Ladies and gentlemen, good morning and welcome to Konez Capital Markets Day 2012. It's a great pleasure to have so many of you here in sunny Helsinki with us today. We also have people following the webcast. A very warm welcome to you too. We have an interesting day ahead of us.
We will start the day with a presentation by our President and CEO, Matti Allahofta. And Matti will be mainly focusing on how we are accelerating the development of our competitiveness at KONE. After Matti's presentation, we will hear from Heikki Leppmannen, EVP, New Equipment Business and Heikki will tell you about our new elevator offering, the one that we just announced yesterday and are very excited about. After these two presentations, we will have the day's first break. And after the break, we will continue with a presentation by Ari Lettoranta, EVP for the Central and North European Area.
And Ari will tell you about how we develop our business in that region. After Ari's presentation, we will hear a China update by Bill Johnson, the Head of our China business. So Bill will discuss both how the Chinese market is developing as well as how we are developing our business in China. After the day's second break, we will have the last actual presentation of the day from and that presentation will be held by our CFO, Henrik Anruth. And Henrik will be discussing how we are driving the profitability development here at KONE and also about our capital management.
After these five presentations, we will have a separate Q and A session. So there will be time for Q and A after each individual presentation, but more so at the very end of the presentations. So a separate longer Q and A session there. So don't worry if you don't have time to ask your question after the actual presentation, just write it down and we'll have more time later on. At about 1 p.
M, we'll have lunch here at the Finlandia Hall. And at about 2 p. M. Or actually 2 p. M.
Sharp, we will have a short bus transport to the High Design Expo, where you will have a chance to see and test ride a couple of elevators from our brand new elevator offering. So without any further introductions, let's get the day going. Matti, the stage is all yours.
Thank you, Carla. Good morning and welcome to our Capital Markets Day. Yesterday, we announced our new global product offering. And what is very essential here, we are doing this at a situation where the competitiveness of our current products is very strong in the marketplace. I have to say that this feels really good.
I will as Carla mentioned, I will focus very much on how we have been and how we are accelerating the development of our competitiveness at Kone. I will first start by briefly giving a little bit perspective on how our performance has been developing, followed by our estimates about the global markets sizes in 2011 and how our market share has been developing. Then I will focus on how we are accelerating the development of our competitiveness, of course, including the, let's say, main points of the new global product offering. Naturally, Heike Lippmann and then after me will go much more much deeper in telling you about that important new launch. Then at the end, I will tell how the development in the markets has been year to date this year so far and give our market and business outlook for 2012.
So let's start by first taking a look at to our quarter 1 development. There as many of you well remember, the biggest positive news was that our order intake growth in quarter 1 was very high. It was more than 30%. And even without the impact of the consolidation of Giant Kone in the beginning of December last year, it was more than 23%, so well above what our key competitors have announced. Sales growth was also strong almost 18%.
Then what comes to profit growth. This year, as you know, we are amortizing a lot of the intangible assets from the Giant Kone consolidation. And hence, the most illustrative comparison here is in EBIT before amortizations. And here you see that the growth was 15.8% and the difference in the relative performance compared to the Q1 last year was minus 0.2%. Also cash flow was strong at almost €250,000,000 But then I would take a longer perspective and show how the rolling 12 months performance in orders received, sales and operating income has developed from 2,005 to the Q1 of 2012.
So first orders. And here you see that although the many of the Western markets have been very weak in construction activity since the spring of 2008, we have been able to raise to a new level during the last 7 years in our order intake. In sales, our we have been continuously growing. And this, of course, has required a major change in our geographical mix. From this picture, you'll see that the share of sales to Asia Pacific has grown in this time period from 12% to 27% and that the average annual growth in Asia Pacific from 2,005 to 2011 has been 23%.
But I have to say that I'm equally pleased with the fact that we have been able to grow by more than 5% also in Europe, Middle East and Africa and in the Americas in this period with many years of weak markets in these two areas. The average annual growth at KONE as a whole over this period has been 8.3%. And just to comment that the average annual growth in operating income has been more than 18%. And here you see how the operating income has almost tripled from 2,005 to 2011. And this is the result of our very systematic and intensive continuous development of our competitiveness in a broad scope, but in a focused way.
This is very essential in a broad scope in the business system, but in a very focused way. So that about briefly about the development of our development of our competitiveness so far. And now let's take a look at how we estimate the size of the market last year and what are the comments regarding our market's development. Let's start with the new equipment, which is the pie chart on the left side. We estimate that the market went up from 515,000 to 610,000 units last year.
This means that the growth was actually high. It was 18.5% And it was very the growth was very much driven by the extremely fast growth in China, where the market went up from 310,000 to 390,000 representing hence a growth of 26% last year.
From the picture you
will see that China in terms of volumes was 64% of the global market volume last year. It is, of course, a very high number. It went up by its share went up by 4% points from 2010. The share of Europe, Middle East and Africa went down by 2% points to 18% and the share of North America remained at 3%. Now as I mentioned, we consolidated Cayan Kone in the beginning of December last year.
And if we include giant KONE numbers for the full year last year that leads to the result that KONE's market share last year in new equipment based on volumes went up to 17% in our in the new equipment market. Then about maintenance, we estimate at the end of the last year, the maintenance space globally was 11,000,000 units. You'll see that Europe, Middle East and Africa continued to be more than 50% of the market. Its share went up by 2% points to 53% went down by 2% point to 51% and whereas the rollout China market increased also here, so that each year increased from 15% to 18%. In new equipment, we have been able to improve our market positions quite significantly since 2,005.
And let's I'll first comment on our progress in Europe, Middle East and Africa. As you see already in 2005, we were a strong player in both Central and North Europe, in South Europe and also in Middle East. But we have been able to further strengthen our positions clearly. And now in 2011, we were either number 1 or number 3 number 2 either number 1 or number 2 in all of these 3 important geographical areas. In Russia, we continue to be number 4, but our market share has clearly increased also there.
We are in Russia, we are number 2 about the non outside of the domestic players, so about the non domestic players. In Asia Pacific, the progress has been even faster. In China, we have moved from 8 from number 8 position to number 4 in 2,009 and then to become the 2nd largest company in Novecment in China last year. In India, we have moved from number 2 position to the leading position in Southeast Asia from number 5 to become the 3rd largest company in New England there and in Australia from number 2 to number 1. And in North America, we continue to be number 4, but our market share is clearly higher than what it was in 2,005.
So of course, these market positions, they give us a very strong starting point when going further. And in maintenance business, our average annual growth from 2,005 to 20 11 has been 6.7%. Our objective is, of course, to grow fast in the maintenance base and at the same time to have that growth in a healthy way. We have started to be increasingly active in acquisitions. As Henrik will show later today, our acquisition activity has been we have invested in acquisitions much more in 2010 2011 than in the previous years.
About this 6.7% growth roughly 2 thirds has come from organic growth and 1 third from acquisitions. So this is about the performance development and global market size and our market share development. And now I will move to the how we have been developing our and accelerating the development of our competitiveness. I think that this picture is familiar to already to many of you. However, I would like to raise some of the, let's say, real highlights about what importance we have here.
It all starts here from urbanization. We are in a very positive situation in our industry because we have many important global megatrends that are driving growth in our industry. The most important of all of this is urbanization. And 3.5 years ago, we defined ourselves a vision based on the urbanization mega trend. And this says that in the more and more urban world KONE delivers the best people of low experience.
This vision has 2 important messages. First of all, it clearly defines that what are the limits of our potential business scope expansion. Secondly, it also leads all of us 37,000 KONE people to see our company from the perspective of the users of our products and from the perspective of our customers. Our strategy is very simple and straightforward. It has 2 parts.
First of all, we differentiate from competition by delivering the best people by delivering the best user experience and the best customer experience. And at the same time, we all the time strengthen our competitiveness by developing our people and our processes. Every 3 years, we define that what are the 5 most important major development programs that put our strategy best alive in that situation and help us to move towards our vision and continue a profitable growth. 1 could ask that how come 3 years is not at a very long period, but the reasons are the following. First of all, 3 years is a long enough time to develop some, let's say, permanent strength.
And at the same time, it is short enough in order that we feel the urgency in this development every year and every month and every week. In addition to these 5 development programs, we have 3 high priority areas that we take into account in everything we do and these are safety, quality and simplification. And as the basis for everything, we have KONE values, which we develop all the time and measure the development of course also here. And we have our common way to work globally, which is the Konevay process architecture. So these are the 5 development programs, which we have been working with from the beginning of last year and will continue to work another 18 months.
And now I will tell some of the initiatives, not all, but some examples of
the
initiatives that we have been and are working in each of these 5 at the moment. And I will start with customer experience. In this development program, we have studied and identified that what are the most critical touch points in the customer interaction in the whole business system. And what we are doing, we are developing processes and improving processes in these most critical areas. Secondly, we have continued to work actively in order to get more and more granular market understanding.
