 48%.
Our fast growth has naturally also required developing stronger market positions and especially in the biggest growth markets, which naturally has also been in developing higher market shares our primary target because it is common knowledge that when increasing market shares in growing markets, it is easier to do that in a way where also profits are growing continuously. And here you see how our market positions have developed in different countries from 2,005 to 2,009 and 2,000 and 12. So if we first take this the markets of this last crop of the 3 spear bird, I will start with China and India, which are the which last year were the 2 biggest markets in this industry. And in both China and India last year, we were the leader in our industry. Last year, in addition to this, we improved our position from number 2 in 2011 to become number 1 in Middle East.
In Southeast Asia, we stepped up from number 3 position to number 2 position. In addition, last year, we were the share number 1 intershare number 1 position in Central and North Europe and in Australia. In South Europe, we dropped from number 2 to number 3 position, while we were, let's say, balancing last year also their margins before volumes. And we continue to be in Ample 4 in Russia and North America. I have to say that I am very pleased with this development in our in the development of our market positions in the new equipment markets.
A few words then more about our progress and what we are doing and what we have been doing in China. Naturally, Bill Johnson in his presentation a bit later today we'll have a much more extensive review of both our activities and especially the development of the marketplace. The key comment here is that our development has continued to be good also this year. We have been growing clearly faster than the market, not only in the first half, but this development has also continued in July August. A few comments as a background.
Now in this situation where the Chinese market has been last 12 months, then several of the key competitors have communicated that they have been dropping prices. Having 2 parallel operations and having Sajan Kone in addition to Kone has made Sajan Kone a very important asset for us, because the Kone and Siont Kone pricing positions complement each other nicely and help us to protect our margins. What comes to product competitiveness, the our new volume elevators in mini space and mono space that we launched last year are making good progress in the markets and the ramp up. You remember that when we launched, we thought that our objective is to be in full volumes end of next year and this continues to be the case. I'm also pleased that the new that the Jagged Kone's new product launch at the end of last year to the affordable housing segment has been a big success.
It has been very well received by the market. And the rapid growth of this service business in China has continued. Then next ladies and gentlemen, this is now a little bit long story. And typically when I see this kind of slide with a lot of text, I don't like it. But I try to make this interesting because this is absolutely something that I want to share with you.
The question is that how have we been able what have been the actions to increase our market share from 3.5% in total, so 5% to 17% last year in China. The answer is that the answer comes from these actions related to these five strategy directions that I will briefly review. 1st of all, products. In 2005, our products were very much focused on high medium segment. So we had a very small accessible market in China.
What was obvious to start to do for us was that we started to expand our product portfolio fast both up to the high end and down to the volume segments. And now the situation is that we have a broadly competitive offering for all segments. What has been very essential here is that from 2,005, we have taken care that we have always some of our best product best people who have both a thorough product knowledge as well as market knowledge. And these people all the time are in a very tight connection and communication with our global product management and our global R and D. And as a result, we have several cases where with good timing, very successful timing, we have been the first to enter the market with a very attractive product to an interesting market segments providing a lot of opportunities.
So these kind of moves they have given us clear growth steps. And this will also continue even more actively our way also in the future. Related to care geographical coverage, we were concentrated in 2005 in the larger cities, which started to expand fast to the inner parts of the country. Now we have I think maybe it's not approximately, it is quite exactly 400 locations in Solvit Ville that we have in China. And the cost expansion continues.
Now what comes to the market situation at the moment when much of the high growth is also in the inner parts of the country, it has been, let's say, a very good situation for our kind of companies, which expanded early also to these markets. I have always said that competition in the peak emerging markets is competition about best talent. How to be able to get the best talent, develop the whole personnel actively and make them loyal KONE people. And this is what we started to do actively in 2,005 and this has developed very well. And this has also resulted in improved retention rate and improving all the time improving employee satisfaction.
And of course, this is the way also how we will continue. I see that Giant Kone has become a major asset for us. And when I remember the time when we signed the joint venture agreement in February 2005, I did not have an idea that Giant Kole would become such a key element in our activity in China in this kind of time frame. We increased our ownership to 80% in end of 2011 and the integration phase has gone very successfully. And we very actively continue with this not only Duals brand, but dual parallel 2 parallel operations approach also in the coming years.
Maintenance, a very important future opportunity in China. We were rather small as everyone else also in maintenance in 2,005. And we were also one of the very limited number of companies who in the maintenance have started to develop also maintenance business active in China already in 1990s. We had a good background in this respect. We continued with the active development and between 2,005, 2012, our average annual growth in the maintenance space has been close to 40%.
And of course, we will further expand our maintenance network all the time. In maintenance, globally, the solid we have a solid growth in Europe and North America as well as continuing good growth opportunities in Asia Pacific. We have been growing faster than the market in maintenance space in all continents. The average annual growth over this period has been in maintenance space 6.2%, while the global market growth has been 5.5%, roughly 5.5%. In modernization, we have decided to increase our priority for this segment.
In modernization, our market share has been rather flat during last few years at about 15% to 16%. The markets globally have not been growing for many years. But as said, there is more and more untapped market potential. And that starts to make also this market increasingly interesting. What we have started to do is that we are developing more actively our modernization capabilities and related tools.
We are working more actively in order to understand the markets with better granularity and also bring new products to the markets. Many of you remember that already since the beginning of the financial crisis, actually already a little bit earlier when we anticipated that this will last long, in the early 2008, we decided that let's try to take this difficult market situation and this difficult and challenging phase as an opportunity. And we have had this approach all the time over these years and it consists of these 3 different elements. Working hard in order to have a more granular understanding of the different markets in order to be better in focusing on growth opportunities. So being able to grow also in markets that are not growing.
We have accelerated our development programs and since early 2008 all the time increased our investments in developing our people and especially the leadership capabilities everywhere in the organization, because it was already then very clear that this is very important to do especially in the coming environment because people have heard over the last years a lot of negative news from the environment, how the different economies are developing and what companies are doing and all of that. And it is so important to really communicate and lead in such a way that people don't have to guess that what is happening to us, but they know what we are doing. All of this has led to this increasing improving market shares strengthening of our competitiveness throughout the business system and improvements continuous improvement in employee satisfaction and engagement. And it has also made it possible for us to improve our operating profit every quarter since beginning of 2,005, including over the most difficult years of recession, which of course is also something we as a team are very pleased about. So this was the story about last 5 years in a very exciting environment.
And now I will tell about how we develop our competitiveness, which I said to be a very important cornerstone for our enabling our progress. I know that many of you have seen this picture, but I also saw that not everyone. And this is what we call a holistic picture because it has all of the elements that are the key all of the key elements related to our way to develop KONE. It all starts from the global megatrends, which are driving the growth in our markets. In early 2008, we defined ourselves a vision, which says that in this all the time more urban world, KONE delivers the best people flow experience.
This vision not only clearly defines our scope. We continue to be we have decided always to be a focused company. We continue to be a focused company being active in this scope and develop to be as good as possible in fulfilling and reaching this vision. But it also helps and has helped us to make as many as possible of taller people all around the world to see our company with the eyes of our of the users of our products and with the eyes of our customers. Because and this is essential, because always when this is the case, we see a lot of opportunities to make our company better, to making our way to operate better, process better, products and services better.
And it is also the best source for innovation. Then what follows from vision is of course strategy and our strategy is very clear. This is what we a little bit further refined in also then in 2008. It says that we differentiate by delivering the best user experience and customer experience and at the same time develop the cost structure for our competitiveness by developing our people and our processes. Then what is very essential for every company that how to make the strategy alive.
And therefore, we decide every 3 years that what is the best possible set of major development programs that over that 3 year period again in a profitable growth bring us towards our vision. In addition, we have 3 high priority areas safety, quality and simplification. And as a basis of everything our culture, which we develop actively all the time and our common way of working, which is the KONEWAY Process Architecture. From here you see what have been the development programs in the different phases. But first of all, I think that many of you could ask a question that why 3 years is not that a long time.
Yes, it is a long time, but it is also long enough to get something significant to be developed. And if I take just a few examples from here, for example, in sourcing between 2,005, 2,007 and in environmental excellence in between 2,008 2010, we got a lot done. We made a major change. And then we have been able to continue very active development in these areas without that kind of internal visibility that we give to these development programs. Another important example here and point to mention is that you see that we have been working with customer focus and customer experience in a way meaning that transforming KONE to become a customer driven company all the time.
And that has been a very important factor in our change. And then, of course, what I already mentioned, starting to make the people development very important activity and even more important it was earlier than in the beginning of 2,008. Innovations are very essential for every company that has set to itself ambitious long term objectives. Innovations are essential because they help to differentiate from competition and they also help to build the brand. A couple of examples here.
The new volume elevator offering that we launched last year is bringing us to the top both in ride comfort, Visual Design, Eco Efficiency and Space Efficiency. The Ultra rope hoisting technology, this that we launched in June this year is revolutionary innovation that enables Elevator rise to new heights. But the key aspect in Ultra Europe related to our business objectives is, of course, that it brings us a lot of opportunities already with all of the buildings that high rise buildings that are 150 meters or higher. PoPs makes the ranking of top 100 global companies globally every year. And we were ranked as one of these this year as at the we had we are at the position of 37.
And of course, this is also something that we are pleased with. Next about the priorities when going forward. In new equipment, it is clear that our target continues to be to grow faster than market in order to ensure even all the time growing economies of scale benefits. In maintenance, we work very hard to accelerate our growth and productivity development. And in modernization, as I said, we have put we are now setting a higher priority also for this business.
And the objective is to capitalize on the untapped modernization opportunities on the demand that has been accumulated since 2,008. Our current situation in this what we see as attractive global markets And the development of our markets, they give a basis for very interesting ways to develop our business in the coming years. First of all, we our objective is to continue good growth as a result of future market share gains combined with the market growth driven by the global megatrends. Our strong market position in Asia brings good growth opportunities and the strength in service business brings stability. It is a very strong combination.
We continue to have a very hungry challenge attitude and the consistent active way in developing our competitiveness. And we will continue to work very actively in order to further improve our execution of our capital light and cash generative business model. As you know, this business does not require major investments, fixed asset investments. We are working all the time actively in order to further improve our working capital rotation. And overall, the objective is to maintain a good return of invested capital.
Now let us turn to and finally the market outlook and our long term financial targets. This market outlook is exactly the same that we communicated in July. In new equipment, we expect that the markets in Asia Pacific will grow clearly. The market in China is expected to grow by 10% to 15% this year. The market in Central and Northern Europe is expected to decline slightly and the market in South Europe to continue to decline from the already weak levels in which are already at weak levels in many countries there.
The market in North America, we expect to continue to grow. In modernization, the market will be stable or decline slightly And the maintenance markets are expected to grow well in most countries. This business outlook, we upgraded 2 weeks ago. Now in sales, we estimate that the growth will be 11% 14% at comparable expense rates as compared to last year. And in operating income, we expect to be in the range of €920,000,000 to €955,000,000 As you remember last year, our EBIT was €828,000,000 and this assuming that the translation exchange rates don't materially deviate from the situation of the beginning of September.
The long term financial targets continue to be the same that we have had. Our objective is to grow continue to grow faster than the market. Our objective is to reach the 60% EBIT level. And the in what comes to cash flow, we are working hard in order to improve working capital rotation all the time. Ladies and gentlemen, this was my story about our progress during the last 5 years, about how we are developing competitiveness and what our strategic priorities when going forward.
So enjoy the day and now we have time for your questions. Please.
Good morning. This is Antti from Janske Bank.
I would like
to ask about KONE and Giant KONE. You started I mean, in outlining your success in China, you started by saying that KONE scaled down its product offering. And then as a second step, you acquired Giant KONE. So my question would be how do these two companies differ from each other, KONE's low end offering versus Giant KONE's offering? And how do you organize these 2 companies in the marketplace so that they don't actually compete with each other?
I was maybe I was a little bit inaccurate in the way I communicated the scaling down of the portfolio. In case of the Kone brand operation, we are covering the market segments from the very high level to almost to the lowest volume levels, but not quite. And there and Cajadkone start covers everything in the lowest volumes levels and there is some overlap. And both of these has also their own sales networks. And of course, they compete in some cases.
But again, with careful target setting for both businesses, we have managed to have a let's say very good spirit in our total activity.
Good morning. Arne Ibbotson from Goldman Sachs. I was just looking at your sort of impressive development over the last 6 or 7 years in China in particular. And what you've already done looks very much like what a number of your competitors are now trying to copy effectively. So how do you see that you can sort of continue to outgrow the market over the next few years?
Or are you worried that some of your sort of global or Western competitors are now coming with sort of spreading out in China and doing these mid- and low end offerings as you've done very successfully already? Yes. Let's take back this slide 12.
Yes, slide 12. Thank you. Okay. So we simply we have a good combination. We have the challenger attitude.
And so we are not pleased what we have achieved. We want to make more progress. And on the other hand, we have very good starting point. In product competitiveness, we have a very good starting point. And our objective is to continue with the same approach even more actively.
In geographical coverage, we have already now a good coverage, but more to expand. Again, this year, we have been expanding to many new locations and this will continue all the time. Then this talent management, recruiting test talent, developing the people, having the stability in management that we have had in China now for many years, I would I could not be able to emphasize this enough as a starting point also when going forward. Then we have 2 successful active parallel activities, but not more. We don't believe that it would make sense to try to have more than 2 different parallel activities there, then the management of those would become very difficult.
With the CYAENT KONE we are in a very good track. And then in maintenance, Bill will tell more about what is our situation in the maintenance in China at the moment and that brings us very good basis to continue successfully. If you would ask me that what are our 3 biggest opportunities globally, I would say maintenance in Asia Pacific, maintenance China absolutely in one of those.
Thank you. Erik Kollrang, over Gersundgaard Collier. Two questions on the maintenance business. The first one in mature markets, the fact that you're growing your maintenance base a bit quicker than the market, is that an important element to keep price pressure at a bit of a distance for you that you're sort of increasing your density a bit quicker than the market average? And then the second question on the maintenance opportunity in China and the sort of legislation in place to make sure that that develops, how is sort of legislation from different levels of authorities in China developing now to make sure that elevators are kept at a good quality?
First of all, what comes to the our growth in the maintenance business. In maintenance, we are very much a challenge because our maintenance space is only 4th biggest in the industry, 4th largest. And we have been catching up to a certain extent over the last few years, but our objective is to accelerate this catch up. So I have to say that I'm totally satisfied to our progress in that respect. Then what comes so this is why I don't see that our maintenance growth as such has helped us in particularly has helped us in keeping the prices.