This means that we start to learn the different the needs of the different segments better and better. This again means that we are able to develop and deliver better solutions to customers in different segments. And this also means that we have been moving more and more to value based selling. And the third point is that, of course, we are training and coaching a lot of our salespeople and sales managers and continue to be the sales activity level at a high level and, of course, follow the opportunities created in all our markets in a similar way in strong market and weak markets. Employee engagement is the 2nd development program.
Many of you remember that already 4 years ago in the spring of 2004, we decided to increase our investments in people leadership in the leadership skills of our people with the motivation that we believe that this will help also us to keep the continue to have the good spirit at KONE everywhere even in a very difficult economic environment. And this has worked extremely well. Now we have continued to increase our leadership programs. And at the same time, we have started to let's say put a lot more attention to the job rotation possibilities for our people as well as to mentoring and coaching skills and actions. And of course, we are now more active even more active in an area in promoting well-being, in encouraging people and creating possibilities for different kind of sports activities, health measurements, just to give a couple of examples.
In innovative solutions for Peopleflow, of course, our development of our new global product offering has been the let's say, the key initiative. And ride comfort, visual design and eco efficiency have been the key objectives in that development. At the same time, we have continued to work actively in order to get the best possible quality and cost competitiveness in all of our product categories. And in addition to these two comments, we of course have many interesting other areas also what we are working with under this development program. In Service Leadership, we have been shortening our management and follow-up cycles in order to get better consistency globally in our service business.
This is a major effort because we have clearly more than 1,000 different offices from where our people work and getting the leadership and the process is very consistent everywhere requires of course consistent development and attention. Naturally, we are all the time further developing our field mobility tools. That is a very, let's say, big impact area as well and increasingly training and coaching to our technicians, supervisors and service managers. In modernization, we are working at the moment very extensively. We see a lot of opportunities and we are working with a lot of opportunities for developing our products offerings and sales capabilities as well as all of the processes in the modernization business.
And finally, in delivery chain excellence, we are implementing Lean and 6 Sigma throughout the delivery chain. We are developing our processes to get a faster ramp up of new products. And we are also developing business specific delivery chains. All of these 5 development programs and their initiatives have helped us a lot during the uncertain times to develop our business well and to get a solid business development. Already in the spring of 2,008, we chose an approach that we are still using.
And the big idea here is that we try to take also the difficult market situations as an opportunity in the current uncertain environment. This approach has 4, let's say, key factors. First of all, strong differentiation from competition with our development programs. All of these 5 development programs, they help us to differentiate. Secondly, focus learn to know understand the market development with better granularity and hence be able to focus even in weak markets to growth opportunities and in geographically and segment wise.
Thirdly, continuous improvement of quality and productivity and the 4th one being this developing very actively our people, leadership skills, people very broadly. As you see, we are working in all of these areas in our development programs. So they are very integral part of Kone, very central part of Kone. However, if I would call this that this has been and will be very fundamental in the in the long term as strong company this attractive industry as possible. As strong especially what comes to market position and absolute operating income.
And we assess our development every year based on these five areas. In each of these five, we want to make positive development every year and they are
the
following. Every year, we want to develop get positive development in customer satisfaction and in employee satisfaction. Every year, we want to grow faster than the market and get better development in financial performance compared to our key competitors. And every year, we want to get strong progress in sustainability. Now if you think about these 5: customer satisfaction, employee satisfaction, faster than market growth, good financial performance and strong performance development and sustainability.
It is very clear that if we are all the time developing positively in all of these five areas, We are all the time developing KONE to become a better company. And we are in a good path, but we have a lot of potential to make KONE better. Typically, during the last 7 years, we have been we have had positive development in 4 or 5 of these areas. And always if one whatever of these 5 areas have declined even a bit, We have put at Kone a lot of management attention in that area in order to ensure that during the following year the development is positive okay. I would say that we have well a lot of focus on all of these, but very special focus on the first two, because customer satisfaction and how that is developing and employee satisfaction and how that is developing, they are very important early indicators on how the business will develop in the future.
So this is fundamental in our orientation in how we develop this company. So now I have told you about our development in our business performance and about last year's market size and how our market size developed. Now I have started to discuss about how we are we have been accelerating the development in competitiveness at KONE. And now I go to the very essential element in that competitiveness, which is launching the new product global new product offering, which I said is the most important new product introductions at Kone during the last 16 years. Many of you know that KONE has been especially during the last 20 years, KONE has been known as an innovative company in our industry.
We have in several cases where we have brought to the market something very new and very interesting. Now during the last few years, we have been working very actively in order to get our product competitiveness even a step up. This work naturally has been happening as part of the innovative solutions for People Flow program. And we have at the same time also been increasing all time our investments in R and D. And now we have launched or communicated about this new global product offering, which is very extensive in its nature.
The new offering will cover about our global volume in elevators eventually 60% in the new equipment business and 90% in the full replacement business. Full replacement means that when modernizing elevators, the customer decides to replace the existing elevator with a total new So in hence, this full replacement is part of our modernization business. And of course, we have developed this new global product offering with a target to maximize user experience and to maximize customer experience. Regarding user experience, we believe that with this new product offering, we will have the best ride comfort in the industry. In Visual Design, we will raise this industry to a new level.
We have a lot of different alternatives that are a great fit to different customer needs and different geographical markets. Regarding customer experience, we are the leader already now and with this new product offering, we will become even stronger. This new product offering will also increase our improve our space efficiency and we will be at par with the competitor which is best competitor in this respect. In addition, we will have considerable progress in installation, in planning tools, in quality and which all makes us a better partner an even better partner to our customers. And with the harmonized and modular technology, we will when we get into more volumes get even bigger economies of scale benefits.
So after me, Heiko Epponen will tell about the new product offering much more. I just not could not resist in starting to say some of the key aspects. Now, next about market development and how the market development has been so far this year and then after that about the market and business outlook. And let's start from Central and North Europe and new equipment. Many of you remember that in the first half of twenty 11, the development in new markets in Central and North Europe was very positive.
And then towards the end of last year, the market stabilized in many countries to a relatively good level. Now what has happened so far this year is that the markets are stable that markets have been stable or declined slightly. Markets are at relatively good level at the moment in Germany, Austria, Switzerland and the Nordic countries. And on the other hand, markets are weak in Netherlands, which as we have communicated several times earlier. From beer, as we have communicated several times earlier, the impact of the recession started later than in many other country markets and the markets are weak continue to be weak in Ireland and are weak also parts of the Eastern European countries.
In modernization, the market has been stable or declining slightly. And in maintenance, the markets have been developing well, but pricing environment is challenging. Arillelectoranta later this morning will naturally go much more in detail and tell much more about the market development and our progress in Central and North Europe. In South Europe, the headline is continued weakness, which is no surprise. Also here, the development year to date has been, I would say, totally in line with what we have communicated earlier.
In new equipment in France, the Q1 developments was somewhat positive. However, already in April, we communicated that we don't believe that to continue, but that the market will start to slightly decline and this has been happening. In Italy, the markets have continued to decline and in Spain, the markets are at a very low level. In modernization, the markets are declining slightly. And in maintenance, the price competition is intense.
And of course, we see also the impact of the low level of construction that has taken place in South Europe already for several years. I mean that see the impact of this as a result of lower number of conversions to the maintenance base. Then I have here a combination of Middle East and Russia, where we see continuous growth. And in new equipment in Middle East, the good growth has continued in Saudi Arabia. And then maybe a more interesting comment, because the first one was I think well known is that the development in United Arab Emirates saw some signs of market recovery.
The development in United Arab Emirates during the last 5 years has been such that before recession, the construction activity level was there very high. And then there was a collapse at end of 2,008. However, almost all of the projects have been continued after the first phases of recession and now really part of the markets have been at a weak level. But now really we see some signs for more positive development. In Russia, the good growth has continued.
In modernization and maintenance development has been positive both in Middle East and Russia. Then North America. The headline tells it all gradual recovery. In new equipment in the United States, the gradual recovery has continued, however, with regional variations. But as we said in April, some positive development in the broader geographical area that was the case end of last year.
In Canada, the market has been stable at a good level. And in Mexico, where the recovery from the weaker levels has continued already quite some time, The market seems to have stabilized to the recovered level. In modernization, the market has continued to somewhat grow. And in maintenance, the market is developing well, but the pricing environment is intense also here. Well, that's what is mostly central about North America and then Asia Pacific.
There the markets have been growing, but in new equipment at a slower rate than compared to the exceptionally high growth rate last year. In
China,
the growth has continued, but at a lower rate than last year. As we communicated in April, the quarter 1 market growth was 10 plus percent. And we said about then we said about quarter 2 that the market growth will be between 0% 5%. And this seems to be the case. And what comes to the second half, the message continues to be the same as in April that the growth outside the 45 biggest cities will continue also in second half.
But in the 45 biggest cities, the situation still at the moment is such that apartment buyers are waiting for prices to decline. And we have seen quite a decline already. And we expect that the markets within these 45 biggest cities will start to develop positively by the end of this year. Phil Horchad, naturally will give a comprehensive view of the market development and our progress in China later this morning. In India, the market will continue to grow slightly despite the continued financing constraints.
As such, this is quite, let's say, typical behavior in the Indian market that after a stronger pace, the finance is financing is made more difficult and then it is released typically quite soon and the positive cycle starts again. As we have communicated earlier, it is estimated that the speed of urbanization will be doubling will be double during the next 15 years in India than compared to the previous 15 years. So India is and will be a very interesting market. In Australia, the markets are declining due to longer lead times in decision making because of the weaker weakened economy. And in Southeast Asia, the growth has continued.
In modernization, the market is declining in the biggest has been declining in the biggest modernization market in Asia Pacific, which is Australia. And hence, the overall market development has now been flat, whereas in maintenance, the market development has been has continued to be very strong in Asia Pacific. So this about market development this year so far and then market outlook. And this is exactly the same as what we said in April. In the new vehicle market, we expect that growth will continue in Asia Pacific, but significantly lower rate than in 2011.
And we continue to see some uncertainty to the related to the development in the second half of the year. The markets in certain North Europe are expected to remain at remain relatively stable or decline slightly and the markets in South Europe are expected to decline from an already weak level. The markets in North America is expected to continue to gradually recover from a low level. In modernization, we expect that the markets will be at about the same level as in 2011 or grow slightly. And in maintenance, we are we expect that Mats will continue to develop well.
And also the business outlook is exactly well, it is the same that where we upgraded it to in late April. It according to this, we estimate that sales will grow 10% to 15% at comparable exchange rates as compared to 2011. And the operating income will be within the range of €750,000,000 to €800,000,000 assuming that the translation exchange rates don't materially deviate from the situation at the beginning of 2012. Now we have as I see 8 minutes at this stage to your questions.
Thank you, Matti. And please do wait for the microphone because before you ask your question because we have the webcast so that everybody on the lines can hear your question as well. We have 2 microphones at the back. So please lift your hand if you want to ask a question.
Thank you. This is Antti Suttelin from Danske Markets. A question on China. If you look at the recent data points, we note that those data points have been indicating falling demand from the construction industry. So I wonder what is the basis for you saying that or basis for you estimating that growth will continue in China this year?
If we look at
the building start based
on The point is that I did not say that. But later when Bill Orchard sorry Bill Johnson will tell much more about China, he will say that our full year estimate regarding the China market growth is positive. And he will also say the arguments why. And we have as I mentioned, we have to see China not as let's say single country, but as a combination of different regions. And Bill will give so much information related to this that I will not let's say take his messages at the moment.
Also we have to remember that the Chinese government is now all the time taking actions to change the cycle to a positive cycle in the real estate. The real last decision was yesterday when the interest rates were lower by 0.2% to 5%.
Okay. Thank you. And let's wait for William. But just
as a note, I can see from
the slide that you say that China continued growth this year, albeit as lower growth rate.
Okay. I'm sorry. You were right.
Katri, I think there was a question. Elena wanted to ask a question here.
Yes. Hello. This might go into the same category. I have a question on China as well. But about the 45 largest cities versus the cities or the market outside those cities, could you quantify what kind of addressable market you're looking at if you look at the 4 to 5 biggest cities versus the rest?
It's about half and half.
Okay. Thank you.
But please we will have some we will get you will get so much information out of China later today that you can ask also from myself. No problem with that, but if you have other questions now maybe that is an opportunity.
This is Tom Skouman from Handelsbanken. A non China question. You have not really discussed your long term targets, which is quite typical of Capital Markets Day, but I assume they are reiterated. And I just wonder, is it possible to continue to improve the working capital rotation? And how come that you don't have a firmer dividend policy, given you have such a strong balance sheet and a great cash flow outlook most likely the next couple of years as well?
Okay. We reiterate our long term targets and Henrik will have that as a starting point in his presentation later today. And he will tell us a lot about the balance sheet and our thinking there. What comes to the dividend policy,
it
relates to our whole, let's say, flexible approach that we are working very hard at KONE in order to provide a good total shareholder value. And our balance sheet has been very strong. We have been doing relatively well also in difficult times. We had higher dividends that this year than earlier. But here we have this kind of flexibility, which I consider as very good for all.
But just a bit of a follow-up on that. Is it possible to do any moves between the top 4 players in elevators technically, just if you would ask the European Union competition authorities? Is it possible? Or can we only see smaller kind of transaction within this industry in the future?
As we have said always during the last few years, it is possible. That is what we believe regarding what comes to the European Union policies, I think it
is.
Thank you. Katri?
Hi, it's Ed from Swedbank. You're describing the modernization market both all over Europe as either stable or declining, does this mean that the SNEL potential is not materializing? Is this about the weak overall economic environment? Or do you think something else there as well?
Yes. Regarding Central Northern Europe, I will tell about Snell, of course, Snell e spring potential. But especially in Southern Europe, we see very clearly the impact of the weak economy and uncertain economy and the unemployment levels and all of this also in modernization and also in some of the countries in Central and Northern Europe. Just to remind you that how the modernization market has market size has developed during the last few years, modernization market had a good growth of about 10% according to our estimates before the start of recession. And then in 2,009, the modernization market went down by about 5%.
And then 2010, 2011, it has been roughly flat. And as we estimate now and have estimated all the time this year, this year will be flat or slight improvement.
Thanks.
Good morning. It's Glenn Liddy from JPMorgan. You gave some interesting comments about the development trends in each region. You give us an idea of what's happening pricing for new equipment? You gave it mostly for maintenance, but pricing in new equipment and also pricing in China.
I mean, you say you talk about the growth, but not the pricing environment in Asia generally. Okay.
Very good. Very good. So first of all, the pricing environment continues to be equally intense than what it has been. As we have said is that we have been already for quite some time in a very active phase of developing our pricing competencies and at the same time our product competitiveness has been good. So this means that we have been able to get price increases through during this year better than what was the case in the second half of last year and both in China as in many other markets several other markets our prices have increased.
Okay. Thank you.
Now I think that I have spent my time this time and I ask or do you ask him to continue? Thank you.
Yes. Thank you, Matti. In fact, before we let Heiki present and talk about the new elevator offering, we will watch a short video on this new global offering of ours. The video's duration is 4 minutes. So please sit back and enjoy.
What does the elevator of the future look like? To find out, we've listened closely to our customers, analyzed every single element of the revolutionary CONNECT Monof space elevator solution, taken it back to the drawing board and recreated it so that it's geared up for the future. Everything we did best, now done even better. Better echo efficiency, better ride comfort, better design. We've always been a pioneer in delivering eco efficient elevator solutions.
And now we've taken eco efficiency to even greater heights. The new KONE Monospace is now up to 35% more energy efficient. At is now up to 35% more energy efficient. At its core is the completely redesigned Kone EcoDisc hoisting machine. The innovative new copper winding arrangement helps to minimize the amount of energy lost as heat.
By combining the highly efficient KONNET Echo Disc with our regenerative drive, you can save even more energy. The drive captures elevator braking energy and makes it available for immediate reuse around the building. Inside the car, LED lighting uses up to 80% less energy than halogen lighting. We've also developed more advanced standby solutions that power off the elevator when it's not in use, which cuts energy consumption even further. KONE was the 1st elevator company to achieve A Class Energy Efficiency Certification for its volume elevator range.
All buildings deserve an elevator that delivers excellent ride comfort and passenger experience with every trip. We analyze and test every single elevator before we hand it over to make sure that it meets our strict ride comfort and quality standards. The all new Kone EcoDisc generates less motor vibration and noise, which means an even smoother, quieter ride for passengers as well as less disturbance for people in the building. Noise and vibration levels are further reduced with the new car structure, centralized hoisting system, pulley assembly and renewed braking system. As the Kone EcoDisc is now even more compact, it can be installed in elevator shafts with smaller dimensions.
It also leaves more room for a bigger elevator car. Delivering the perfect passenger experience requires an inspiring user friendly environment. With the new KONE design collection, you can create an elevator that really stands out when you step in. To make selection easy, there are over 50 complete elevator designs to choose from. There are also hundreds of materials, accessories and lighting options, giving you millions of possible combinations.
The only limit is your imagination. Combine innovative surface finishes, eye catching patterns and bold fresh colors to create a unique look and feel. Complement your design with the perfect choice of lighting and add the finishing touches with our customizable user friendly signalization. Whatever combination you choose, KONE's award winning design offering helps you create a consistent look and feel throughout your building, from lobby to the elevators and beyond. The new KONE Monospace is what the elevator of the future looks like.
It's the evolution, a revolutionary elevator solution, ready to meet the demands of the buildings and cities of tomorrow. It takes everything we do best, from award winning design and superb ride comfort to best in class echo efficiency. And makes it even better.
All right. So good morning and I have pleasure to introduce this KONE latest development result in achievements. And this video is telling the key message. We are now developing completely new volume range elevator offering. And also it's very exciting to me to present this because I have been long time in KONE and half of my career has been in R and D and technology.