What helps there is the good level of customer service, good quality and good customer communication of course. Then I would like you to repeat the other question related to China.
Yes. You just mentioned one of your top three growth opportunities was maintenance in Asia Pacific. And I'm just wondering of the legislation and structure of requirements on the quality of the elevators and how they are maintained. Is that developing that you could envision the Chinese maintenance business to be the same as in mature markets at some point?
Okay. Good question. The market structure in China in maintenance as is familiar to many of you is different than in most other markets, especially in Western markets. So that at the moment only about 25% of the Chinese maintenance base is being taken care by equipment and service companies such as KONE. Then the rest is divided by the local small local service companies and by situations where the customers themselves are doing the maintenance.
Now during the first half of this year in China, new regulations have been developed to all building to a broad range of building technologies. Now during the second half of this year, the work is continuing in how to apply these regulations to the elevator and escalator maintenance. So this is why we know more about this in early parts of next year. However, what we understand that as you correctly mentioned safety is a key driver there. And therefore, naturally also that how to get and currently more good expertise in place, so that let's say professional people are taking care of the maintenance.
So all of these seem to be the priorities. And therefore, this looks like this will be positive for let's say professional equipment and service companies such as such, but too early to say more.
This is Tomskomma from Handelsbanken. Based on the industry's experience from Europe and the U. S, you know that there a great long term earnings opportunity in maintenance. But I we have probably never seen such a fast expansion in the installed base in the history as we see in China at the moment and the race is on there. So I just wonder, could you somehow describe your strategy when it comes to developing and growing your service network because it must be very tempting to open very many offices early on and then just accept that you have losses in some of these locations early on and then just because you have such a great long term opportunity there.
So do you accept losses for many years now when you open so many new locations in the service business?
The profitability of our maintenance business in China is good. As we have said, the margins are roughly at the same level as we have in maintenance globally. The expansion of our, let's say, maintenance service locations has gone smoothly. We are doing that actively and we continue to do that actively. What we have what we decided 2 to 3 years ago when we had in a way taken a look also that should we speed up our maintenance growth by targeting through targeting also their acquisitions in order to accelerate our maintenance based development.
And we did not start to do so because it was actually quite easy to decide that at this stage it makes much more sense to focus on this organic growth opportunity and focus on doing the making the organic growth with as high quality as possible. So at the later phase sometimes difficult to say even timing, we start to be interested about maintenance based acquisitions also there.
It's Glenn Didi from JPMorgan. For your 16% margin target, is getting the growth in the Chinese aftermarket a key element to get you from where you are today to the 16% margin target?
The Chinese maintenance opportunities is naturally a very good opportunity there. Now I have to say that Henrik later today will speak more specifically about each of these our long term targets. But okay maybe I leave this question more to Henrik, so that you have something interesting to wait.
Thank you for all your good questions at this stage. May I just remind you that there will be more time for questions later on. So we will move to our next presentation with Pier Leoto discussing South Europe and what we are doing to identify and capture opportunities there.
Thank you, Carla. Good morning, everyone. My name is Pierre Liautaud. I'm the Executive Vice President for Western and South Europe. I've been in that position since the month of March 2011.
So it's really a pleasure for me to be here this morning with you. I've not met you in previous occasions. I have the hope that at the end of this presentation, you're actually more familiar with KONE's business in South Europe And you're actually quite pleased about our progress, because despite what you might think, there is actually a positive story to tell about our business over the year. So my purpose this morning in the next 20, 25 minutes is to take you through 3 major things. The first one is describe the market, the dynamics, what's happening in our area.
The second one is what has been our strategy, what continues to be our strategy to identify and capture the most profitable opportunities despite the challenging environment. And third, which is to describe our continuous focus on service quality and customer satisfaction that we believe is key to develop a profitable business in our area. So let's start with what we at KONE call South Europe and the countries we are talking about are actually highlighted in blue on the map. And let me tell you kind of key important elements about our market. The first one is that more than half of total equipment in service in Europe actually is in South Europe, which means that we have about 3,000,000 elevators and escalators in service, not just KONE, but the total market.
And that represents a huge opportunity maintenance pace. By contrast, only a third of the new equipment business shipments in Europe come from the South of Europe. And that is a much lower level than it used to be in the previous years. France, Italy, Spain, Belgium are our largest market, both from a service business perspective and also modernization and new equipment. And we have certain part of the territory, which are highlighted in kind of light blue here where we do not have a direct presence, but we are represented through authorized distributors.
And therefore, the opportunities that we capture in this part of the territory is actually only the new equipment business. So what has happened in our market? First of all, when I look at the economic background, I mean, it's fair to say that the Southern Europe economies have been badly hurt by the financial crisis. And even though the forecast the economic forecast point to some little recovery in the next 2 years, I would say that we need to be cautious about our own outlook. And we are not counting on a lot of tailwind to take our business forward.
When we look at the total construction industry in the major markets of France, Italy and Spain, we actually expect that this construction market will stabilize at a level which is about 2 third of what it was at the peak years of 2,007. So compared to a 910,000,000,000 dollars of construction market in 2,007, we expect or there is an expectation that the construction industry will stabilize at around 600. When you look one level below and you look at the elevator and escalator business, let's start with the new business, the new equipment market. As you can see here and this is a comparison between 2,007 20 12, there's been a dramatic decline in terms of volumes, right? In every market, with the some exception in France and also in Belgium to a lesser extent, I mean, there's been a strong decline.
And if you look specifically at Spain, we can say that the 2006, 2017 kind of time frame was an anomaly, because that was fueled by speculation on the real estate and I would say bad lending practices. But even if we are to normalize it, I would say that the decline compared to the historical level is probably in the range of 50% to 60% compared to the base. So more or less what we are seeing in Italy like 50% decline from the peak years. One consequence of this is actually there is some overcapacity in terms of manufacturing in South Europe. And the risk is that there is a trend to lower the prices to fill up the manufacturing capacity.
And we are obviously monitoring this kind of development as it might have a negative impact it has a negative impact on prices and potentially on quality. By comparison, what we see in the maintenance market, they actually have been quite stable in the past couple of years. There has been some growth coming from the net conversions. So this is actually a positive element to that. And as you probably know, in terms of monetary value, there is in most European countries, there is actually some price escalation which are automatic, which are built on general public indices in terms of inflation.
So the positive impact on the monetary value of the maintenance comes from net conversions and price escalation. And the negative development the negative factors are more well the economy and the competition on prices. But as you can see here when you look at the biggest market, I mean, Spain and Italy are very close to almost 1,000,000 units in each of those markets. France is about half of that. And we have again a substantial portion of the total equipment in service both market wise and also from the perspective of KONE.
So when you look at this kind of background, you might tell, well, listen, this is really bad. This is really weak. So the development of KONE in South Europe must be pretty poor. Well, actually not. Actually, we have some positive stories to tell as I said.
And I think the main rule here is to not look at market averages. In every single business environment, there are always pluses and minuses. There are always portions of the business that develop better in each business line in each country. And I think it is our responsibility to dig deeper and identify those opportunities that carries the most profitable opportunity and to allocate our resources accordingly. And so we have a clear focus on profit development, not just market share in terms of volumes.
And we are actively working on developing our offerings in order to adjust to the customer demands and to the request of the market. So what we're going to do in the next slide is actually to describe you in further detail I mean how we are developing our business in the 3 most important business line that is service modernization and new equipment in that order, I mean, from the size ranking. But before we do that, I would like to spend a few minutes to talk about what we see are the latest developments in our territory. Well, first of all, in Spain and Portugal, as Matti mentioned earlier, we see some signs some early signs that the construction market might be bottoming. And we are not seeing this yet into our orders.
However, some of those signs are that the unemployment is seems to be peaking and kind of going down. It's been now certain number of months since the unemployment in Spain has gone down. And the statistics on where this employment is picking up is actually in the construction industry. So that's a kind of positive news. And the other positive news is that when you look at the stock of vacant flats in Spain, I mean, we start to see some regions.
So it's not a countrywide statement, but we start to see some regions where the stock of vacant flat is getting lower to a level where you might think that there will be more construction going on. So when more money flows in, we expect to see better orders. In the service space in Spain, the market continued to be under very strong price pressure and that applies to all segments. When I look at Italy next, the new equipment business continues to be weak and weakening further. We don't actually see much again opportunity or coming from that yet.
The service markets are quite competitive in Italy. But I would say the opportunity that we see seems to be the most attractive at the moment is in modernization. As you probably know, there has been no boost from Snell in Italy. And therefore, the aging of the equipment provides actually quite a number of attractive opportunities, which are for us to grab at the moment. In France and Belgium, the new equipment markets have actually been relatively strong over the past years.
Belgium continues to develop in a positive way. France is starting to see some weakening since the beginning of 2013 in new equipment. We hope that the new equipment will start pick up again next year, but we are not expecting that to happen before the end of the year. And both in France and Belgium, we have seen some uncertainty in the short term development of the modernization market. This is mainly due to some rescheduling of the SNEL deadlines.
I mean there was for example in France a deadline of July this year for the 2nd phase of modernization and that has been pushed out to 1 year later the summer of 2014. So we're actively working with the regulation authorities to work out the best out of this situation. But as I said, there is some uncertainty at the moment about that. So when you look at opportunity by opportunity, I mean, let's start with our largest business in South Europe, which is the service business. It is very important for us in South Europe and it's also very important for KONE.
As mentioned for KONE overall, I mean 20% of the total equipment in service in the world is in France, Spain and Italy. And we have actually very strong presence in France and Italy. We have a lot of upside potential in Spain given that our position is one of a challenger. The profit opportunities in that business continues to be quite high. And we believe that actually there is a continuous opportunity to develop this business.
So where is the growth or the profit growth coming from? It's coming from conversions from new equipment business and elevators in free service. It's coming from retention of the existing portfolio. It's coming from selective wins from competition. And we actually focused mostly on extending the share of wallet of KONE with our existing customers.
And it's also coming from selective acquisitions to increase the density of the portfolio of equipment in service. As for the rest of KONE, we are actively developing our competencies in maintaining both KONE equipment and non KONE equipments. Actually the international training center for 3rd party equipment is in Trappe near Paris in France. And we are very committed to continue to develop that part of the business. We have a set of contracts, agreements and packaged offerings to maximize the value of KONE service and to set the right balance between the level of service that is expected by different customers at different segments.
So, obviously, a hospital will have more requirements about maintaining their equipments in good state 24 hours 7 days a week where other segments might have less stringent requirements. The second opportunity in South Europe is clearly the modernization business. As you know, the modernization business is triggered by 3 key factors. The first one is technical obsolescence, equipment being unable actually to continue its normal life and there are technical changes that are done now and then to improve the technical quality of the equipment. The second one is the compliance to safety norms.
And the third one is energy efficiency. Snell, as you probably know most likely has been a mandate led by the European Union to boost that business through compliance to safety norms. It's been enforced at various levels in the various countries where we operate. I mean, it's been actually quite strong in France, Belgium, to a lesser extent in Spain. And it's been practically nonexistent in Italy.
So Snell is just a boost and accelerator to our business. But actually the underlying potential of modernization is there and remains to be there, because every year the equipment gets 1 year older. And the running costs of running an elevator actually increases over time. So the only actually element that is holding that opportunity back is the lack of financing. But if we adapt our offerings to providing the right offering at the right time with the right financing, we can actually get more out of this modernization opportunity.
The 3rd opportunity and believe it or not, I mean still is a new equipment business. New equipment business has gone to quite a low levels. However, there are still opportunities. And let me give you a couple of examples. The first example is this map.
You might ask, okay, I recognize that looks like Spain. What does the dark area mean? The dark area means the number of construction licenses that have been granted during the boom years. And the darker the area, the higher the number of licenses granted has been. And if you look at the Southern Coast of Spain, Andalusia and this is where most of the growth has been coming from.
By contrast, as I said, I mean, the lighter areas show some potential. And I had mentioned earlier, I mean, we start to see some provinces in Spain where the vacancy rate has gone down to a level that makes us optimistic about potential growth in that area. Actually in the Madrid area, there is probably a significant potential that has been accumulated and will be soon released. In a difficult market, it's very important for us to actually differentiate our offerings and to adjust our offerings to the various level of requirements of the customers. And we have actually in the KONE, we have 3 main offerings.
The Eco space that addresses the least demanding customer segments, low end housing, up to the Mono 500, which is the core of our volume business, which addresses most of the segments and to the high end with the Monospace 700. And we have competitive offerings, which are tailored country by country to the need of various segments and which are packaged from the future and the price perspective to match the requirements of the customers. And our deep understanding of the customer behavior and the customer request help us 1st of all to package the offerings in the right way and b to allocate our resources in order to tap the most attractive opportunities. This said, I think we need to realize that the most important currency in KONE Business in South Europe is the portfolio of existing equipment in service. It is our mandate to actually protect it.
And our strategy has been to increase the value of that opportunity and to focus on quality of service and the customer experience. So I will take the next few minutes to describe this in a little further. I mean, there is an alternative strategy, which is to lower prices to get more volumes. But we believe at KONE that that strategy is synonym of lowering the quality of the product, lowering the quality of the service and at the end getting a poor customer experience. And in a business in a service business, we are absolutely convinced that customer loyalty comes from quality of service and not the opposite.
So what can we say about it? We can say that each opportunity to interact with the customer is actually an opportunity to deliver value and to and a positive experience. So when we hand over a new equipment, when we do a preventive maintenance visit, when we respond to a callout, when we modernize the equipment either partially or full replacement. And then we have opportunities to show high commitment to the quality of service and to get a positive customer experience. And we are doing that over the entire life cycle of the equipment again and again and again.
And this is happening quite often. I mean think about the fact that in South Europe, each month, there is more than 150,000 preventive maintenance visits. There is more than 60,000 individual responses to calls from customers to attend to equipment. So each of those opportunities is an opportunity to deliver value and we are training our people to actually deliver that high quality of service. It is generally accepted that the costs of running equipment increases over time.
And when I say cost of running equipment, I'm not only talking about the maintenance cost, but I'm talking about the spare parts. I'm talking about the cost of the breakdown. I'm talking about the electricity. I'm talking about all those costs. And it's very important our customers are telling us, you need to help us to maintain the equipment in good running condition at the right cost level.
So we have actually developed a set of modernization offerings that are the right offering at the right time. And the right offering at the right time, it's extremely important, because you don't want to overspend for something that you don't need and you don't want to get the risk of your elevator running badly or at a higher cost if you have not provided the right offering. So depending on the stage of the life cycle, we offer repairs, modernization of subcomponents of the elevators or actually full replacement of the offerings. We're actually very pleased with the development of our replacement offering, which is based on the Monospace 500. It actually has picked up quite significantly across all segments in South Europe.