So I still feel that this is really the celebration of the new babies. So that is going to be my story in next 30 minutes. And after that there will be a good time for discussions and comments and questions. So I hope to so I can be able to carry you now through this good story. So as we all know, KONE has been a very good company to do on technology.
We have been in pioneer to make the elevator technology in the next step. Everyone remembers this Massey Romanes elevator technology what KONE was making 1st in the industry. And we have done a lot of new things over the years and we are systematically developing our product competitiveness. So it's a question what is a good product? What does it look like?
What are the customers' and users' expectation needs today? And more important what are their needs and expectations tomorrow? To answer for those kind of questions, we organized some years ago several customer focus groups in all key markets and we got a very good list, very concrete list of the answer of what customers are looking for the future. At the same time, we analyzed our existing technologies, existing components, existing products. What we can do on those to really make those things even better.
So this story has been like a learning curve for whole our development teams. And now this competitiveness is improving. But so question is what is now coming out on this all this exercise? So we have now launched 2 new platforms, the Monospace platform and MiniSpace platform. The Monospace platform is targeting for the market segment base no need for machine room.
And then the mini space platform is targeting the market base small machine room is still applicable. And then this is the global release where we are really able to cover all the market needs and market areas. And then we are now able to apply the same components both those platforms. So it's really like a big step for our technology development point of view. So what are those key elements which will make these platforms as a future of the elevator industry?
There are 3 very clear reasons. First one is this eco better, eco efficiency. I will go through that in more detail. 2nd one is better ride comfort. And third one is this better design.
All those three elements are valid for all our customer groups market areas. So they are valid globally. And we have done now these things that we have been able to combine those all elements with the same design, same product. So we have done even the best has been even done even better. So I will now go through what this offering is all about, what are those elements and more details in understanding about this what is behind those elements.
And then I will comment what are those what these elements would mean for our product competitiveness. So these new product platforms are going to cover 60% of our elevator volume in years to come and it will cover about 90% of our full replacement product offering. It will cover as I mentioned the machine room less and small machine room market and then it will be able to apply on the residential segment in office, in hotel and retail. So it's very wide coverage in that respect. These new products are called in European market Monospace 500 and in Asia Pacific KoneEn Monospace and KoneEn Minispace.
It's based on the harmonized modular components and platforms. So we are using the same technologies in all over the world. It includes the new machine. I will talk about that a little bit later, hoisting mechanics, car, sling, signalization, visual design. And this is now launch is happening so that we will start the sales activity second half of this year.
And early next year, it will be starting in North America. So this is the single biggest release in 16 years, if you look at the whole scope of this release. So we have been developing the eco efficiency many years. So thanks for Hana Ussitalo and his team or her team, we have been able to do a great step already in the earlier. So KONE was the first company who was introduced in the A Class Eco Efficiency 20 10 in elevator industry.
And since that we have now been able to improve the eco efficiency even further. So it's now 35% better than 20.10 level. And now we are also able to apply this A Class energy efficiency in full entire volume range, 1st in the industry. And then if you look a little bit later what this energy efficiency means. So here you can see the European case where we have 2010, it was the 1st in the industry we have leadership.
It's we have been able to reduce today 35% from 2010 level. So major improvement step on this eco efficiency in the European case. Here are 2 cases from Asia. So in the left hand side there is this Asian N mono space where we have been able to reduce 28% from 2010 level. And in this N mini space we have been able to reduce 20%.
And we have to remember that I want to remind that all these measurements are based on the 3rd party measurements in customer premises. They are not in R and D laboratory test facilities. They are really done in looking what is the reality in the marketplace. What are those elements on this eco efficiency? First one is that we have totally new EcoDisc machine.
There's over 20 patents on this machine. We have now been able to develop the motor what have the minimum losses on the windings and the electricity. And then we have done the centric hoisting using this machine concept that every element what we can eliminate on the friction between the car and the guide rails is now minimized. So the friction means always source of the energy consumption and that is now minimized. Then other one is this regenerated drive, what has been used normally in the mid and high rise elevators, high speed elevators, now we have been able to apply that fully on our volume range.
When elevator is accelerating, it will take consumes the energy, it takes the energy. When elevator is decelerating and stopping, it will generate the energy. Now we are pushing back this generated energy to the power supply network. And that will mean that it's about up to 35% better efficiency comparing the case where there is not regenerated ride. So that is a big step on this overall improvement.
3rd one is this lighting system. So we are now applying the LED lighting full range that we are able to reduce the energy consumption comparing halogen lighting about 80%. And then we have this advanced standby mode system, which means that when elevator is standing like night times and during the days and there is no passengers entering. So all the electrical components like door operators, controllers, signalization, lighting, they will go into standby mode. So they are we are minimizing the energy consumption on that way.
So all these four elements are behind this up to 35% or up to 28% or up to 20% reduction on our monospace, minispace energy consumption. This is the picture about this new machine. So as I mentioned, it's totally new. There's a lot of important benefits. Energy efficiency is brilliant.
It's silent. It takes less space. It's light. The weight is minimized. So it's easy to install and so on.
So many, many elements. And those who wants to visit on this our afternoon session, you can see you can be able to see these things on real life. The second big theme on this product new product is our Ride Comfort. The Ride Comfort is what the busers passengers will feel about on the moving on the building and the feelings are part of that what kind of value and quality the building will reflect. So Ride Comfort is very essential.
So there's 3 elements on this right comfort how to look at. The first one what is not normally coming into mind that what kind of noise is going through the walls to the next rooms, bedrooms, living rooms on the building. How we will eliminate that elevator is not causing any disturbance on the tenants on the building. That is the one. Second one is this user experience on the landing and inside the car.
The vibrations, noise levels everything is let's say making as smooth as possible and low as possible. And third one is that how we ensure that every installation will fulfill our hard requirements on the specification on the noise or specification on the vibration. So those three elements are the key what we have now focused on. So how we have done it? One is this the hoisting system as overall.
We have now this together this new machine and ride. We are able to have a very accurate smooth start and stop and stopping accuracy and smooth ride. So there's a minimum source for any vibration inside the car. Then there is this new hoisting principle. As I mentioned that we have the Centric hoisting system that we are minimizing the friction.
The friction is a source of the energy consumption, yes, but it's also a source for noise and vibration. So we are minimizing the source or the vibration by making very accurate centric hoisting. And then those components like rotating pulleys, we have been able to do the isolation that every noise source or vibration source is now minimized. That is the very big thing as we have done to run-in the new platform. It will be every elevator is taking those improvements now in the product in the next level.
3rd element is very important. What is the touch and feel? How the users are feeling inside the car? Now we have very how to say what Vopto emphasizes to make a rigid car, what will make a touch and feel impression in the good level. And then this installation, I say that it is the big part of the whole quality of the elevator.
Now we have dedicated tools to measure every installation before handover. And if there would be any deviation from our specification, we will correct or make that we are always we will promise the quality what we are specifying. And that is happening in all our installations. That is very fundamental improvement from customer perspective. Then 3rd theme, what is this visual design?
So the visual design has been also a very exciting story. We have developed the design over the years. KONE design team has won a couple of awards already in the earlier years. And I can say that this new design is absolutely best in the industry. I can be proud to say that these things what we can see, but you can see some parts also in this room, but later, I think it's really impressive.
And what will make this design to be so great to our customers? So it's not questionable we are making something what is fancy or unique. We have really analyzed our customers' expectation what are their needs. So we have very wide design collections, which will fulfill the expectation in different cultures, in different building types and taking into account the trends what customers are seeing. So we have wide design collection up to more than 50 design versions where customer can select quite straightforward way how this design would fit on his or her building.
Second one, there is always customers who wants to make the very, very own way. And on that purpose, we have now the widest collection of all materials and accessories, lighting systems where customer can make the tailor made own design. And we have this CAD system easy to use CAD system for architects and designers who can see immediately what is the design solution for that. Then third element is the new materials. We have really totally new material what we are now able to apply in elevators.
We have a lot of new patterns. You can see some of these also in here in the break time. So these are really creating the very new taste what is this elevator can look like in living building. Then we have this design. Design has got already recognition outside this industry.
We have got 4 red dot awards for this design collection simulation. And this red dot award is the biggest international competition where over 1800 companies were participating from 55 countries. And KONE Design was able to get 4 awards on this. I think this is really good recognition for our design team. Then and that is the picture what I mentioned this car design that every customer can have an online tool where she or he can select what kind of lighting, what kind of wall panels, finishing patterns, what kind of walls and ceilings and floors can be put on his case.
So that is helping our customers very much on this design optimization. Then there's some examples about the design collections about the car design and the digitalization. There's plenty of, plenty of different kind of variation on these. Then the three elements, eco efficiency and ride comfort, visual design, they are valid for all customer groups around the world. They are how to say that these are the drivers in every market, every customer group.
Then there's requirements in specific customer segments. For example, this full replacement market in Europe, this base efficiency is very vital part of that market requirement. So we have now been able to also apply that this new product will cover these space efficiency requirements in a very good way. And if you look at the Europe market, there's a 2,500,000 elevators, which are more than 25 years old. And this market demand for space efficient elevators is growing.
And this new mono space as well as it's giving this kind of eco efficiency, right comfort design improvements, it will also be able to now cover 80% of existing European elevator shaft sizes. So we are able to apply this product in the existing shaft, shaft 80% on the cases and then we can be able to put a bigger car on the existing shaft sizes. That is a very big driver for future. In cases where we have a very, very difficult space requirements, we are using our existing grade products like Maxi Space and those. But this new product is going to be as a platform to cover the major part of the whole market need.
So these are let's say the elements on behind those, but what that is all about? What that would mean for our product competitiveness? Is it just that it's nice to have or is it really valuable and important? So I want to keep this explanation about using this picture. So this picture is our own view about where we are.
So these dotted lines are our existing position and I want to remind that our product portfolio today is good. It's great in many, many, many ways. But as I said, we can always look at how we can do it better. We are already today leader on the eco efficiency, but because of these new great improvements, we are able to make it even stronger. So we are clearly saying our leadership in the eco efficiency will be in the market in the top.
Then concerning the visual design and ride comfort. Based on our understanding and discussion with customers, these new elements what we are now launching are going to put KONE as a leadership also in these two areas from product performance point of view. Then the space efficiency is important and we are really making a good improvement there. And at least we are in the bar if we compare the best possible alternatives in the marketplace. We are now really creating value.
We are minimizing our customers' total cost and that's why we are also improving our life cycle value for our customers. And installation has been always our strength. And now these improvements are even making better. So these are the like the big picture. Then if you look from customer angle, the good great products are good, but it's not enough.
The customers are expecting solutions. That is very clear. They are looking the solution which will help them to make the right decision and design on the plan billing planning phase. They are looking the solution which will make the construction time, construction phase better and then we will look how we will use the product in the normal use. So we have put a lot of focus to develop this better customer service and helping our customers in all these phases.
We have now very good support systems tools for our architects, our developers, builders. So we have traffic calculation tools where customers can simulate easily the building traffic flow. We have an energy calculation tool. They can calculate in each case what is the energy consumption during the lifetime, during the annual level, what are the costs and benefits. We have design tools where customer can really online select their own design alternatives.
They can choose different alternatives. And then we have this building information model what is helping our architects to put the elevators easily in their building plans in their building design drawings. Then in the installation construction time, we have simplified the building interface further. We have been already working that in many years and we have now even improved that that make the building construction time easy and we don't have any difficult interfaces between elevator and the construction company. Then we have developed our installation processes that we are taking into account construction constraints on the site to ensure that we are always in the quality, we are punctual, we have taken into account temporal electrification on the buildings and so on and so on.
And in handover and there we are we currently the quality that we are really able to say that we are delivering what we are promising every case. So these are the big things on also from top of the products. But if you look now this picture, so these three elements, I repeat, eco efficiency, ride comp design, they are valid for all markets, all segments. Then the base efficiency is important in dedicated segments like food replacement in Europe is very important. Then we have this process support tools to make our customers' processes efficient, easy.
And then we have these global products, global components, technologies, we have been able to apply in full range. That sounds very clear. But being a long time in this design world, R and D and technology, I can tell that this challenge has been big to put all these requirements in the same product platform, fulfill those requirements and I can say that we have even exceeded our targets and to do those in cost competitive way. And I think this is really the things and also that we are able to apply all the different market requirements on this product portfolio. That's why what we said in the beginning that this is the single biggest product introduction in 16 years.
That is the point. We are now able to combine so many improvements in the one harmonized product portfolio that we are able to really make the step improvement on the competitiveness on the products. And because of that, in my eyes, this is the big step for KONE to improve our good great products in the further and this would be in our eyes the elevator solution for the future in the volume range market segments. And of course, we believe that this is also the foundation where we can really improve our competitiveness further on. So that is really my point that this is not one item.
This is combination of the elements which will make our competitiveness better. So thank you very much all this your attention. And I think now we have a good time to really have questions and comments. Please.
Yes. Thank you, Heike. So the same principle applies. Please wait for the microphone.
Michael Harkmann at HSBC. Two questions. First, if you could give us a more granular picture of the rollout pattern for the product. So you already mentioned you're starting in Europe then you go to the U. S.
How long will it take to in the different regions to roll out the product?
And then the other one is
the cost benefit curve. How do we have to think about the cost and the benefit of the rollout in terms of product development cost, training cost for the salespeople and for the technicians and so on?
Good. Very good questions. First about this, how we are now ramp up and rollout this. So we have now released that internally in Europe and Asia. So it will cover all the other markets this year.
North America will start early next year. So we have country Pacific implementation plans. So they are going to happen in second half of the year where we will promote those locally with our local customers and we will start to active sales early this autumn. And of course, if you look at the time span what that would mean if we are if the architects and developers are looking at new projects they are of course, making the big plan first and they are asking the different suppliers like elevator suppliers to tender. And from tender to the order is typically in European case, it's about 3 months.
From order to the installation it's typically 6 months. It can be 9 months. But let's say so before these real volumes will go up it will take easily let's say from tender phase to the installation phase about 6 to 9 months. So that is, let's say, the European view. In Asia and China, basically, this is much more faster.
Then coming back on this GretaNet, what that would mean for benefit and cost. So I repeat what I said about this that we are now harmonizing the KONE technology portfolio to cover both machine room and machine room as elevator by using the same components globally. And of course, this will take time until these new platforms are fully replacing our existing products. And so that way, it will have a certain transition, how to say, work and impact. But at the end of the day, it will be simplifying our total product portfolio, our delivery chain processes, our training processes, our maintenance on the maintain our existing product technologies and so on.
So it will be in mid- and long term a very big improvement for total cost and value. So that's my answer.
Thank you.
Hi. Rudolf Freyja from Goldman. Can you expand a bit on that 60% of new equipment that's being covered by this rollout, how many product families does that replace?
Okay. Very good.
That's the first one.
I'll kind
of run through all of them. The remaining 40%, can you say what that is? Is that basically affordable housing in China? And then the final question is when it comes to new equipment, I can understand how you improve your product portfolio and your cost base. But when you go to maintenance, this actually makes it more complex for your engineers.
Suddenly they have another product to service. Can you talk a bit about how that works through how that becomes a benefit?
Okay. Okay. So how this new product is going to cover our existing portfolio? And first, let's look from the total. So we are now covering all geographical market areas, North America, Europe, Asia.
Then we are covering our key market segments, residential segment, office, hotel in the low mid rise area and then we are covering partly the retail sector. So it's a very big portion on our customer base. So it might be better to say what are not covered in this platform on this stage. The affordable housing, what we have implemented last year, we have very competitive, very standard good offering on that area. That is not in the scope at the moment.
And of course, we have this more demanding office segment, high rise business and then escalator and medical sector and those. So we have still, of course, those areas where we have different requirements. But this technology, of course, can also be applied partly on those products. So in that way, we will get the benefit also on the in the component level in the wide, wide range. But this 60% was, let's say, looking from the customer market coverage point of view.
And we have to remember that it will take years until this, let's say, 60% is going to be covering on the total market. Right. And then the other part of what the question was maintenance. Right exactly. That is our total why we are making this harmonization is really simplifying our life cycle cost of our product portfolio in the maintenance, in the modernization and spare parts.
So of course, now when we have the existing product and this new product is going to gradually cover those in this transition period, we can see that there is some, how to say, new spare parts and this kind of needs. But in the mid and long term that will automatically lead us to the best much more better position in the service business point of view that our maintenance base is going to be more, how to say, harmonized in this new delivery product point of view. So it will simplify our maintenance service business in the longer term. But you are right, in the short term, it can have certain, let's say, transition time, cost and efforts what are there. But that is happening anyhow when we introduced the new products.
But this is of course the big thing for us to have a so wide transition or wide coverage at the same time.
Hi. It's Efrain from Swedbank again. Two questions if I may. First from the customer viewpoint, what's the importance of electricity saving in terms of operating costs? If we talk about 500 kilowatt hour saving I.
E. 0.5 megawatt hours, we talk about a few tens of euros. How important is that?
Yes. That is the absolutely right question and every customer is asking, please tell what that would mean. And that's why we have this energy calculation tool where customer can calculate his case exactly in what that would mean in practice. I will keep some kind of simplified case because that is maybe helping everyone of us to understand. So if you will take today the Central Europe country, we will take the typical residential elevator case weighs 630 kilo 1 meter per second 4 floors 50,000 or 100,000 staff per year what is very typical low duty case.
So if you look this new product and if you compare average market average product in the market in Central Europe and we will take into account the energy cost on this country, we can calculate that during the lifetime of the product, the energy saving benefits based on the new product what we are now telling today is paying back the whole elevator price. That will keep the point. It's remarkable. And also we have to remember the energy costs are not I don't believe they are going downwards. They are more upwards.