It's actually been a very positive experience for us. As I said before, I mean, we are actively looking at customer feedback at any point in time. And we are collecting and analyzing the feedback of customers in order to improve the quality of our service and the quality of our products. We have 3 major ways to do that. The first one at the left hand side is the activity annual customer satisfaction survey.
In South Europe alone, more than 6,500 customers are called individual actually more than that are called, but 6,500 customers are responding to the annual survey to express their views about the quality of the service delivered and quality of experience delivered by KONE and kind of rates their preference about KONE compared to other suppliers. This is done once a year. On a real time basis, we have 2 other opportunities to collect feedback. The first one is what we call transactional satisfaction surveys, which means that we are sampling customers that receive a new equipment or a modernization or customers who have called us for attending to a breakdown in their lifts. And we are asking them after the experience, after the job, we're asking them what has been your experience with KONE?
And so we collect thousands and thousands of feedback every month about this. And the last one, thanks to our customer response center, we're tracking complaints and other queries. We have quality levels, quality thresholds. So we need to respond within 7 days. We need to check with the customer that they are satisfied with the solution that we have provided within 30 days.
And that is helping us to collect all this kind of information and continuously improving the quality of our service, the quality of our products, whether it's at the global level or it's at the local level. So to conclude, I would say, I'm actually quite optimistic about the development of our business in South Europe, not so much because of the economic environment, because as you know it is not positive, but actually by the focus that we have done on profitable opportunities, on service quality and on customer satisfaction. At KONE, we call this smart growth. And smart growth builds on us having 3 major competencies. The first one is market intelligence, understanding in a detailed way what are the requests of the various customers of various segments of various countries.
The second one is superior pricing capabilities. I mean our ability to test at any given point in time to test the sensitivity of the market to prices to address sweet spot where we can actually make positive adjustments of the prices and to managing our pricing policies in a professional way so that we have the right balance between the volumes and the profit. And the last one, I think which is super important in our difficult market is to have an extremely strong operational discipline. And that operational discipline addresses many things. It address the productivity of our people.
So we're investing continuously in process refinement, in tools in order to maximize the productivity of our employees. We are also working on accelerating the clock speed. And what I mean clock speed is that we have sensors in what's happening. We have key performance indicators in each of our businesses and we're monitoring them on a weekly basis, not on a quarterly or on a monthly basis, but on a weekly basis to be able to prevent any deviations to the plan and to react faster to any chances. So as I said, I mean, I'm quite optimistic about our development.
I think by building and continue to build on our competencies, we actually are successful in growing our profit in South Europe. Thank you very much. I think I can take a few questions as well.
Hi, there. Good morning. It's Ann Mertson from Goldman again. Just two quick questions, if I may. So one, in the previous presentation, we saw that Kona has outgrown on the service installed base or maintained base in Europe.
So I was just wondering if there's any chance you can separate between organic and inorganic. Do you believe that you have also outgrown the market organically? Or is this a consequence of acquiring?
Yes. It's both. I mean, it's difficult to completely separate. I mean, the organic growth comes from conversions from new equipment. And as you can see, I mean, the new equipment shipments have gone down and therefore the positive impact of that is less.
And commercial balance, commercial balance meaning how many equipments we win from the marketplace, how many equipments we lose from the marketplace. And there is no one single answer to that. I mean depending on the country, depending on the market segment, there are different behaviors. I mean, we are actually faring better with customers who put more value on the quality of service than with customers that only look at prices. So on average, I mean, we have in South Europe a competition balance, which is slightly negative.
But it's actually not so bad. And the acquisition helped us to increase the density and again to maintain the total number of units in our portfolio in a positive way.
Thank you very much. And then maybe this is a very straightforward question, but just because I'm curious how it works. How does sort of price pressure or something mature sort of express itself if I put it this way? So how often do you renegotiate? Because we hear a lot about these automatic resets with that you mentioned about 2% a year or something like that or price inflation.
So what percentage of your customers in the service space roughly do you actively negotiate with every year sit down and discuss offering pricing if they want to increase or decrease the service level or something like that? I
would say that again that depends very much on the market. In the public bids, it's 100%. I mean it's 100% of the public portfolio is put back to tender on a regular basis, whether it's annual or it's multi annual. So but that comes for renegotiation and typically is the lowest price win, right? In the private residential, it's mostly triggered by the price escalation and the percentage of renegotiation there is much lower.
In private, non residential to commercial offices, retail and so on, again, it varies widely. I mean, they are some countries where less than 20% is renegotiated. There are countries where it's a little more than that. But it varies by segment and by country. So it's difficult to give an average.
But again, all my pitch has been forget about the averages just go segment by segment, country by country and this is where you get the most value out of it. But thank you for your question. Thank you very much. In the back.
Erik Ekland, UBS.
I wonder if you could give
us some more color on the opportunity from an economic recovery in Southern Europe. And if it's possible to quantify the opportunity from pent up demand over the next 1 or 2 years? And then as a follow-up to that, I wonder if there's a cyclical aspect of the service business and how you would describe that?
Okay. The first part of the question is, I mean, frankly speaking, I don't know. What's the well, obviously, the economic recovery will have a positive impact our business both from a service perspective and a modernization perspective because a lot of for example, the modernization demand is actually held back because of the lack of financing a lot of money in the economy. So the better the economy is the better that opportunity can be materialized. And but we have seen this economic outlooks.
I mean year after year say tomorrow is going to be better, right? So we do not count I mean when I do my plans and did my 2 year plans, I mean I'm not building a lot of confidence on economic growth. I'm more building on targeting the right opportunities, working on productivity, right allocation of course in order to develop the profit. And your second question was?
Whether it's a cyclical element of the service business.
Whether there is a Cyclical.
Oh, cyclical, I would say not so much. I think well, there is as I said, the modernization, I mean, is an ongoing opportunity that keeps kind of feeding itself from the aging of the equipment. Is there other factors that are more kind of cyclical? I don't think so.
Thank you very much. We will now break for a break. So let's be back at 10 past 10. And as a reminder, there will be more time for questions later
on. So if you didn't have a chance to ask your question, rest
assured, there will be time. So let's
Good morning, ladies and gentlemen. I'm Nel Feher. I'm the Area Director for Asia Pacific and Middle East. I joined KONE in 1999 and have been responsible for Asia in KONE since 3 years. I'm going to give you today an overview of where we stand in Asia Pacific and Middle East.
Then I will go into a little bit deeper the different parts that Asia Pacific Middle East consists of and then developing how we're going to which comes very diverse. In fact, general state urbanization in the very from people moving from rural areas into urban areas. So that is of course driving the short, medium and long term growth of our business. The majority coming from India of course with the biggest population, but also Indonesia and Philippines showing a lot of urbanization potential. In addition to that, there is the middle income bracket that keeps growing in the whole area.
So that of course also supports the business model of our company. If I look at the opportunities that we have, we have new equipment units market majority of it coming from India. So the total market we expect to be about 75,000 units every year. So that's on the left hand column. And on the right hand column, you see the installed units in operation, which is around 700,000 units.
So the majority coming from India in units. As you can see there the Australian part is a little small in units, but I can tell you it's a lot bigger in monetary value. So that skews this picture a little bit. But that's where we stand opportunity wise. Market positions like Matti already said earlier, we've grown to a number one position in most parts or we have retained our number one position in many units.
How have we done that? Over the last three years, we expanded our coverage of selected market segments. So continuously looking and listening to our customers and looking at the markets what's going on, what can we do better, how can we adjust our products. Let me give you an example. There was a new disability discrimination legislation in Australia implemented a couple of years back.
We looked at that and we've adjusted our offering so that we are now able to offer a standard product to that particular to fit that particular need. That's really been received well and we've been able to increase market share for that particular segment. So that's just an example of how we continue to listen to the market and act on it. Target market share gains in growth markets. Of course, I will go a little bit further into India and Indonesia in a few minutes.
So that's certainly something that we continue to target. Improved value proposition in the high rise segment That's also very interesting. A lot of high rise buildings in my area going on and being planned. I will get to that a little bit later as well. But one of the things was already mentioned by Matti is the Ultra Rope launch that is specifically for the high rise segment, a great innovation that Con has come up with.
Heikki will talk a little bit later also about the Jumplift. That's another fantastic solution to customers to improve the efficiency of the installation of high rises. So these are both examples of great work how we can get serve our customers better. Let me then give you a little bit of a flavor of some of the countries that we have. So firstly India.
We've got new equipment and service of course to grow there. The most important part of the vast majority of the market consists of residential and infrastructure. If I look at the development of India, a lot of underinvestment in infrastructure over the past years with the growth of the urbanization that I've shown or the urban population that I've shown earlier, infrastructure is key to being able to sustain the growth in the future for India. So that's a very important segment for us to be in. Another thing is deepening market presence with branch expansion.
So it's key, of course, in the vast country like India as well, just like China, which Bill will cover later. But India very diverse country with many different parts. So it's very key to be very deep into that country. And that's what we've done. We've got 31 locations at the moment in India, part of which are full branch locations, part are a little bit less full locations.
But we are present in 31 places in India. And that gives us the information about the market and the closest to the customer closest to the customers that we need to build our business. On the service side, growing market share following the leading share in new equipment being number 1 in the new equipment market and making sure that we convert all that into LIS, which Pierre also already mentioned, into our lifts and service and making sure that we don't lose the lifts and service that we have gives us an increasing market share on the service side as well. For that we need or that helps in improving our productivity as well, because it increases our density. So that's going to be very interesting for us.
If I look at that productivity a little bit more also we haven't touched on wage inflation much yet, but in many of our countries it's an important issue to deal with and we're dealing with that through increasing our productivity. Double digit wage inflation in India is not uncommon. So we really have to continue to work on that. And then talent management I see or I put here training in 2 parts. So the training of new equipment sales team, the training of service technicians.
Talent management in India in general is a key issue because the attrition in the country of India, it's not so much an issue. Well, it's an issue, but it's a challenge for us. And we are working with that with very key because the attrition in India as a whole is higher than most countries in the world. So we how we deal with that is through recruitment and then starting the training. So we offer training.
We offer on the job training and formal training. We look at career plans. So we look at individual development plans, incentives of course as well. But all these things together lead to a lower than industry average of attrition. And it's something that is very, very important not just in India, but in other countries as well.
Southeast Asia another exciting market in Indonesia where we have the majority of the new equipment units coming in Southeast Asia coming from Indonesia, Strong urbanization already 50% urbanized the population in Indonesia, but yet there's plenty more to come. And it's not just Jakarta in Indonesia. It's very decentralized. A lot of urbanization taking place in other parts of Indonesia as well. The only thing is it's relatively the elevator and escalator market is relatively small compared to the total construction market because of the general lower rise buildings with sometimes no lift needed.
But that is we see that increasing in the coming years as well as these cities become denser then they tend to go higher. Malaysia, Singapore a little bit higher level of urbanization, but yet still good opportunities for us both in the major projects and in the volume segment. So we see that with a lot of optimism. Thailand, Vietnam lower more rural countries, but Thailand certainly growing and urbanizing. And Thailand also the government is very keen on developing their Malaysia, like In Malaysia, like I said, we're expanding.
We have increased our market share there and we're currently building this beautiful IB tower in Kuala Lumpur. That's the latest major projects that we're building with a designed by an internationally renowned architect. We've got more in the pipeline coming in Malaysia as well. Indonesia, like I said, actively working as we do in India. We're also here actively working on where should we be, which branches should we have, where should we expand and we're continuously looking at that to continue to improve our market position.
Australia a more mature market, but still plenty of opportunities there both on the major projects, but also on the volume side a very balanced market residential office and other market segments. And what really is going to be very interesting in Australia is the huge potential for modernization with 45% of the very again both volume and major projects. We've got a very good position on the major project side. United Arab Emirates, the market was of course a little bit weakened especially in Dubai with the financial crisis, but Dubai is coming back. We see especially more in the sustainable part of retail and hospitality hotels where we see lot of growth there coming.
Even residential over the last 6 months is picking up again. So things are looking a lot better in Arab Emirates now than it did a few years back. Qatar has continued to develop well. And Middle East in general is a very important market for us for the high rise. So 16 buildings over 200 meters tall have been completed last year.
And for the next 3 years about double that amount is still to come. So lots of good opportunities there. How we are present? We have our own operations in Arab Emirates in Omar, in Bahrain, in Qatar. And we work through a joint venture in both Egypt and Saudi Arabia.
And the rest is covered through distributorships, the smaller markets in Middle East. Our priorities are very much to capitalize on what we did, what we do good and the strong brand in the markets on both volume, but especially on the high rise markets, very important high rise market there. We got a good image there. We got a good brand. So customers trust us and that's going to give us a lot of pluses in building that business further.
And of course, in every country, we put all the new equipment into service base. So that is going to improve as well there. This is an example of a project that we built the World Clock Tower in Saudi Arabia. This is the 2nd highest building tallest building in the world, 600 meters. It consists of 7 buildings and the clock tower itself the clock the diameter just to give it to put it in perspective the diameter of the clock that you see there is 40 meters, 4.0.
So it's a huge building that we built there. And it's got 300 equipments in there. This is where you see so here you can see the amount of impact or the impact that we have in the high rise market in Kona. So out of the 10 tallest buildings that have been installed or that have been completed last year 4 of those ten were installed with KonaLift. So we're really getting a lot of traction in the high rise market, which is very exciting and of course gives huge potential for the coming years.
3 of the tallest 4 were built in Middle East. So the second building that you see there the Princess Tower in Dubai is actually the tallest residential building in the whole world. So lots of things to be proud of there. And then to finalize, I would like to talk a little bit about the developments that we are taking to grow the business further. So on the new equipment side, it's already been mentioned by Matti the new volume elevator offering that we have introduced last year.
That's ramping up now according to plan. We're filling the order book with those. So that's going exactly as we planned it to go. Installation productivity, I mentioned that issue of wage inflation. So not only because of that, but because we want to be more productive anyway that is going in the right way and we're planning to continue with the installation productivity improvements.
Training of salespeople extremely important for making sure that the advantages of our products actually get translated to benefits to our customers and that we continue to train value selling. And I believe Henrik, he will talk about that later as well, but very, very important to continue to work on that. On the maintenance, grow the business through these conversions. I don't have to repeat it moving it from net to from new equipment to maintenance, develop the competencies the right where it matters and through open day opportunities in Australia that I already mentioned. So that's going to be key for us to develop further.
And then on the right hand side of the slide responding to challenges from the currency movements and inflation, which have been caused by some the recent tapering issue that's come up. So we have to continue to look at our contractual terms what can we do on the productivity of our operations, but also the price to pay for it and that they know what the value is. And then the finally and I think the most important part is this talent management. In Asia, it is it continues to be key to have the right people in place and the right people engaged. And this employee engagement focused training of personnel continues to be extremely important.
We measure the employee engagement every year. And in my area all every year the employee engagement has gone up, which is great, because you need excited people, you need engaged people to bring that engagement to our customers and to get happy customers. So that is going to be key for the future as well. We do a lot of training. We do individual development plans with people to make sure that everybody sees where they're going and what they why it's so good to work with us.
And luckily, we all think that it's better every year. So we're very happy with that. And the last thought I would like to give you is that the reason why I think that we have a competitive advantage and a true difference compared to the competitors is the stability of our leadership. I see it time and again every month when we have calls I hear how this company or that company has changed. This is and we have really a stable leadership.
Of course, we change leaders as well. But overall, we have a very stable leadership and that really I think drives the success of our company. Of course, we need to continue to listen. We are globally a challenger in our industry, to our leaders' minds, we really have to continue to our leaders' minds, we really have to continue to listen to our customers to make sure that we are open and we don't go like this, but we are open to improve our business further. And that I think is the key success factor to our business in the future.
I'm very optimistic. I think we've got a great team of people to make sure we capture all these opportunities that are in the market.
That's what I wanted to
share with you. I'm open to some questions. I was too clear. Okay.
Afferently, yes. Thank you very much, Nao. Thank you.
Thanks, Carla. Good morning, everyone, and thank you very much for coming to our Capital Markets Day. All right, excuse me. I wanted to give everyone a brief update on where we stand in terms of the position for KONI in the market today in the China market. Then briefly touch on some of the what we see are some of the recent market developments taking place within the real estate industry.
And we'll give our latest forecast. The 3rd area I wanted to look at were some of the drivers in the market that we see are the long term touching on the long term elements and why we see that there's continued very good opportunities in China. And finally, give you a sense of what our strategy is going forward in the market. In the first slide, I wanted to give you an update on where we stand in terms of our growth in the first half of the year. As you can see, we've grown about 30% in the first half.
The overall market has grown slightly less than 20%. So we've been able to keep up our good record of growing faster than the market. In 2012, we ended up in a great position in terms of our new equipment market being number 1 in share with 17% of the overall market, up from 15.5% from the prior year. In addition, this year we became another milestone for us, we became number 1 in our service business in terms of units under service in China. Now, Monty has gone through most of the other factors here that have driven our growth forward over the last 8 years.
So I don't want to spend too much time there. But there are a couple of areas I did want to touch on. Number 1 was our product offering, which continues to be I believe the best and broadest in terms of the strength, the broadest portfolio and offering in the market today in China. Last year, we introduced the N Series, both the N Mono, which will continue to support our number one position in the machine real estate segment of the market. In addition, the N Mini space is strengthening our position as well in the mid rise market.
And someone asked earlier about our product portfolio on the GK side and some differentiation. One of the areas that we've worked on very heavily is introducing GK's own unique product offering. In this case, at the end of last year, we introduced the GPS 33 ks. This is targeted at the lower end of the market, including the affordable housing segment. And finally, all these products have done very well in the last 6 months, been well received in the market and we see that very good strength for us on the new equipment side of the business going forward.
One thing I didn't want to bypass though was the strength of our e mini product which was introduced in 2011 continues to be a great workhorse for us giving us very good margin and very good volume. So I look at our product offering and it is really among the best in the industry today. I want to thank Heggie particularly for his support and team support in giving us these great tools to work with. Another area that I wanted to touch on was our geographic expansion across China. As you can see, we're located mostly along the Eastern Coast, but we've also positioned ourselves very well in the center and western part of the country.
And as you'll see in a few minutes, this mirrors very closely to where a lot of the investment new investment is taking place in the real estate industry. I think what's important here though is not that just we that we have all these locations in China, but that we have, I believe, very solid and mature organizations there. It's very easy to open an office and set things up and try to get people in, but they may not really be able to operate as effectively as I believe the Komi team can. So this is one of our strengths is not just good geographic expansion, but very well staffed, well trained personnel in that area. And our approach is to be as close to the customer as possible.
We decentralize a lot of the decision making so that response time is very quick. In addition to good products and good new equipment market and good geographic spread. We've made very good progress as I mentioned in the service business. As you can see since 2,006 our growth rate on average has been 39% year over year. And it's this I believe gives us a really powerful combination, good positioning in the new equipment market as well as a very strong service business.
And it's every year I see more and more of our customers who ask me, well you've talked told me about how good your products are, But Mr. Johnson, can you tell me who's going to support my equipment once I buy it? Who's going to give me that service? So for our customers in China, service is becoming more and more of a concern. And you can Clearly,
we
have things that we need to work on. We need to Clearly, we have things that we need to work on. We need to continue to focus on our productivity, our pricing in the market and of course make sure that we keep up our industry leading conversion rate. Our conversion rate is about it's a little bit less than the global average, but it's still the highest in the China market today at around approximately 60%. Let me now move to some of the recent market developments that we're seeing taking place.
In terms of properties sold, we see that there's been a very nice increase year over year. The properties in the first half of the year sale has been up over 29%. So we see good strength in this area. We have heard that prices have increased across a number of cities. The last poll that came out or last research was that in about the top 70 cities prices have increased in all of them.
However, what we're seeing is that the prices have been quite moderate. They're still slower than let's say the growth of disposable income. So in that regard, we see that this has not really gotten this is a positive trend and one that's going to continue to build confidence in the development community for continued construction. Construction starts for the first half, up 3 up about 4% year over year after a decline last year, but still I believe moving in the right direction. And clearly one of the most important indicators for us to look at is the amount the growth of the investment in real estate.
You can see us up over 20% year over year. I think it's a very positive and bullish sign for going forward. And when we take a look at where the investment is going into, China, you can see that it's moved from the eastern more mature markets on the eastern seaboard into the center and western part of the country. And if you relate that again back to our locations across China, this matches very well. So we have we're in very good position to support this kind of growth.
There was a question about the liquidity situation in China. Of course, this is a big concern for our customers. And we noted that in June, there was a short period of a very tight liquidity crunch you would call it. And that was fairly quickly resolved and liquidity came back into the market soon after that. And that's again continued our customers' very strong financial position.
Projects have moved forward. And we see that particularly our big developers have benefited well from this and they're going to have a very solid year this in 2013. I think some of the smaller developers, mid- and small sized developers will have some challenges. They may have to go to some non banking sources for credit. But they're in general, it's still a fairly open market in terms of strong market in terms of liquidity.
And finally, as I mentioned here that we continue to see land sales even in Tier 1 and Tier 2 cities, which have traditionally been very mature markets picking up again. So there's a lot of movement back and forth. One thing that is interesting is that a lot of our customers, our major customers also follow a 2 tier strategy in their development Then when they go to Tier 3 and 4 cities, they have a different lower Then when they go to Tier 3 and 4 cities, they have a different lower cost product offering. And again, this dovetails very nicely with our own strategy of having a KONI brand and Giant KONI brand to serve these different markets. As we feel very good that your overall growth between 10 and 15.
And so we're seeing that picking up in volume and that's a good sign for us. In the affordable housing market though, we're beginning to see a slight downward trend. This is expected because we're now coming towards the tail end of the 5 year program that was launched in 2010 and a lot of it was front loaded, a lot of the start for front loaded. So now it's beginning to trail off and we're going to watch any future developments quite carefully. Okay.
Now we wanted to go and have an interesting discussion or a little bit deeper discussion on what we see are the long term market drivers going on in China. We know in the last several months there's been a lot of discussion behind this and we welcome this and we think this is a great thing to talk out a little bit more. And today we want to give you sort of our read on how we see this going forward. Essentially what we're looking at is I believe are 2 buckets in a way. The first bucket looks at the floor space growth taking place in China and that's driven by 3 things primarily.
1 of course is the increase in the number of urban dwellers straightforward. Another one though however is the increase in per capita living space. We'll touch on this a little bit more, but demolition and replacement. And this is surprisingly a significant amount of space what we call new flow that needs to come into the market. Tensity of elevator usage in a given space.
So for every let's say 1,000,000 square meters of space built, how is the intensity growing? And we see that's growing in 2 different ways. 1, you have a mix change. As new buildings come on board online and to the market flow into the market into the stock, you're seeing a change of mix from low rise to mid rise. And of course, mid rise have more elevators than low rise.
So this is a very important significant change in how buildings are being built. The other factor is that across the spectrum of low, middle and high rise, the intensity of elevators is increasing in general as well. People expect higher levels of service. They want more comfort. They want more security.
And so this is taking place as well. So you have these two drivers are moving the market forward. And let's go look at this a little bit more in detail. I talked about the number of urban builders coming into the capturing more people into their next step. They become to 2012, you've seen this fantastic growth in a shift in people in urban centers from 250,000,000 to almost 700,000,000 people.
In addition during this period of time from 1990 to 2012, we've seen a in the year 2000, there were 4% of the urban households were considered middle class. But by 2012 growth that's in income now also see a significant intensity of the decline. And as the market increased and as construction increased so too did the intensity. And by last year, the new flow going in, in 2012 was now 225 units per 1,000,000 square meters of space. So this was really a doubling of the intensity over the last 10 years.
And again that was driven primarily again by change in mix, more mid rise buildings being built as well as an increase in demand for comfort and in quality of life across the entire range of low, mid and high rise buildings. Going forward, what does this look like? Well, the experts say that going forward from 2012 to 2025, we're going to increase the urban population by 210,000,000 people. And you can see from the map, the heat map you can see where most of that growth will take place. Interestingly enough that also reflects where a lot of the investment is going in, in terms of new construction And it also grows very nicely with where we're located on the maps as well.
So with all this growth, what does this mean in terms of per capita floor space? Well, according to McKinsey Global Institute, they see that today the average urban dweller has 26 square meters of space. By the year 2025, that's going to increase to 38 square meters per urban resident. So again, you get this drive in demand for more personal space. When you take this number and you translate it back to that 210,000,000 people coming into the city, in 2012, we had 22,000,000,000 square meters of space, what we call stock already built.
We're going to add to that stock another 20,000,000,000 square meters of space net 20,000,000,000. However, I'll come to the next let me come to this slide first. We believe this is a very reasonable trend. And the reason being is that you see that historically many countries both developed and developing had as they become more wealthy their per capita demand for living space increases. As you can see here, we have signs from India, from Korea, Japan, Germany, even the United States.
As people grow wealthier, their demand for greater living space increases. So we believe this additional growth is quite reasonable going forward. And this is from the sources are coming from McKinsey and The Economist Intelligence Unit and other analysts as well. So what's happening here is we're going to see from 2012 to 2025 a net increase in 20,000,000,000 square meters of space. And interestingly, well in the year 2000 to 2010, this grew this adding 11,000,000,000 square meters of space, the intensity grew from 30,000,000 to 110,000,000 Any new floors any new floor space coming in, any new what we call new flow into the stock will come in at 2.25 units of elevators per 1,000,000 square meters of space.
And we see that intensity increasing as we go forward. One other element we wanted to talk about what was what we would call living space in cities, 18,000,000,000 square meters of that space represents residential housing. And of that 40% or about approximately 7,000,000,000 square meters of space is obsolete. Even according to China's own figures that said the majority of buildings built between 1979 1999 are far short of today's urban development needs and can only last another 10 to 15 years. So during the next 10 to 15 years, fully 40% of the total stock in place right now needs to be rebuilt demolished and rebuilt.
And that will represent an additional approximately 6,000,000,000 square meters of space. So really the total amount of new stock, new flow we call it that needs to be built from the year 2012 to 2025 will actually be 27,000,000,000 square meters of space. If you look at that that is and when we look at the intensity of that, it will be at a rate of that new flow going into the stock will be at a rate of more than 2 25 units per 1000000 square meters of space. So what we have here is between 20122015, the next 13 years, twice top floor spaces at a rate twice what was added during the last period of time. And so this gives us great optimism on the growth of the elevator and escalator market going forward in the future.
Chinese say a picture is worth a 1000 words. I know a number of you have been to China, a number of you have seen this. You can see that in these slides this happens right before our eyes. In Shijiazhuang for example, these low rise buildings there in the front, there are no elevators in them whatsoever. Behind them, mid rise and high rise coming through like a wave.
Same thing if you look at Changchun, those low rise shantytowns all demolished and built with high rise or mid rise apartment complexes. And it's important to remember that in urban centers virtually 100% of the people live in apartments. There are no single family homes. So we have basically 700,000,000 people living in apartment blocks. So when we talk about the urban population or we talk about elevators, we really see that this is very much akin to very high density living spaces that you might see for example in Europe.
You look at Xi'an surrounded by low density housing with nothing no elevators around it, but an apartment block right in the middle and that will be that will again continue similar profile like the rest of the cities Shanghai and Changsha. Going forward, we believe that the elevator intensity is expected to continue to increase again because of this change of mix from low rise to mid rise. You can see here from 2013 to 2025, we can see a significant increase in the amount of mid rise buildings. But on top of that, mid rise buildings which go from 7 to let's say 30 stories, they will themselves have an increase. Right now, there's only one elevator required for a building above 7 floors and above 12 floors you have to have mandatory 2 elevators, but we see that rate beginning to increase as well from 2% to 3%.
Because this was such I believe it's such a very important concept for us to really grasp, I want to just repeat it and essentially saying that again there are 2 significant drivers to our growth going forward. 1 is the growth in floor space driven by increased numbers of people into the cities. Per capita demand increase as wealth increases people want more space for themselves. In addition, we see a significant demolition and replacement market of more than 6,000,000,000 square meters of space in the next 13 years as well. In addition to that growth of floor space, we see the intensity of elevators increasing 1, due to the mix and 2, due to the overall increase in demand for better service levels comfort and safety.
So that was the new equipment market seeing how that is growing. Clearly, the next part of this equation is the maintenance business and we see continued great growth in this area as well. From 2010 to 2012, it has grown significantly and we see that growth continuing on in the future. However, as Matti pointed out earlier, it's still a very fragmented market. Only 25% of the overall market is handled by the OEMs.
More than 30% to 40% we see is self maintenance and the rest handled by small independent service companies. However, we're seeing an increasing trend by the government to relook at that and say this is not a sustainable model. They're expecting more better qualities of service, more attention to safety, more professionalism. So all of this will I believe bode well for the major manufacturers in the future. This has I believe significant opportunity.