So I think these benefits are going to be very remarkable. So you can I'm more than pleased to show how this is calculated in whatever case we want, whatever country we want. So it's really valuable. But you are right that if you count short term annual or monthly, it's we speak about €500,000 or X €100, it's not the big thing. But if you look at lifetime, it will be a major, major thing.
But I would say that this energy efficiency is not the option. It's mandatory. It's a prerequisite to be in the companies who are going to do this is going to be leading on the market.
Okay. Thank you. And then on top of that, how does the new product line perform versus competition
in terms of energy consumption?
So we have done several hundreds of measurements in the marketplace. But of course, we don't want to give any comments about our competitors. So we are focusing what we are able to do ourselves, what we are able to improve ourselves and we can be really but as I said and said already, we are market leader today and this is even going to be strengthening our position in the Eco Heavy CMC.
Okay. Thanks.
Hello. Elena Ryotter from ABU Bank. How is the pricing of these new products versus what you have in the market currently?
So of course, the market pricing is very much depends on the local situation, local segments. And of course, when we look at if this product will as we really see will deliver we will keep for our customers better value. We will make the more valuable billing. We will make the more how to say quality in the billing and we use experience in the billing. I'm sure that this has a positive impact for the pricing.
But I don't want to give any definite numbers or speculate, but it will be of course very much up to local market situation. But I'm very optimistic.
Thank you.
Do we have further questions to Hague at this stage? Patrick Rudolf had a question here.
Sorry, just one more links a bit on the cost base. So if you standardize this across the globe, your cost price for the various regions, is it quite comparable?
Cost price?
Yes. So basically what it costs you to create one of these cars and install one of these cars. Now that you've standardized the product, is it quite a standard cost for you across the world?
So okay. Then if you look already our existing situation today, so we have a global supply delivery centers. And already today we are using the of course our supply units in optimal way that what is the let's say taking into account the total cost, the currency rate, logistic cost, product cost and so on installation cost. Installation costs are always a local issue. It's a question about the country and the installation things on each area.
And in this new product, I don't see any major change what we are doing already today concerning our supply chain and the cost. Anyhow, we have a supply unit in each continent. We are very much balancing if there's some changes, traffic changes on the between the continents or currencies. We have freedom to select those kind of things. And we have to remember that our product total cost, the major part is coming from our suppliers.
So the supplier our supplier network is very, very important part of the whole, let's say, total cost development. And I'm very pleased to see that our suppliers are really keen and excited to make this as a good step also from their angle to participate on all elements on this in this new product.
Thank you very much Heikki. Now it's time for our first break. There are refreshments served outside of this room. And please note that there are tables we put tables also outside now that the weather is so nice. So you can use the tables outside as well.
However, as a practical remark, do not use please these doors here. These are emergency exits. But the door is on your left side there as emergency exits, but the door is on your left side there at the back of the room where you can enter the outside area. Thank you very much. And let's please be back at half past 10.
Thank you. Okay.
Didn't come. My field is empty as a drum. I don't know why I didn't come. I don't know why
Welcome back. Let's continue right away. Our next presenter is Ari Lehteranta, who is the Head of our Central and North European Business. So without any further introductions, Ari, please.
Good
morning. I will describe the Central and North European market. I will also give you some notes about our performance in that area. And then I will specifically talk about some of the issues that has been touched already this morning on how we implement, what kind of actions we are doing in Central and Northern Europe in order to further develop our business. I will talk about the new equipment business, talk about the maintenance and modernization.
I will then finish with proudly presenting some of our latest references, not only to present the preferences, but also to talk a little bit about what we are doing in the major project segment itself. Central and North Europe area consists of 19 countries, so all the German speaking countries, 5 countries in Eastern Europe, all the English speaking countries, then to Scandinavia, Finland and Baltics. We have in our area about 2,000,000 existing elevators and escalators running. And in the new equipment, we represent about half of the EMEA area's volumes. If you look at the new equipment and the size of the markets, we can see here clearly that Germany is the biggest one.
But then it's followed by the kind of 2nd tier markets U. K, Switzerland, Poland, Austria and then Netherlands, Sweden, Czech Republic and so on. The positive thing about our new equipment market is that the codes and regulations are pretty equal. So we don't have too big differences in our countries. There are differences then in the segment side, if you think about the weight of the different segments in different markets.
For example, U. K. Has a very strong weight coming from the major projects and retail segments. And then in the northern part of our area, we have a very strong residential focus. In the maintenance market, again Germany here clearly the biggest in terms of units followed by U.
K, Switzerland, Sweden, Netherlands, Czech Republic. The size of the market in terms of value is then also impacted by the local codes and legislations on how what kind of maintenance and scope needs to be there in place. New York keeping market had a very good development last year. We have been estimating that the earlier part of this year including now April and May time frame have been stable or in slight decline in our area. We have many countries who have been going through a very nice growth Austria, Germany, Switzerland and Sweden, for example, and they have now stabilized in a good level and still continue some of them continuing to grow.
But then on the other hand, we have had some delays on the decisions in Netherlands, some decline. And then of course, we have countries like Ireland in our area, which have been weak already for quite some time. East Europe is a little bit mixed. We have countries where we have had good development such as Poland and Czech Republic, but then smaller ones, Hungarian, Slovenia having some challenges. We grew our market share last year in our area.
One of the main reasons was our good success in major project segments that was developing very well especially in U. K. As many of you have seen. And also the residential segments where we are very competitive and that segment was developing very well last year. Maintenance market continues to develop steadily grows steadily.
There is the price competition in all segments. There's no too big difference in the segment split. We are in a good position because of our good competitiveness in the new equipment market. We are able to convert with a very good rate our customers new equipment customers for maintenance. And then we have also a very good retention rate which then tells about our competitiveness in the maintenance.
So we are able to keep when we get our customers. The good thing about the constant growth that we have had is that our competencies in maintaining and addressing the 3rd party equipment is constantly also growing, makes it easier to continue also growing in that area. Modernization market as such is the most difficult one to estimate. Maybe it's good to remind that what modernization market is. So we have therefore main segments.
We have the repairs. So we have in our area over 50% of clearly over 50% of the 2,000,000 units are already over 20 years. So there's a lot of repairs needed. But then we have the modernization for various different reasons. And then we have full replacement segment where we are then replacing the whole elevator or escalator units.
And then we have a specific segment which is called the buildings existing buildings which don't have yet elevators and elevator shafts. So we are delivering both. So the market have been strong in Sweden, especially strong in Sweden. And then Austria has started to grow this year, the market because of the snail boost. On the other hand, Netherlands market have been declining.
Segment wise, strongest growth has been in leisure and education segment, medical segment and then multi use buildings, but also office segment has started to grow this year. KONE market share last year slightly grew. Then going for these 3 different businesses and what we are doing. And then I start with the new equipment and I'll continue from Heikki's presentation and tell you what is the impact of this new product for our area. Several messages on this slide.
So first of all, it's good to note that this new product offering covers most of our segments in a great extent. So we truly have a big impact in our volumes coming from this new offering in our area. Not only it covers most of the segments, but it covers the biggest ones to very extensively. So the residential and office segments are the biggest in our area, clearly the biggest segments and it has a very nice coverage in this area. Not only that, but it also covers those segments very well, which are which we feel that are the most positive in terms of future prospects.
So these are the segments that we see that are growing or are going to be stable. Segments like public transportation are suffering because of the governmental financial challenges. This offering now for us when we think about what our customers and their customers, the end users are demanding in all of these segments, all of these areas that we are bringing in are important. Of course, depending on the segment, the benefits the kind of importance of the benefits varies a bit. For hotel segment, for example, the right comfort and design are clearly very important.
For modernization, definitely the space efficiency is going to be the most important. We have almost a full coverage or impact coming from this platform also on the modernization in full specifically on the on the modernization in full specifically on the full replacement area. So we are extremely excited. I had my sales guys in training here 1 or 2 weeks ago and you could clearly feel that we are in a situation where our customers they trust us. They like the offering we have today and now we are able to bring this new offering under the discussion table.
So it feels very good. So we are now going through the ramp up. There was a question about the ramp up. We are now training our sales people, our installation and maintenance people. We are ramping up the tools and sales capabilities, translating the documentation and organizing the customer launch events.
As said, we start tendering and selling in autumn, early autumn time and we went through already some of the phases that from the tenders to the actual orders, it takes certain months. And then we start manufacturing, we start shipping, we start the actual construction and installation. There is a certain construction time usage typically and then handing over to the maintenance. So volume wise, we are ramping up the impact next year, but full volume benefits in terms of deliveries will take place 2014 with full scope at that time. Okay.
Then moving on to modernization. Here I'm going to talk about the growth. Modernization is a market where we have many drivers to provide us good growth opportunities. As I said, one of the drivers is this existing installed base. Over nearly over 50% are very old or even older elevators.