What has I think a much longer opportunity is not a priority for us right now, but a much longer opportunity will be modernization. Modernization as you can see right now is not very big, but by the year 2,030 more than 1,200,000 elevators will be in service more than 20 years. And interestingly enough every year after that another 300 plus 1000 elevators will add to that population. So this is not a priority right now, but it has huge, huge opportunities for us going forward. Okay.
Where are we going forward? By the end of 2012, we had reached the number one position. We would certainly like to hold on to that position. But most importantly, we want to make sure that our growth is profitable. We want to make sure that we have a sustainable business.
And in the new equipment market, in the service market, we want to continue to grow that and again maintain our number one position where possible, but again in a profitable fashion. And the way we see we're going to do that is through our people. We need to continue to grow our people. Today, we have more than 10,000 employees in China. Most of those are in the field.
And right now, this represents about 25% of KONI's overall employees globally. So we see this as a big responsibility for us. We have to carry a very strong standard, very high standard to make sure we keep up with the KONI values. Half our people are as I said are in the field. So technical training, safety training, productivity training all this is going to be very important for us going forward.
And we also want to continue to grow our leaders as well. These will be our future and help make sure we have a sustainable business going forward. Objectives going forward. This slide may be familiar to many of you and it will be because we haven't really changed what we want to do. We want to continue to grow faster than the market.
We want to grow profitably. And of course, we want to build the world's best service business in China.
I guess that wasn't a huge surprise that I was going to ask a question about that. But thank you so much for all the detail you provided. I'm just trying to understand your numbers a little bit. So you're talking about EUR 27,000,000,000 roughly square meters being added in the urban area with an intensity of 225,000,000 or increasing. So if we do the numbers, we get to around €6,000,000 over 13 years.
So or 460,000 or something units per year. So my question is, if you look over the next 10 years, do you see that sort of which is roughly where we are today, I guess. So do you expect growth over the next few years and then a decline from there? Or do you expect us to run at sort of this type of level over the next 10 years? So that was my first question.
Can I take that one first? Sure. I think your questions are real good and we want to make sure I give you a good response. I'm very optimistic about the future. I mean the numbers and what we see as the key drivers are very solid.
There's no question about that. There could be debate on what the growth rates are and we're really at this point not prepared to give such a long term forecast. But I think generally we have a very optimistic view of the future for the new equipment market in China
for sure.
So you don't protest about my math there, dividing 225 by I'm not going to confirm nor. But I was also curious if you had any view of what your competitors or what the markets are doing because you, but in particular many other companies, seems to now finally sort of 5 years after you have caught up to the Chinese miracle and are gearing up their expansion. So I know I asked the CEO this question, but I was just curious if you had a view, I get to maybe sort of 50%, 80% capacity being added over the next 2 or 3 years of the ones that have announced it. Does it worry you at all if you're now looking at if we do the math roughly stable demand level over the next 10 years?
I think to that question, I'd like to say that and I know Monty did touch on it in his presentation, which is namely that when you look at the capacity within in China, this is not there's not a really heavily capital intensive business. We don't build to stock. We don't have to have a constant flow. And what we actually do is we build to order. When we get an order, we place it at the factory, it gets shipped.
And when it's shipped, we get paid. Or in fact, we don't even ship it until we get paid. So from that regard, I think it's different than many other manufacturers in which capacity or overcapacity or overbuilding, some of these factories have to keep producing in order to reach a certain level of efficiency. In the elevator market, yes, of course, we have to have a certain level of production, but it's not as critical as let's say some of these more heavily capital intensive industries. We don't manufacture until we have an order.
Okay. If I
ask you slightly differently, are you increasing your capacity significantly for the next 2, 3 years? Because I know on the presentation on Southern Europe, I'm fully aware of the sort of low capital intensity, but it was still mentioned that increased capacity had caused some price pressure. We had the same from the U. S. Where you now have a bit of low margins in your backlog because it was weaker markets.
So
Well, I think there is price pressure for sure in China. There's no question about that. And one of the things that when we see we know our a lot of the competition has said they want to gain back share. They want to they're dropping price. We're of course very aware of that.
What we've had to do is we've really had to go back and look at okay, we want to make sure that we have the best products. We have the right cost and right competitiveness for our products. On top of that, we want to make sure we get the right pricing, our own pricing for our brands in the market, make sure we've got the best pricing mechanisms there. So that's very key to us. I think also having this dual brand strategy has proven to be extremely powerful as we go forward.
So that if one brand can't capture a customer, the other one is ready to be right there to capture that prices. So price pressure is there, but we think we're doing a pretty good job of meeting that challenge. Thank you very much. Thank you.
Okay. Now it works. So I just want to address the maths that you suggested at the beginning. I think your math when you multiply, yes, that's correct. One thing that we still I think have a slightly different point of view is that if you look at the intensity that has more than doubled if we go from year 2000 until now.
And if you look at Bill's presentation, I think we have pretty strong grounds to believe that that intensity will continue to increase as the mix of buildings are changing and as well as the need of what types of buildings these new middle income people are requiring. So I think that that's an important thing to remember.
Thank you. Yes.
Erik Eklend, UBS. I wonder if you could give us some details on your installed base in China and how it's divided between Taiwan, 2 and 3 Cities? And also how that differs for current orders? And then it would be interesting to hear your view on how you see the Chinese service market developing in the future as it matures?
And what you
think would be the main differences versus the European service market?
Eric, we don't break out our installed base geographically or by brand at this point. So I'll defer that to another time. The service market is clearly a huge opportunity going forward both in terms of the rise, the increase this new equipment flowing into the service market. Elevators once they're installed have to be serviced. There's no question about that.
So that's one. But on the sort of the shift in who's going to be doing that service, we see that increased regulation is I think a net positive for the OEMs as regulations tighten up standards for safety, standards for response time become tighter by the central government and local municipalities. So we think this is really going to work in our favor going forward. We're cautious about it. We're watching it very carefully.
But I think we're number 1 in the market right now in terms of service business. We have the great coverage that can we can ramp up very quickly. So that's I think again all good for KONI going forward when it comes to the service market.
Thanks.
Thanks.
Thank you. This is Antti still on the mathematics. And I need to start by saying that I don't have a computer here. I only have a cigarette box even if I don't smoke. But when I calculate on the back of that cigarette box, what my math says that basically what you say is that over the next 12 years, there is there would be demand for roughly speaking 600,000 elevators per year in China.
And last year the number was something like 430,000 units or so. So roughly, roughly, roughly speaking, you anticipate 50% growth in elevators sold per year over the next 12 years relative to the 2012 figure. Is this about right? Or did I miscalculate
the first part? You really want to get me to commit to this and I'm going to have to pull back. I think yes, you can do some very good calculations there. We think long term clearly there is additional growth in this market. Exactly how much?
We're not really prepared at this point to give an exact figure. We'll give some good guidance in early 2014 what we think the 2014 period is. But long term guidance, what we really wanted to say is that at this point, we believe still very good drivers in the market, very solid ones. And that points to I think very strong positive trend as you just indicated from your numbers there? This gentleman may get this one and I'll come back to you.
Thank you, Erik Kollrang, ABG. Will the market grow or not? That's fair. A question on the market share potentially instead. 17% market leader on new equipment.
Is that given that it's a big country, I'm trying to sort out how happy you are with the regional footprint. I'm guessing within that 70% you have maybe 30% in some region and 5% or 10% in some other. The map there with your presence is that a how complete do you feel that is? Is there a big opportunity in certain parts where you're underrepresented? How much room is there to simply grow your presence in the country?
Sure. At this point, we have about 400 locations in China. And so that gives us we can basically on a quarterly basis, we can see about 500 plus submarkets across the country. So we have I think a pretty detailed understanding of what's going on across the map of China. We think that as we when we want to open offices either sales offices or service stations, we want to do it in a smart fashion.
We want to make sure that we're they're profitable. There was a question I know earlier about do we just open and if they run at a loss. No, we don't do that. We want to make sure that there is a solid foundation of business there in which to support an office and we can start very small and then have the office grow up into a larger one. And then from there, if we see it grow into more of a regional or full standing branch operation, we can do that as well.
So we have we maintain a lot of flexibility as we grow our offices. But I think we're generally very, very well positioned across the China market.
Okay. Thank you. And then one more question. I think that if I'm not wrong that United Technologies is putting their Altice business together with some of the other commercial businesses like the air conditioning businesses trying to get a bigger piece of the cake in Asia Pacific. Have you ever experienced that being only an E and E supplier has been a disadvantage in the market?
I can't really comment on what the strategy of our competitors is. I will certainly watch it. I think our strategy has been to be very focused, to be very clear in what we want to do. I think it's been working so far. We certainly want to see if we can keep this formula going.
And so I think that we're our strategy is working. I just want to keep doing what we're doing at this point. Thank you. Please.
It's Glenn Liddy from JPMorgan. Giant Kona and Kona, if we look to the building where you both could potentially supply the same product or products for the same specifications, is there a significant price difference? And secondly, although you're running as separate brands, do you share any resources joint procurement any other back office things?
Let me begin that with a story. About 3 months ago, we ran into there was a customer who was looking to find a number of suppliers. And they had 2 different product line, 2 different apartment offerings they had. And one in mature cities and one in more developing more remote cities. They ended up buying from both of us from both KONE and Giant KONE, because we were able to provide them with one face to the customer in this appropriate situation.
Normally, we have our own separate channels and our own separate teams, but in this case we work together. Pricing was appropriate for the brands that at the hint they were very good. This is a large customer, so we certainly wanted to capture the business. But those are increasingly the kind of opportunities that I think are coming in the market today. Yes, we do have different price points, not so significantly.
And when you look at our back office operations, we've made a very clear conscious decision that we're going to keep these operations as separate entities as much as possible. They have their own manufacturing capabilities. They have their own sales teams, their own management teams, etcetera. There is a number of sharing though in what we identify as some strategic areas, particularly sourcing, because that allows us to leverage the volumes of both companies and Hakee is very much involved in making sure that we really maximize that kind of leverage. But essentially, we try to lead the entities as individual as possible, so that they can operate as independent operations.
And remember the joint that GK is still a joint venture. So we need to respect our joint venture partner that way.
With big customers in China, if they have multiple locations and they decide to have a service contract, are they bundling them together to try and get bigger volumes and discounts?
We're seeing that in some cases. In some cases, we welcome that, because again that leverages our strength of great coverage across the market and then we across the country. But we've always maintained that we need to and our margin our service margin is roughly the same as the global service margin. So we want to make sure that we can maintain that margin rate. We've turned down some business when it gets a little too pricey for us and we're not very comfortable with it.
But generally, when we see opportunities like that, it works in our favor.
Let's take one more question at the back. Thank you. Hello. Elena Ryota from EBL Bank. Do you expect to see consolidation in China that would change the competitive landscape?
Well, right now, there are about 400 elevator companies in China. This is down from probably about 600 maybe 8 to 10 years ago. So we're seeing on the low end more and more people beginning to exit the market. I think in addition there have been some legislation that came out. Monty referred to it about the overall equipment in buildings.
And this is forcing manufacturers to provide more documentation and more rigorous testing standards. I think this is also going to have placed an additional burden on some of the smaller players. But essentially the market the competitors we face day in and day out maybe 20 or so, we don't really see any significant change in that at this point. Those will still remain. But consolidation, we see it taking place on the very small more regional elevator companies at this point?
Thank you very much, Bill, and thank you for your questions.
Thank you, everyone.
We will now have another break and we'll be back at quarter to noon finish time. So also for those following the webcast, so we will continue at quarter to noon finish time. Thank you.
Good morning and welcome back to start the next session. My name is Heikki Leperin and I will next 30 minutes, I will give a brief update of our offering development and supply chain development. I will start by giving updated status about our new volume range elevator elevator offering in Europe, in Asia, Elevate offering in Europe, in Asia, in Middle East, in Russia, in Mexico. We are now making the introduction into North America in Phase Cs in next 12 months. If you look now the tendering volume, in Europe, we have already the new product is covering already now 50% of all tenders in Europe.
So we are in very good speed. In Asia, we are progressing according our expectation in a very strong way. Then if you look at tender and order time lag, Typically, there is 3 to 4 months lag before tenders will go to the orders. And then there is about 1 year in Europe, 1 year from order to the installation completion. So we have to still to say that we are in the ramp up phase.
And we are expecting that full volume will be reached in the second half or next year in installation and delivery point of view. Of course, all of us are interested in to know what is our customer market reaction. And I have to say, we are very pleased about the first customer feedbacks and sales feedbacks. Our new values of the offering eco efficiency, ride comfort, visual design are concrete and meaningful for our customers and their businesses. I'm especially pleased about cases what we have seen that our big customers have carefully analyzed our new offering values and looking at how much this is helping their business and they have selected our offering as a preferred choice.
So this is very much convincing us that we are really going in good direction. Of course, we are all the time collecting the customer feedbacks, sales feedbacks, installation feedbacks and we are fine tuning our offerings, our sales training, our delivery process issue, our installation issues based on the feedback. So we are in the learning curve and that is very, very important part of our success of the new offering. Let's look at the new values. How what are these values mean for our customers?
I will start by commenting the energy efficiency first. So in this picture, we have this Monospace 500 for European market and Nminispace for Asia market. If you look at KONE Monospace 500 energy consumption in European residential application, it consumes about 1,000 kilowatt hours per year. If we compare this to the best on the market comparable product like a careless permanent magnet elevators, we are 1.8 times better than our best competitors. If we would compare on the hydraulic technology, then we can say that it's 5 times better than hydro technology.
If you look at the same application in the Asia residential buildings, the N Mini space have about 2,700 kilowatt hours per year. And comparable state of the art product in Asia is about 2.5 times 2.4 times higher. So these are meaningful figures in the kilowatt hour energy. But of course, question is, so what? What is the impact for the customer point of view?
Let's look at the buildings. Typically in the residential buildings, there is 2 to 3 elevators per stairway in the block. And if you calculate now in the European case first, what is the annual cost saving impact on the one stairway, we can say it's about €500, €600, €700, €700,000 comparing the best comparable products in the marketplace. If we count the life cycle cost of the building, what is typically or elevator is typically 25 years, We can see that the life cycle cost difference is 12,000 €15,000 €17,000 on the life cycle point of view in the per share pair. And then if you look at Asia markets where the elevated duty rate is higher, usage is higher, The energy consumption is higher.
And of course, the saving share is even bigger. And then when we go into commercial segments, more small offices, retail, hotels, where the elevators are slightly heavier, bigger and the duty rate is higher, the energy consumption is savings are even more meaningful. So I have not counted in this any about indirect cost savings what the customers will have concerning the power supply cabling, main fuses on the buildings, generators on the like in hospitals is a very big thing. I have not counted anything such poor energy costs. So I think we can all in all, we can say that the energy saving impact is meaningful matter for our customers and in the building cost.
Then if you look at 2nd key objective of our new offering, it was to deliver the best experience, the right comfort point of view and visual design point of view. As we have launched, we are measuring every single installation what we are doing. We are measuring the performance on the right comfort point of view, the noise, vibrations, all these things. And I can be proud to tell that all our installations have more or less almost all are exceeding our very demanding targets. So we can be very satisfied about our RideComfort result and progress.
The second key item is our visual design, how attractive our elevators are from builders' users' point of view, from tenants' point of view, from building image point of view, quality point of view. And as you remember, we have launched a new design collection last year covering the different type of buildings, commercial buildings, different market areas, different cultural taste and so on. And now based on the customer feedbacks and our sales organization feedbacks, our design offering is very well accepted by demanding architects, our customers and different kind of buildings around the markets. So this has been convincing us that we have really been able to make the right design solution for our customers. We have got several design awards last 12 months, just mentioning one this European iconic award 2013 we got this year.
And that is very much how we will see that progress is moving in a good way. Then it's not only that we have a new product, better product, but this new offering is also creating better delivery process. And what I will mean about I want to give some highlights about this. So if you look from manufacturing point of view, from our suppliers' point of view or our own supplier units' point of view, this new product platform is covering wider the product range. What this wider product range would help?
So it means that we have a very concrete meaningful cost benefits in the certain different corner points on the product rates. So we have seen that we have really able to make good steps on the many critical points what is helping our cost competitiveness. Secondly, this modularity harmonized product, you remember volume economics of scale. This enable us to make more consistent quality and of course also cost optimization. So in manufacturing point of view, the new platform is making the good progress in overall when we look at the whole product range.
The second important element is the engineering cost. Typically, there's standard products and customized products. And customized products require engineering. Now this new offering is very wide from flexibility point of view offering design elements all the dimensions. And the key point is that we have now done the pre engineered components and modules and solution.
This means that our process costs are now moving in good way, good direction. So we are really going in good way on this. Secondly, this pre engineered solution means that we are able to control the quality of the process easier or better. We have a more consistent quality. And thirdly, we have put a lot of emphasis on the installability.
I will mention later on about the field productivity, but also the installability means consistency. Consistency means quality and it means value for our customers and quality end users' point of view. The third element is our customers. So if you look at the cost point of view first, our customers will see clear benefits on the energy savings and also space efficiency. We have not discussed that in this slide, but we have also very good progress on the space efficiency.
And certain applications, we are really making the breakthrough step improvement. So that is the clear improvement for customer point of view and from cost. Then is attractive could be good visual design appearance and end user experience, the right comfort. They are creating the better value for building, the better image, better quality perception. And I think that's why, as I mentioned, our customers have been very pleased after evaluation to take this new offering as a preferred choice.
I want to also mention the escalators. We always speak used to speak about elevators. But in escalators, we have done same things. We have focused very strongly on the eco efficiency, visual design and improving the safeties. The visual design, we have also have defined the same type of design collection for escalators as we have done for elevators.
As you can see in the picture, we have the same patterns, same materials, same experience, the user's point of view when they will enter the buildings that we our products are not like different things. They are harmonized also from design point of view. Also in escalator design, it was it is good to mention that we got this year, recently in China the successful Design 2013 award. So it has been seen as one of the leading product on the Chinese design world point of view. Then we have plenty of improvements on the safeties escalator safeties.
They are the mass transportation equipment and we need to take care of all our products and every element is improved from safety point of view as much as we can. So there we have a lot of good things. Then I want to also mention this energy efficiency. This new escalator family what is now launched, we will improve the energy efficiency more than 20%. It might be thinking of what is the energy efficiency.
Is it important for escalators? But we have to remember escalators are used normally in daily 20 hours per day. It's only a few hours per night now when they are out of the use. So energy consumption is meaningful matter also in escalators and we have plenty of good improvements. We have this direct drive saving the energy on the whole escalator drive system.
We are using the efficient next generation inverters. We are using handrail drive, what is saving energy. And we are using the LED lighting as in elevators and so on. So also in escalator side, we have done a good step improvement in same matters like in the elevator side. That was shortly about volume range.
But now I want to move on the next exciting matter. It's our high rise. High rise offering high rise opportunities. And I want to start by introducing the breakthrough innovation we published last June. And what this innovation is all about, let's look a short video about that.
Keeping pace with the growing demand to move more people ever higher requires far more than just gradual change. There comes a point when existing technology and solutions can be taken no further. A revolutionary breakthrough is then required if the needs of the urban environments of the future are to be met. As buildings rise higher, logistical demands rise with them. A typical ultrahigh rise building sees of people moving around, each one using an elevator on average 6 times daily.
That's around 50,000 elevator rides a day. This places huge demands on elevator technology. The moving parts of a single elevator carrying 24 passengers can weigh up to 27,000 kilos and consume 130,000 kilowatt hours of energy a year. The components used in high rise elevator systems operate under highly demanding conditions, making durability a huge challenge. Elevators are also subject to severe strains, such as building sway, which can put them out of service on windy days.
It's clear that current elevator technology has taken us as far as it can, and that mere refinement is no longer enough. KONE's ongoing commitment to innovation has delivered a revolutionary solution, one that opens a world of new possibilities in high rise building design. Kone Ultra Rope, a super light rope technology that sets a new benchmark for elevator performance. Its durable lightweight carbon fiber core and special high friction coating, Kone Ultra Rope is the revolutionary break through the industry has been waiting for. Kone Ultra Rope has been rigorously tested under the most extreme conditions and has been approved by independent 3rd party experts.
This revolutionary new technology brings a whole host of valuable benefits. Not only does Kone Ultra Rope last twice as long as conventional steel rope, it's also less sensitive to building sway, adding up to a significant reduction in elevator downtime. With an elevator travel height of 500 meters, this lightweight rope cuts the elevator's moving mass by 60% and reduces energy consumption by 15%. When elevator travel heights increase in the future, even larger reductions can be achieved. Moving masses can be reduced by 90% and energy consumption by 45% for an elevator with a travel height of 800 meters.
KONE ULTRA ROPE will take elevators higher than they've ever been before. In the future, it can enable travel heights of up to a 1000 metres, twice as high as what's possible with today's technology. This groundbreaking innovation will support the design of more sustainable, higher performance buildings that are better equipped to meet the demands of the urban environments of tomorrow.
Great, isn't it? Say yes. So it's really exciting matter for engineers like I am and background. So this is the breakthrough innovation, what is now make the eliminate the one limit in the industry is steel ropes cannot go higher than 600, 700 meters max. This is now enables elevators to go even higher.
And then we are now drastically reducing the moving masses. The 1 elevator, 6500, 6 100 millimeter, the rope way today is 10 full size truck lorries. And this new rope is less than 1. So our moving masses are going from 10 to 1. So that is creating huge benefit for our customers building, planning, etcetera, etcetera.
We will have a time in the afternoon to go into all the details. But let's look at the high rise market. So we can see clearly there's a few key trends we have to think about what is happening. First one is the billings are higher. I will show in the next page what this means.
Also the number of the high rise billing is growing fast. And thirdly, typically the high rise buildings were earlier only office buildings. Nowadays, the high rise buildings are typically multipurpose building space, the residential blocks, hotels, offices, shopping malls. So there's also different demand coming from the user's point of view. So this picture describes very well what is high rise buildings global market.
So in the middle of the picture, you can see that this is the total amount of the high rise buildings in the world. So today, the number of the high rise buildings is 4 times higher than it was early 2000. So very fast growth on the billings point of view. In the right hand side, you can see annual growth rate above 200, 300 meters buildings. And then if you look from elevator point of view, because we want to look at elevator opportunity, high rise billing typically have 20 to 50 elevators, sometimes even more and few escalators.
So this growth is also very attractive elevator market segment for us. And growth is very, very strong. Then I don't want to now go into details on the ultra low, but I want to take up what Manard was mentioning the champlift concept. Sounds like what is that? So it's an elevator concept where we can install the elevators.
You are in the construction phase that when the building is coming higher, we will move the elevator accordingly. So elevator is in use in construction time. Normally between 10 to 15 floors, we will always change the height of the elevator. And what that would mean for our customers, which are the builders and developers. Let's look from builders' point of view.
This construction time use Champlift method limits the need for construction company to have this construction hoist. So direct saving from their operative cost. Secondly, in these high rise buildings, there's typically thousands of people workers. In Marina Bay Sands in Singapore, there was 5,000 workers on the same site. It's a huge amount of people moving up and down during the day.
So it's a productivity of the of construction work. So this enables our construction companies, our customers to make the labor cost lower and productivity better and it's more safe. Then if you look from a developer's point of view, this means that the builder can also close the facade, the building exterior. And it means that the developer can start the pre selling earlier, attract the tenants, start the active selling. So whole lifetime of the construction project is shorter.
So these are we have seen many cases that in overall the benefits are so big that the elevator costs are smaller small part. So I can see that this is the great thing what we have applied now in all most important markets and it will grow rapidly around the world. Then I want to also take up this project engineering and project management. We have systematically developed our engineering competence centers in Europe, in India, in China, in U. S.
And that is very important. We are near to our customers' architects and their engineering to make the final product specifications. Secondly, we have systematically and we will do systematically our project management training around the world. We have professional persons who are able to drive the project from day 1 to the completion. And of course, we have developed project management processes on that.
3rd important item I'd like to take up is we are participating our customer building planning in early phase, Because when customers are planning the buildings, there's always question about what is the capacity, how many people, how many thousands of peoples and what is the geographic solution. So we have been we have simulation tools, traffic calculation tools. We can really provide the services for our customers in the planning phase. So very, many important matters on Hydra's area. Then that was the solution part.
I want to now go shortly about our supply chain development. And if you look recap what is our KONE supply unit network. So starting from Asia. In China, we have 2 supply units Kunshan and Nansong. I will comment later about Kunshan side.
Then in India, we have a Chennai supply unit. In Europe, we have 3 units. Pero Italy, what is more focusing on the volume elevator production in Hvinkka, what is more competence center for high rise elevators. And then in Oste, we have manufacturing units for door and car. In North America, we have Intoria in Mexico, the manufacturing units for North America products.
In Holland, we have Engineering Logistics Center R and D. And Covelli, we have an escalator production unit. If you look now our supply chain, there was already a couple of questions today about the capacity and investments. Let's look now what is our supply network. Our suppliers are producing most of our components and modules.
They are a key part of our success. They are they have to be flexible. They have to be punctual. They have to have a right quality, right cost level. And they are sending the components or modules either directly to the distributor centers or our supply units.
KONE own manufacturing units are producing only few components. And as manufacturing units are sending those to the distributor centers and distributor centers have a key role in our logistic point of view. They are consolidating the whole material package and they will send the full material package to the construction site according to installation schedule, not too early, not too late. So we are really also trying to optimize the whole chain plus ensure that quality is always managed in right way. Of course, the final assembly will be done in your installation phase in the construction site as we all understand.
Then if you look at the supply manufacturing units in Kone, we are producing 2 components: elevator cars, cabins, landing doors, the motors, control system and also we are making the full escalator assembly in our own premises. In afternoon, we can see the Hvinkar factory where it's more or less those elevator parts, but not escalators. Of course, our supplier network is very, very key for us and we are about around 100 key suppliers. We are working daily to ensure that we are developing right things. We have a right quality.
We have right understanding and we have a shared view about what are the requirements on the delivery point of view. A year ago, we opened a new site in China, the Kunshan new site. We relocated old site to the new area on the Kunsang, Kunsang and it's a competence center. I will start by that. So we have very strong facilities and activities concerning R and D, testing laboratories, testing towers.
We have a major project engineering center, competence center. We have sourcing. We have quality. We have logistic. We have a big training center for our train to trainers on the installation point of view.
And also we have our manufacturing unit producing electrification for elevator, elevator, escalator, car production and motor production and also escalator assembly lines. So there's about 2,000 people in this whole operation and it has been in fully operational last since last autumn in full speed. Then if you look to India, India is a growing part of our global network and our deliveries are growing. We are now in process to relocate and expand our Indian supply unit in Chennai in the new area in Chennai City. And the project will start actively to build the new facilities next year and it is expected to be operational in 2015.
Also in this new site, we are implementing the same processes, same platforms as rest on the KONE and we are building the same supply chain process on India. Also in this new site, there will be a testing facilities and some R and D laboratories on that new area. Then as I mentioned, we have harmonized and developed global products. We have also harmonized and systemized our supply chain processes and tools. I want to take also up that we have very systematic way to develop our quality.
So we are developing our quality concerning our suppliers' quality, our engineering quality, our own manufacturing quality, logistic, packing, installation. And we are using the best quality tools like 5S, Lean Method, 6 Sigma, Statistical Process Control and so on and so on. So and we are benchmarking our quality system for the best on the world leading companies. And that has been and will be always in our focus. Then we have also, as I mentioned earlier in this installation, our installation methods are developed that they are always safe, they have productivity and we have a quality.
And for example, these installation measurements that we are really verifying that all our products are consistent and fulfilling the quality requirements. This has been now implemented in all our new product installation. Also we have a very important process. It's a demand supply balancing where we will tie our suppliers' capacity and our tenders and orders and market forecast that we are optimizing the full chain demand supply process in optimal way. The continued development offering and processes is vital, because it creates value for our customers and their businesses and it will really create improves the customer loyalty, the customer satisfaction.
In addition of this offering and process, I want to emphasize one important point. It's continuous development of all our people, our personnel. End of the day, it's a connect persons personnel who are making the difference seen by the customers. So the responsive customer driven competent motivated, connect people are really the key success factor on our overall and that will make our life real. So that was shortly my presentation.
And now I want to thank you and give time for a few questions.
Thank you. One question on the high rise market opportunity for you. Could you try and put some figures on how big of a potential that is for you? What's your market share in this area compared to the other segments? How big is this market value wise?
What's the potential if you grow successfully here?
So, of course, we don't publish individual segment market shares, but roughly saying our position in the high rise segment is the same as in volume segment. So I think it's a very meaningful matter for KONE new equipment business point of view. And it's very, very let's say important in this urbanized environment when the cities are higher and higher. KONE is and have to be the full chain company who is able to cover all the product needs of what our customers' project will require. So it's really, really important part of our business.
Okay. Thank you.