Some of you mentioned just replacing 80 years elevators, quite rare to have that old elevators. They must have been modernized many times in the past. But truly there are some very old elevators existing. There was a question about the Snell and I will come back to that in a while. That's one of the drivers.
So the safety norms are pushing in some of the countries lots of activities in our customer base. But then there are other big drivers as well. For example, aging population. There are several impacts coming from the aging population. One of them is that the accessibility needs to be improved.
The safety needs to be improved. But then also, for example, this specific segment of existing buildings without lifts that is growing because we need to be able to stay in our homes longer than we have been staying in the past. Reliability also needs to be even stronger in the future because of the population and age. But then many other things like for example brand image of the office buildings when you are having a new office being built close to you, you need to be able to modernize and increase the brand of your own building and one of the best ways is to modernize the elevators. But then the eco efficiency, environmental friendliness is pushing for modernization.
All this makes it a little bit more difficult really to kind of estimate the size of the market in these different segments. We are shooting for growth and one of the best ways to start the growth is to increase the number of opportunities. So we are having lots of new educational campaigns, awareness campaigns with our customers. We are much better utilizing the 3rd party inspection reports to identify the modernization opportunities. On our own maintenance base, we are using elevator condition process to find out the modernization needs and we have developed ways to support our customers on the asset management planning.
And on the 3rd party products, so non KONE customers, we are extending our reach having more customer visits and having better capabilities on addressing the specific requirements. One thing to know about this modernization is that the modernization is a difficult business. If you just shoot for growth because the environment includes very old elevators, it includes components that don't exist anymore, products delivered by suppliers that don't exist anymore, documentation missing, no drawings and so on. It is quite complex. And if you just shoot for growth, surely if you don't manage it cleverly, you are going to end up in problems in terms of profitability.
What we want to do is that when we get these opportunities, we at the same time increase the hit rate. So in order to be able to do this, you need to be able to identify from those opportunities better what matches your capabilities and your offer. You need to be able to spend and visit spend more time with customers, visit them more often and then consult them better than in the past. This way we are able to address the opportunities without kind of dramatically increased effort of addressing that. When you are then finally getting a growth in the orders, you don't want to increase your effort to execute the offers in the same ratio.
You want to be able to do it with less and the keyword and thing in this kind of end to end productivity is the industrialization of our offering. Not only we package different types of modernization and repairs as one big package, which is easier to sell tender, but also to install and maintain. But we also train our dedicated installation teams to handle the specific packaged repairs making it very effective. And then of course we do the same for the maintenance. We are creating centralized engineering teams to be able to address the very specific particularly customer specific design and planning work for the modernization.
And then the 4th element where we are working is this product offering. We talked already how big impact we now see coming from this new product family for the full replacement, but then we are working constantly on developing our offering for escalator modernization for existing building lifts segment and then for this new packages and components, including also the high rise modernization and new destination control offering. So this is what we are doing to boost the business, grow the business, however, keeping the effort and risk on a good level. Few words about the Snell norms and the kind of recent changes. So Sweden has had a very good growth in the past few years.
The Snell deadline is now at the end of this year. So we see now that the impact will gradually now start decreasing in Sweden, but it will continue of course over the deadline as well. In Scandinavian area, this decline is compensated by the growth that we see in the Denmark and Norway, which are nicely now growing. In Austria, the different states have different time schedules. Vienna state is now the first one having the deadline at the end of this year and that's why we see now the growth taking place in Austria.
We will see how big the impact in Austria will be later next year when the inspections will be done by the TUV organization for those units who have not been modernized and then what will be the force, what will be the impact of, for example, the insurance companies, we will see it then, but clearly a positive one already. In Switzerland, the situation is about the same. So we will see next year growth starting to take place in Switzerland. Moving on next to maintenance. In maintenance, I have selected productivity as a key theme for this session.
Maintenance as I said, the maintenance space is constantly growing. Maintenance even though the fundamentals of the maintenance are quite simple, the management of the maintenance business and management of the productivity is quite challenging. You have a very high workforce, which is gathered to the wide geographical area. You have very many different types of activities and levers that you need to work on. So key things here are to, for example, develop your service leadership, the management, develop the competence of your people and develop further the processes and tools that you have.
We have a good base, grow constantly growing because of the conversions, because of the retentions. We do acquisitions, not however kind of major ones in the past. We are also focusing on providing the better service for our customers by upgrading our contracts with them from the basic contracts to a more comprehensive contracts so that we can ensure even a better quality and safety of the equipment that they have. And then moving kind of from the value and the base itself to the productivity side, one of the latest things that we have developed now is moving from the kind of monthly management cycle of your business performance to the weekly management cycle. Being able to take all the different measures and then being able to have for individual technicians their own targets and be able to get the kind of actual achievements on a weekly basis.
Naturally, we will continue developing our pricing excellence. Pricing is not only related to the new equipment, but also in the same range for maintenance, continue developing our tools, processes and then naturally the service mindset of our organization. In the productivity development, you need to be able to control the hours of your workforce. Make sure that the hours are correct as correct and then they are as efficient as possible. So you want to reduce the hours that go are so called indirect hours.
This includes, for example, travel time and so on. Density naturally is an important booster of the productivity. But then with the field mobility systems modular based maintenance concept, which not only kind of improves the quality of the service, but provides you the capability to measure the efficiency of each of the fitters. Callout rate, we have had a constant good development of reducing the callout rate. Callouts are always kind of additional extra hours that is away from the, for example, service repairs or modular based maintenance.
We have now a full fledged implementation of our field mobility system. Our maintenance people are very happy for the system at the moment. That provides us several benefits on the productivity, not only in the kind of hours, but also on the material consumption. Material consumption is the 2nd key area of the productivity. You want to optimize your stocks.
You want to optimize the each of the van that the technicians are driving, so that the material consumption is very specific for the units that they are serving. This way we are able to reduce the obsolescence and unnecessary waste of materials. This will result to the reduced cost, maintenance business. Okay. Concluding my part by describing some of the latest references.
Several of you are coming from U. K. So I have decided to show you some of the London references. This is anyway the biggest major project market in my area chart. You have seen this growing now and then it's coming now for opening.
5th July is the opening time for public for this great building. It's the tallest building in Europe when it's opening. It's over 300 meters. And so Piano is the architect developed by Cellar Properties together with Qatari Investments. Specific features from our side in this particular preference includes a heavy use of jump lift concept, which is our innovation to speed up drastically the implementation time, not only implementation time of the elevators, but the whole construction time.
As this is coming now for completion, then there are 2 other great buildings that are now you see them going up at the moment. Richard Rogers designed 122 Leadenhall, nickname is Cheese Crater. You can understand why. We'll be open 2014. Clearly over 200 meters as well.
It doesn't look so high, but it is actually one of the highest buildings in London as well developed by British Land. And then 20 Venture Street Land Securities and Canary Wharf Fielding originally designed for 200 meters now reduced to 160 because of the impact to St Paul's Cathedral, but still high building nickname walkie talkie. Again, no wonder why will be opened at about the same time. Raffa Finoli is the architect for this building. We have had great success in London.
And all of these buildings here, the numbered buildings are Kone References. You can see here the highest building at the center of the picture is Pinnacle, which has been now canceled and is subject to the re tendering. And we will of course naturally try to get that one as well. And then the can of ham in front of that is also not constructed. All the others are either completed or in the construction at the moment and you can see that we are having an extremely nice coverage in the London area with our solutions.
Why we have been winning all these projects? Why we are having clearly the biggest market share in London high rise area? Of course, it is because of the products, excellent products not only in our volume range, but also in the high rise range including the designs, capabilities and then the right comfort specific solutions in terms of destination control. But then it's much more than the product. It's also the capability to support the customers in construction.
I mentioned the jump lift already. It's about our capability to plan and simulate the people flow in those buildings, so that the number of subs, number of lifts and the performance waiting times can be reduced. It's about the installation capability. It's the experience. And last but not least, it's about the project management capabilities that we have invested a lot in the past years.
And that's why that's what we are doing in the major project segment to develop our business. With that, I conclude my presentation and introduction to Central and Northern Europe area.
And we welcome questions to Ari about his presentation and area.
Lars Nader from KeyBanc. I have actually one question about the new elevator and you're doing maintenance and refits. Are you allowed to feed back electricity to the grid in most European countries?
It varies depending on the country. You need to be able to now we call to look more technical stuff and Hekki may need to help me. You need to be able to have a kind of good quality electricity. So same sinus curve when you feed it back in several countries, you will not be able to get any saving terms of your meter rotating to the other direction. There are countries where we can do that as well.
And then of course the other natural way is to feed it back to the actual building. So from the buildings, the lift system uses about 2% to 10% of the electricity of the whole building. So typically you can feed it back to the building. But that area is developing constantly when we are having these opportunities to regenerate electricity from the elevator system.