First, I would say that for my part, I think what my colleagues have been discussing is a great backdrop for discussing how we continue to develop our profitability, what our targets are going forward. And I think also Heikki's presentation again very much illustrated how we have again since the last Capital Markets Day been able to improve our competitiveness in the new equipment business. So this is of course very important to our overall development of our competitiveness. So I will first address our financial targets and how we are looking to progress towards this. Then I will discuss how we're developing our cash flow and what opportunities we are there going forward.
And then finally, I will address how we develop our productivity in our maintenance business and also discuss the fundamental growth in this market. So first of all, as Matti already said, we remain committed to our long term financial targets. These are ambitious, but we definitely believe that they are reachable. I think the same thing I said in this in our Capital Markets Day last year, it's first important to give a backdrop of how do we think about our long term financial targets. And when I say this, we have to remember the balance sheet structure that a company like us or particularly we have, where we have less than EUR 270,000,000 of fixed assets.
And if you look at our net working capital over the past 12 months, it has constantly been more than EUR 500,000,000 negative. So in this context, of course, we want to continue to drive good returns on capital. Okay. How does then our financial targets relate to this? So our first financial target is to grow faster than the market.
It is very important. We are a challenger in this industry, and we have ambitions to grow all the time. But as you have heard from many of my colleagues, we have ambitions to grow, but at the same time, we are very focused on pricing. So when we grow, we want to make sure that we also look at both our market position as well as our pricing. Then comes our EBIT margin target.
Here, it's important to remember the balance sheet structure. If we would only focus on our EBIT margin percentage in the short term, we would make different decisions in respect of growth. So the way we are developing it is that we say we want to have the best absolute EBIT over the long term, and we believe that, that is what will drive our returns on capital going forward. But then you can ask why do we have a financial target percentage wise. Well, we think this is very important in order to make sure that we keep an ambition level to constantly improve the profitability of our businesses and to make sure that everyone who runs our businesses have an ambition to raise the margin there.
That's why we have a target. But let's be clear, to drive returns, we need to have EBIT growth over the long term. And then of course, we have our cash flow target where continuing to improve our working capital turns is important to continue to develop cash flow. So if we look at how has our margin then progressed if we go back a few years. So first, if we take since mid-two 1,005, our margins have improved from about 8% and been quite a strong improvement.
But then you can say, if you look at more clear now the more recent years, our EBIT margin peaked mid-twenty 11. And what has happened since then? Well, we have had both positive and negative drivers. The positive drivers have continued to be the operational fixed cost leverage we have achieved from our growth. That's very important, and we have achieved that.
Secondly, we have continued to improve our quality and our productivity in operations. And finally, we have grown the maintenance business, as I will show later. But then we have had a number of factors that have actually meant that our margin has been we have more headwinds in our margin. The first one, which Matti addressed very clear in his presentation, is business mix. And just to highlight this again that if we look at the first half of this year, our new equipment business was 42 sorry, 52% of our sales.
A year ago, the first half, it was 47%. So 5 percentage point change in 1 year, that is quite significant. So that is the strongest impact on our overall margin. Then we have continued to invest in areas supporting growth. As Bill discussed, we have both in China and rest of Asia Pacific very actively expanded our footprint.
We have every year increased our investments in R and D, and we have every year increased our expenditure on process development and IT because we think that these are very important for our competitors going forward. And then of course, another negative driver has been the prolonged weakness we have had in the U. S. And South European markets over the past years. So with these drivers, you can then ask, okay, how do we then progress?
Why are we confident that we will be able to reach our long term targets? So if I then address that, how do we get to our 16% target? I guess that's the main question. And in order to achieve this, there are a few things we need to be able to develop. First one is growth and pricing.
I discussed that how important the combination these 2 are. We need to continue to grow to achieve our operational leverage. And when we grow a new equipment business, we also create the maintenance service businesses thereafter. So it's very important. They come with a lag, but very important to continue to grow to get that operational leverage.
And then in pricing, right balance between growth and price. Then in this industry, what is very critical is quality, productivity and overall cost management. So here, we have continued improvement, have had and will continue to drive improvement in our overall quality, both installation quality, maintenance quality as well as new product quality. And then when we look at overproductivity, we have to remember that in this business, a vast majority of our people are daily in the field. It is quite a labor intensive business, so improving the productivity of our installation operations, of our maintenance operations is absolutely critical.
In Europe and North America, it's clearly critical because of weak markets, strong competitive situation. So that's very important for us to develop our over competitiveness. In Asia Pacific, we also have a very competitive situation. But on top of that, we have labor cost inflation. So these are critical items to be able to drive our margins forward.
So I would say that these four areas are the ones we focus on. And if we're able to achieve this, we can definitely progress towards our longer term targets. And I would again like to remind that we have not set the time frame for this, but this is our path going forward. Let me then address 2 specific issues how we're developing them. 1st of all, pricing and then I'll talk about cost management.
But there's been a lot of questions for many of you that how are we developing our pricing in the environment that we are in at the moment. That if you look at if you listen to both Bill, listen now and Pierre, we have been, in many cases, able to improve our pricing even in difficult markets, whether it's in price competitiveness. And how do we achieve that? Well, there are 3 things we need to get right in order to be able to achieve able to improve our pricing. First of all, differentiation on the product side.
We need to have a strong product offering. And I think that, as you have heard from my colleagues, we are in a good position there. And this is not only new equipment, same when it comes to service product offering, which Pierre talked more about. Then it's about competencies. And this is perhaps the most important part of it all, to really make sure that we have the right processes, we have the right tools and the right data to analyze what the opportunities are and a really granular view of the markets and as well in competencies to make sure that our people know how to sell value.
And then the final part is how we manage our pricing policies, how we set targets, how we set incentives and how we set authorities. So these three areas that we are working on in order to improve our pricing. And I would say that we started very this program, pricing development program in 2011. And I would say that we have made good progress, but we still have a good way to go here, a good way to improve. But good improvements have been done so far.
Then if I look at our how we're managing our costs. First, our objective is all the time to make sure that we have a good cost focus so that we don't get into a situation where we'll be forced to do significant restructurings. So the first one is all to make sure we leverage our growth. But sometimes, we have had to make some programs in order to manage our costs. And last year, we had our support function development and adjustment in certain weak markets, the program to save cost in those areas.
And just an update on that. Our target was to save €35,000,000 by the end of this year, run rate basis. At the end of Q2, we were at about €26,000,000 We think that the end of this year, we'll be at about EUR 30,000,000 that there are a couple of programs they have decided to implement beginning of next year, but by mid next year, we'll be at full run rate. But while we are focusing on cost in these areas, we continue to invest in the areas that support growth, our footprint in Asia Pacific, R and D, process development and IT. So that will continue going forward.
If I then address a couple of more external factors that impact our margins, an update on raw material prices. If we look at the past 12 months, we have now had a slightly more favorable situation following the quite strong headwind we had in 2010, 2011 and still first half of twenty twelve. These numbers are the market prices. When they come in for us, it comes with delay before we have delivered our product. Also, our situation has throughout these years been clearly less volatile than the overall market because we have historically been able to lock our prices in a proactive way at more attractive points than what these prices have been.
But what I'd say, the situation now is that we have a slightly positive situation. And given this situation, we have decided we are starting now proactively lock prices for the first half next year. But if you look at then what are we main focusing on, again, to make sure sourcing also is a competitive advantage for us. Bill mentioned that we have one of the areas that we are looking for synergies in Giant Kone is through a combination of sourcing. It is not only the scale advantage we get.
That's, of course, very important, but it's also to make sure we have the same supplier quality focus in both operations. So that's very important. And supplier quality is the most important focus area for us in our sourcing function this year. If then look at another external factor, foreign exchange. Currently, more than 70 percent of our sales is in other currencies than euros.
So it's clear that the fluctuations we have seen are important to our profitability. The largest currency is, of course, the Chinese renminbi, but also U. S. Dollar is a significant one. So it's clear that the fluctuation we have seen do have an impact.
So the first half this year was quite neutral for us from a foreign exchange perspective that the translation exchange rates were pretty much the same levels last year. From here on now, if we look at the strengthening we are seeing in the euro, we're going to have a it looks like if it stays at this level, of course, we don't know where it will go. But if it stays at this level, we will have a slight headwind going forward. The good thing in our business is that the transactional exposure is reasonably small given the pretty good matching we have between income and cost, particularly in the service business but also in the new equipment business. So let me then turn more to how we develop our cash flow.
And first of all, if we look back the past 4 or 5 years, we can see that we have continuously had a good cash flow level. Yes, it does fluctuate from quarter to quarter, but we have constantly been able to keep it at a good level. And the main driver of this is naturally the improvement we have had in operating income. But another important driver for this is the improvement we have seen in net working capital. So if you look at in 2,009 was the 1st year we were able to turn our overall net working capital to a negative level.
And here, we have been able to improve in most areas. But as you can see from the dark blue line, the most significant area here is our improvement in the difference between our advanced payments and overall inventories. And this is a very strong focus area for us to make sure that we keep an attractive cash flow generating model. This strong improvement has been due to an improvement in most of our areas, but in particular because of strong growth in Asia Pacific where on average, the ratio between advanced payments and inventories are stronger. So that, I would say, is at very good level, and we are very pleased what we have achieved here.
But if you look at then our overall working capital items, we see that they have grown. But if we look at the turns, we can see that particularly when it comes to inventories and now recently for the past year, accounts receivable, we have been able to improve the turns. So for us to develop our cash flow going forward, it will be critical to continue to get better inventory control, better turns on inventories and better turns on our accounts receivable. I would say that the advanced payments we already have at the very high level. So I would say that kind of structurally, I think we are at a good level, and now we need to focus even more on inventories and accounts receivable in order to improve our working capital turns.
Then if we look at other cash flow items, our CapEx. As you probably remember, historically, we have said that our basic CapEx has historically been at around €60,000,000 per year. We had several years where it was lower, but then last year, it was significantly higher because of the completion of the Kunshan factory. But I would say that if we look at our basic CapEx going forward, given the growth we have seen in our business, has now increased from about EUR 60,000,000 to a level of EUR 70,000,000 EUR 80,000,000 at our basic level. Next year, we will have so this year, we will be at pretty much around our basic level.
Next year, we have a little bit higher because of the completion of the test tower and R and D center in China. And then in 2015, as Heikki discussed, we will have our investment in the Chennai factory. The Chennai investment is clearly smaller than the Chinese investment, but still an important investment for us. Another important investment area for us is acquisitions. That remains a priority area for us, and we want to also find further growth and therefore, density opportunities in our Service business through acquisitions.
As you can see, we've completed about 20 acquisitions per year, and our level has been between SEK 150,000,000 200,000,000 during the past years. This remains a high priority area for us. We continue to have high activity in this area to find these attractive service companies around the world. I would say this year, so far, we have had less acquisitions, but activity in that area remains high, and it is important for us as a challenger, particularly in the service business. Now with all of this, if we look at how has our absolute cash flow this year developed, so we can see that if we look at the 1st 6 months this year, our cash flow has improved from about SEK 450,000,000 last year to more than SEK 620,000,000 this year, so again, by operating income growth as well as improvement in our net working capital.
Let me then finally turn to how we develop the maintenance business. 1st talk about the growth in the market and then how we are developing the productivity in this business. First of all, if we look at what is the fundamental growth in the world elevator and escalator service business or maintenance business. If you remember, in 2011, the maintenance base was around €11,000,000 end of last year, it was more than €11,000,000 So where do the changes come from? Well, of course, it's obvious most of the changes come from conversions.
But also, we have to remember that every year, and this depends quite a lot on country to country, we have 1. In some countries, up to 2% of the existing base gets taken out of use through demolishing or other reasons every year. In China, as we heard from Bill, that rate is even higher. So those are the drivers. What we all have to remember that the green bar you can see here deliveries from 2011, that is what we expect that our new base in the service base.
But as I will explain, well, before you see it in one of the company's service base, there is a delay because of the so called first service period, but I will explain that a bit more detail later. But if you look at the growth, so we can see that if we look at from 2,008 to 2012, the growth in the business, we estimate that it's approximately, and these are approximate numbers, 5.5% over this period of time. And as we can see, the growth is really driven by Asia Pacific and China in particular. So where is the large base at the moment? As we know, the Europe, Middle East and Africa is about half of the world's elevator and escalator base.
Here, we have a growth of only 2%. Of course, we have a large base, and we have had weakness in the new equipment markets over this period of time. So that has grown at about 2%. Same story for North America. But if you look at China, about 22% growth and Rest of Asia Pacific, about 10% growth.
So what is important here is naturally that why is it so important to have strong new equipment positions in these markets because this is how you can over time capture this growth opportunity also in the service market. Again, it would only we have new equipment in Europe, Middle East and Africa and Americas, also our service business would be growing at a slower rate. So how have we grown over this period? As Matti mentioned, our service base has grown over this period by 6.2%, but our sales has grown at 8.7%. In that 8.7%, we have some currency benefits.
So if you look at constant currencies, the growth has been 7.2%. The 7.2%, to make it more complicated, 7.2% includes our door business, which we have principally in Europe. If we exclude the door business and only look at the elevator and escalator maintenance, then the growth over this period of time has been about 8%. So we can see that we've grown our base by 6.2%, but our sales by 8% in constant currencies. So we have been able to also, with this period of time, been able to increase the sales per unit of our base.
So clearly, faster than the market. If you look at how are we growing our base, what are the methods? And I think Pierre did discuss many of these. First one is, of course, conversions. And here, an increasing amount, of course, coming from Asia Pacific and China.
But what often gets asked that when do you see the new equipment deliveries in your service base? So if we assume that year 1, we deliver new equipment, Then after that, it goes into the so called first service period, which depending on market, it's between 1 to 3 years. There are even some individual markets up to 5 years. And it's what we look at, what we get into our base is what we convert after this 1st service period. So there can be when a building is completed, it can first take a while before it's taken to use, then it starts its first service period and then we convert.
So there can be several years lag between this, but it does come it comes to a delay. But it is important to remember this dynamic, how it works. Then of course, we go through acquisitions. And then we have the competition balance or commercial balance. Pierre discussed that already.
That is something that has been slightly negative for us in the past years because of the very high competitiveness in the markets and because of our focus on making sure we maintain good pricing in this market. This is perhaps one of the most important development areas for us. We have lots of work going on here, how we improve our sales activities, customer contacting abilities and retention activities. And of course, the fundamentals for all this is to have good quality service. And on top of this is pricing.
So these are, of course, the fundamental ways how we grow. But I guess the key point was really what are the dynamics of conversions from new equipment into the service base. Then how do we develop the productivity in our maintenance business? As you can see from the right hand side, the majority of our costs in maintenance are field costs. That means principally salaries of our maintenance technicians and supervisors.
So in order to be competitive in this area, one has to constantly improve productivity. And how do we do it? Well, the first one, we are talking about density. Increasing density brings better productivity. And here, of course, it's conversions, acquisitions that we do.
And if we have more density, we can have better route optimization. The second one is performance management. This is very important. These people are located in many different individual locations around the world and doing a very local job. So performance management, measurement control, very important and benchmarking to make sure that we can develop all of our technicians and also the supervisors.
Then very important is maintenance methods. And here, really, methods to make sure that we improve our quality all the time. And I think it's pretty clear that the better quality we have, of course, we have happier customers. That's a very important factor. But secondly, the better quality also means that we will have less unscheduled callouts, means that we can better schedule our service visits and the job of our supervisors and technicians, very, very important.
And to do all of this, we need the technology and systems, which we continue to invest in quite a lot to make sure that we have very strong systems for planning our people's work and dispatching them when needed. So this, I guess, is the picture of what are the key things for us to develop our productivity in maintenance. If I then finally wrap up, I'll talk about same thing Matti finalized his presentation with almost finalized his presentation with. But how do we look at this going forward? And why are we confident going forward about the development of our business?
First of all, we continue and we have continued to have good growth driven by strong megatrends. We have good megatrends in this market driving growth and we have also captured market share. That's, of course, something we continue to be focused on going forward. Secondly, we as you have heard from both Naud and from Bill, our market positions in Asia Pacific are very good, and we want to continue the development further. That's where the markets are growing.
That's where we want to be very strong. But also, we have then our maintenance business, our overall service business that is very strong, gives us stability. But let's not forget also the opportunity we get from the new equipment business in Asia Pacific for our service business. We continue to have a challenger attitude. As I talked, we set ourselves ambitious targets but achievable targets.
By setting ourselves achievable targets all the time, we demand from ourselves to make sure we plan and find ways to deliver that growth. And finally, very focused on execution, driving the productivity, driving our quality in the business so we can execute this capitalized business model and continue to have a good cash flow and therefore good returns on capital. So with these words, I think we are ready for first a few questions and then a broader Q and A after that. But if you have a reason, please, questions.
Sir. Michael Harkmann at HSBC. Pricing has of course been a big topic and you had this extra slide on pricing. You said you started in 2011 with the rollout. Can you tell us how you've been rolling it out across the organization either by region or by target areas and where you've had the biggest traction and how much further you think you have to go?
The way we roll out this program, if we're not only looking at a few countries, is that what we do is, of course, we have someone global who's a program owner. Our ability is to make sure that the various area organizations that we have gain that knowledge. And then from there, we drive it into our countries. Of course, we look always first at the most difficult countries that we accelerate their development. But if we would only look at a gradual approach, let's do that country first and that then, then it would take quite a long time.
So that's why we have our area organizations. They gain these competencies and skills and they did drive them out units globally. I would say, if you remember, I think we started this in 2011, end of 2011 and end of 2012, I think if we spoke to both Matti and myself, we were perhaps frustrated that we were not making more progress. But then I think from that, we have constantly made good progress when we start to see that our organization started to get these skills and we improved our competencies throughout the organization. As I said, we have made good progress in that area work.
And the more you learn, the more you also understand where you need to strengthen your competencies. Maybe we are Arne.
Yes. Hi there. Thank you. I've got Two questions if I may. One is just on the operational fixed cost leverage.
I'm not sure if this is something you're willing to share, but I'm just curious if you could share with you what you actually think that is. I found it a little bit difficult to sort of assess when I look at your numbers, so we can maybe separate one
let's take that question first. So I think that the way we look at it, we of course have a certain fixed cost base. And when we grow, we of course want to make sure that the percentage of fixed cost of sales continuously goes down that you get the leverage from growth and we don't add as much resources. We have growth. That's of course the key focus area.
But you wouldn't I mean because you're sort of in absolute terms if I try to get like an operating leverage which for some other companies are relatively straightforward to get. I find with Kona that it's maybe a couple of more moving parts. So would you be willing to say something like an incremental €100,000,000 of sales gives you generally speaking, if we're talking equipment, a certain amount of EBIT
or We have not opened up that. And of course, the operational leverage we get is partly fixed cost side as I mentioned, but also maintenance when we grow. What it means is that the bigger our density, the less we need technicians per certain number of elevators.
Okay. And my second question was just if you could elaborate a little bit about this sort of first service period and how it flows through your P and L. Right. I'm just trying to understand the two dynamics, because my understanding, which may be incorrect, is that you generally attach sort of a service contract when you book a sale and then that's exactly work?
So the way it works is that when we deliver new equipment in almost every market, a couple of small exceptions, but almost every market it comes with the 1st service period. I think it's usually 1, 2, 3, some markets even up to 5 years. So when we sell the new equipment that first service is included in that price. So we will make a provision or part of new equipment price and accrue that over whatever the first service period is so that you will see then.
And is that when that is being accrued, is that being accrued as a service revenue and not equipment?
That's right.
Thank you.
I think we have Jan back there.
Jan, Helene, Order and Markets. Just on the previous topic on this accumulation of the service the maintenance space. I mean, you say that the recovery rate is some 60% in China and globally maybe closer to 80 percent or something like that on average. Then if I remember from the top of my head that you delivered during the last 2 years something like 100,000 pieces of equipment per year. And if I look at your service base growth, it's been like 50,000 if I remember correctly.
So if you apply these recovery rates, it indicates that after the recovery maybe 2 years or 3 years you lose quite a lot of those contracts afterwards to make the numbers match?
So first of all, when you make that match, you have to remember this delay. And the delay in China, of course, big part of deliveries are is longer than most of the other markets. So that you usually have 2, easily 3 years of first service period. So it takes longer before you convert. Then if I look at our overall retention rate, which is what you addressed, our retention rate historically has been around 95%.
In the difficult years we have gone through now with increasing competition, it has gone down a little bit, but it varies in most markets between 90% to 95%. So we continue to have, I would say, quite high retention rates. But it's yes, as I mentioned, we have in the past years lost more units in market than we have won because of our pricing focus. That is something we have ambition to turn. But and then this conversion, it comes with a clear delay from when we have delivered the new equipment.
So that when we take these together that explains the growth in the service base.
Okay. Thank you.
I think let's take one last question before we
Yes.
Hi there. Just one question on Europe that it's referring to a presentation that from earlier during the day. How have you managed the decline in the new equipment sales in terms of manufacturing footprint? Have you shut down manufacturing footprint in Europe or not? And if demand comes back in terms of new equipment, how do you plan to address that issue?
If you look at our European footprint that has actually been stable over the past 5, 6 years. Our main supply unit for Europe is the one Heikki mentioned in Northern Italy in Peru that delivers the volume equipment. Clearly, they have now delivered less to Southern Europe, but then there have been other markets that we didn't discuss so much around Europe that have grown faster. You have had Turkey. You have had some of the partly Russia and so forth.
So we have been able to keep the same footprint. And again, given the very low capital intensity here, the difference of what your load is not a huge difference in this industry given the fact that your depreciation charges are not a significant part of your cost. And a very big part of our cost is something we buy from suppliers.
So if demand comes
back in Europe, there will be no need for major expansion there or in terms of manufacturing footprint?
Heikki is shaking his head. And you have to remember also this industry given the type and what you will see in Huttigar today is an assembly operation. So if you have a site with space around it, then it is actually quite modular how you can expand. And what you need is an industrial haul with assembly equipment and logistics equipment. Okay.
Should we, Carla, move on to the next stage?
So now we have more time for questions on all topics that have been discussed today and basically anything you'd like to like to ask about Kone. So let's take one question at a time please. So feel free to choose the topic.
Okay.
Sorry, I don't want to monopolize here, but nobody else raised their hand. So I have to ask one question, which is a little bit of the elephant in the room. And you're referring to expert interview here, so I'll refer to Google then. When I look at the Chinese total market and listening to industry experts, the estimate is that roughly maybe 20% of residential is empty or vacant, so around 3,000,000,000, 3,500,000,000 square meters. So just very curious with your huge insights and your big footprint, if you have any sort of idea on the elevators that you have installed, if you're significantly higher than that?
Or if it's if you have a number of how many of the elevators you've sold are actually in use today in this specifically in the residential space? Thank you.
I think that we have a better expert than myself here. So anti Pyrenean, please, if you would comment this.
Antti, would you please introduce yourself with just a couple of words?
So my name is Antti Pirinen. I'm the Head of our New Equipment Business in Greater China Area. So overall, if you are looking at these empty apartments, we think that it is kind of a very small kind of a part of the total base and also what is going to be built in the next 10 years to come. And typically, it takes some time before all the apartments are filling up. Some people move in 1st and then of course the elevators start operating at that time already.
And then the rest of the apartments are being decorated and then the apartments are taken into use. So as far as I know, it's a kind of a it's a very small part of elevators which are not starting to operate immediately because already some people are starting to move into the buildings.
Thank you. And the other questions?
One more question on Europe on maintenance this time. What percentage of the European market in terms of maintenance is being addressed by the major international players? I think it was mentioned before that in China it's around 25%. But what about Europe, let's say, on
a blended average basis maybe different? In Europe, it is much higher. It is at the level of 70% to 75% roughly.
So the room for further consolidation is probably limited there in terms of buying out minor players or
In Europe, the let's say gradual consolidation has continued but slowly.
This is Tom Skogman from Handelsbanken. You have today said that your China service profitability equals the global average. And I remember previously you have said some years back that your Chinese profitability in terms of EBIT margin has been similar to the global level. Is that still the case?
When we take the whole of our China business, the profitability, the operating income of us for us in China is roughly at the level of our global operating income.
Okay. Thank you. And then second question, we have not heard that much about North America today as your regional manager is not here today. But I've understood that there's a very strong recovery going on there at the moment. Could it be that given the long lead times that North America can be the fastest growing region for you the 2 next years?
Is that possible?
I have to say that, yes, we start to be in a very positive phase there. Our the margin in our margins in our orders they have developed very, very well especially, let's say, already from the middle of 2011, but especially during the last 12 months. So therefore, our business outlook for how it is developing in the U. S. Next year is really positive.
Thank you. First question is a follow-up there on profitability. Maybe a clarification from Henrik. You said that business mix was clearly a negative factor on profitability this year. But if most of the it's related to your new equipment and most of that growth is from China, which you say is group average, then the mix element can't be that big.
Maybe I you can add a vein. But the it is simply so that when in our business mix, the share of new equipment has been growing and even though much of that growth has come from China, the share of maintenance has been going down. And still today the margins in maintenance are best. And it is this change what makes the comment that Henrik said.
Okay.
And the second question a lot of focus on China and India where we have a strong position. What about you have a big strong position in Russia, but it doesn't seem to be a key focus point to grow that. And then also another market in South America, which you exited some time ago maybe an update on how you're reason about the potential reentry there?
In Russia V and M4, the 2 leading companies are local Russian companies and they have very strong position in the low and high volume segments. As such, our business are developed in Russia well. Then what comes to South America, yes, we are interested to let's say start our business more actively there again. But and we are actively looking for opportunities. Nothing new to tell at the moment.
Then the good relevant question is that how important it would it be for us to get back to the Latin American market? The size of the market as such is altogether at about the same level than or less than Indian market. So returning there soon is it is not urgent, but of course that is among our in our one of our targets. What we feel that what is more essential for us at the moment to get prepared to the as it looks at the moment fast growth opportunities in Africa next decade, so that we have good local presence in the right countries in Africa in the beginning of next decade when the urbanization will really accelerate there. Thomas?
Yes. I could just continue a bit on these kind of segmental margins to get a better understanding what's really going on in the business, because what you basically are saying is that the China new equipment margin is equaling the margins elsewhere. And of course, we know that in China we have had an exceptionally strong market for many years now while we see that North American and European markets are 60% to 70% of the values in 2,007. So there seems to be some kind of a missing part there. What is holding back the margin to be much better in China than it is at the moment?
And we know also that Otis has said that their market in China is almost 20%. So
Well, I think we now had a small some kind of misunderstanding here because what I said that when we take the whole of our China business the our operating relative operating income level there is at the same level as our global overall operating income level. When we compare the Nuvikun business in China, the profitability level there is higher than what is our the average profitability level in new equipment out in other markets. And then what comes to one of our competitors that you referred to, it is impossible to compare their profitability and our profitability based on the comment you mentioned that also we have heard, because it is difficult to know that how much do they allocate global costs to their China activity and all of that. But yes, we are very pleased with our profitability in China. That is clear.
Other questions?
I think there's one more.
Over there.
Yes. Hello. Markus from Ditta Fund Management. One question on the balance sheet. It seems to be very liquid for the time being and probably too much cash.
So what could we expect dividends going forward?
Well, the dividends are a poor decision and it is naturally impossible to say anything. As we have always said, we want to have a strong balance sheet, because we are a challenge. And our objective is to continue growth both organically as well as through acquisitions. Of course, we also take care that our balance sheet is not too strong. Okay.
Maybe it is time to wrap up the day. We have had today reviews on many interesting areas of our business. In the morning, was optimistic about South Europe, not because of economy, but because of our strong operational principles, because of our all time strong pricing capability and because of improving granular more granular understanding of the different markets. As Peer said, it is not in business, it is not a question about averages, but it is about finding the growth opportunities. Now then told about how our Nuviklun business has been growing and to the leading positions in his area and how this development gives a good basis to the further strengthening of our service business in these countries.
Now it also emphasized the importance of talent recruitment and talent development in much like India, Southeast Asia and Middle East. And that of course very much is the case. Then Bill. Bill first told about how we have become the leader in China both in new equipment as well as in the service business in the maintenance base. Then he illustrated and demonstrated why we are confident about the long term attractiveness of the Chinese market.
Confident that it will continue to grow. However, the growth rate will gradually get to a more moderate level. Heikki then told about the leading characteristics of our new elevator product range and then focused on the high rise business and what kind of developments we have there in developing our competitiveness further. Henrik continued by telling about our financial long term financial targets. He stated that they are ambitious, but reachable.
And with our systematic way of developing KONE, I believe that we will move towards these objectives. Then there was a question about our business scope. Our vision is as I said in the morning and as it is well known to all of you that KONE delivers the best people on flow experience. This defines our business growth. We are we very much believe on developing a focused business.
You have been participating very actively today. Thank you for that. And Caroline, now I think it is time for lunch.
Yes, that's right. So thank you very much also on my behalf and on all of the other speakers' behalf. And I will come back to some practical notes to those of you present here. But before that, I would like to also thank all of those who have been following the webcast. So this is the end of the webcast and in the afternoon those of you who are present here are very welcome to join us on the factory and showroom tour in Hvinkah.