Michael Harkmann, HSBC. On the maintenance business, you were mentioning the 3rd party servicing. So how many of the elevators or what percentage of the elevators that you service is now 3rd party? How much would that have been say 5 years ago? And what is it going to be going forward?
We don't reveal the exact numbers, but I can tell that the number of kind of how big part of the units are KONE units, it's a very small part at the moment. So we have a great opportunity to address the market.
Is the profitability much lower or is there no big difference?
Of course, you have typically customers combine Elevator, so you have a mix. There is a big difference on different products. So we aim to have a good profitability from all of our maintenance space. And that's why we need to develop. We have developed, for example, these 3rd party competence centers.
We are having excellent training capabilities in our area in German training center for all different types of third party products. Typically what you want to do is that you select a product that you target for. You don't again start shooting out and take everything without understanding what your capabilities are. But you need to be able to look at the for example, we start naturally from the bigger volumes of the 3rd party equipment or we may decide to go for the hydraulics knowing that they will be replaced anyway and then later on. So this drives again this kind of select intelligent selectivity of the opportunities.
Thanks. So just had a question about the full replacement within your modernization. What proportion of your modernization revenues actually goes towards full replacement?
Again, it varies a lot in different countries. And it seems to be so that the richer the country is more they do full replacement. And that happens for example in Austria and Switzerland to a great extent also in the Netherlands. But in some of the countries like East Europe, it's more package and then component replacement.
Can you maybe give us a context in terms of how old they are on average? So when you do a full replacement, are they typically 20 years or 30 years or 40 years old?
Full replacement starts to take place after 20 years of
Lyft lifetime.
But as said in some countries people continue to do the replacement in partial steps and in some of the countries the speed is faster. Of course, we have also the segment specific differences. In the office segment full replacement is maybe more popular than it is in the residential segment.
One more question from Tom.
This is Tom Skogman from Handelsbanken. How many elevators do you really have in the service base in this area? And how many customers is that split on I. E. How many elevators does a single customer have on average?
I said we have about 2,000,000 units overall in this market, again, segment specific differences. In the residential side, the contracts typically are very small. The average size is only few elevators for the maintenance contracts. When we go to the retail and office, typically we get tens or even in some cases, we have hundreds of units under the same contracts. The biggest ones are even up to a few 1,000 when we talk about, for example, some facility managers or some big city
organizations. The reason I'm asking is, I'm just wondering if there is any kind of trend visible in this part of the world that the customers would get more organized than they are at the moment?
There is. But it's again, it's only in certain segments that, for example, facility managers combine for their bids. They typically combine more units. Maybe the cities do the same. But again, in some of the other segments in residential, you don't see that retail has been there already for quite some time.
So there is no significant change
that is
impacting that particular segment. Thank you.
Thank you very much, Ari, and thank you for your questions. Our next presentation will be on China. So, presumably a lot of questions after this one as well. So please, Bill Johnson, Bill go ahead and Bill will discuss both the development of the China market as well as our business in China.
Thank you very much, Carla, and thank you very much, everyone. I'm looking forward to giving you a little bit more insight into the China market. I know people are very anxious to ask questions. I'm getting ready for that portion of the presentation. But let me first tell you a little bit more about what the content of this presentation is going to be this morning.
The whole theme here is of course is sustainable growth. We've had a great story over the last 7 years and we want to give you a little bit more insight into how we're going to continue to grow that. The first thing we'll talk about this morning is sort of the overall real estate market and construction trends. Next, we'll talk a little more specifically about the elevator and escalator market development. Then we'll look at just briefly the new products that have that Heikki mentioned this morning.
I'll give you a little bit more context how they work they're going to work for the China market. Then we'll talk about the maintenance and modernization opportunities as well. And then finally, we'll talk a little bit more about what the future looks like for KONI and how we're going to move forward from there. So let's go right into some of the macroeconomic data. Now, Matti talked a little bit earlier about the rate cut, the interest rate cut that China announced yesterday.
So we need to keep some of this in context, keep that in mind as we're talking about some of these figures here. But the first big figure for us to look at would be the GDP growth. Last year at the Capital Markets Day, I mentioned that construction and real estate directly indirectly accounts for about 25% of GDP. It employs about 150 1,000,000 people according to McKinsey. So it's a huge portion of the overall GDP.
And so we look at this number quite closely. And you can see that the GDP has slowed down from 2011 in Q1 of 2012. So but this is very much in line with what the government has been trying to do which is rebalance the economy a little bit, slow things down from 2011. Another important number for us to look at is the fixed investment because that goes into a lot of the infrastructure projects for example metros, high speed rail, airports, etcetera. And that's certainly an important market for us.
Of course, the key number that we look at is the overall real estate investment. As you can see, in this case, it's down from the prior 2 years the rate, but it's still growing. It's still growing at a quite healthy pace. And we'll discuss that a little bit more in detail. We'll give you a little more granularity where that's coming from across the market.
I think it's to reiterate what Matti said earlier, China is a huge market and you can't just look at it as a sort of an aggregate sense without you have to look a little bit more deeply in terms of the geographic distribution of the growth. So when we talk about real estate investment, you can see that Q1 quarter over quarter, it's still grown 24% versus 2011. However, interestingly enough, if you look at the left hand side, it hasn't quite translated yet to any real appreciative growth in new construction in 2012. The main reason we believe is that real estate investment has gone into the purchase of new land as well as finishing up projects that were started in 2010 2011 to move the economy to move these projects forward. One thing that we also keep a very close eye on is the government policies to control the real estate growth and how they control that.
In a nutshell, what the government is trying to do really is 2 things. It's trying to control the demand and yet increase the supply. Controlling the demand has been to sort of harmonize it. They say they want to make sure that first time homebuyers can get into the market that they can move the development of purchases from the coastal cities more into the inland and western provinces. At the same time, they want to stimulate and ensure that new supply is steadily coming out to the market to keep prices in line.
So, on the demand side, the government has continued to limit 1st time home or sorry, limit second and third purchase home purchases, particularly in the we call it the top 45 cities. They're really still controlling that very much because they want to prevent homes from being scooped up by people that already have. They want to make home purchase available for young couples and people moving from the rural into the urban centers. So they still have are holding pretty tight onto that policy. At the same time, they want to encourage first time homebuyers, so they're making financing more readily available for those people.
On the monetary policy side, they want to continue and that's what's going to stimulate construction. They want to continue to lend into the sector to keep liquidity in there, so that developers can continue to build projects. And as you can see by they have just done a third cut of the reserve requirement ratio for banks recently and we feel that there's going to be more coming in the coming months. Going back to where is this real estate investment taking place. If you see from this chart, clearly Tier 1 cities have over the last couple of years slowed their real estate investment.
Again, this is a specific deliberate policy by the central government to rebalance investment. Whereas in Tier 2 cities, investment has continued to decline. In Q2 Q1 of this year, it's up to 30% growth in Tier 2 cities, while as in other Tier 3, 4 cities, it's begun to slow a little bit. And let me show you a chart that shows you the geographic distribution. And if you look at this chart, you can see that some of the big changes that have taken place from 2011 to 2012 is you see the North Province there and the 2 Western provinces.
That investment has significantly slowed down there. Now the good news is that these are very sparsely populated provinces. But interestingly enough, you see that growth has taken place up in the Northeast and down in the Southwest. And also you're seeing that we're seeing steady investments still taking place in the central provinces moving from the coastal cities towards the inland in this effort to rebalance. And the government has made this a very clear objective of theirs and it seems to be working so far.
So what's the impact on the elevator and escalator market? Let's take a look. In 2011, the market grew 26%, hitting just under 400,000 units last year, which is a significant growth from 2010. What does 2011 look like? We have given indications that 2011 2012 excuse me, overall growth will be single digit growth versus 2011.
What it looks like quarter over quarter is that in Q1, the market grew more than 10%. But for Q2, we see that the market will probably grow a little bit maybe flat to 5%. In the second half of the year, we see that in the top 45 cities, there'll be perhaps negative growth. But in the other the next 45 cities, there'll be some additional growth there taking place. So by the end of 2012 blended, it will be clearly single digit growth overall in the China market.
How that breaks out by segment? You can take a look that the commercial and infrastructure market will grow. The affordable housing market will also grow. I'll have a chart in a minute and we'll talk a little bit more about that. The area that will probably that will be affected mostly will be the commercial residential market.
That will slow appreciably. And a lot of that of course is taking place in the top 45 cities, so where the market is a little less price sensitive. So that will be the area that will be most effective going forward in 2012. We mentioned the affordable housing. In 20 10, the China government made the announcement that it had intended to build over the next 5 years 36,000,000 affordable housing units.
Now there has been some recent discussion whether or not that will be a total of 36,000,000 units or maybe around 32,000,000 units. But nonetheless, the effort is very clear. The affordable housing market is an objective by the government. They're pushing that hard. And in 2011, 10,000,000 starts in this area were announced.
And in the Q1 of 2012, we've already had more than 2,000,000 starts of the affordable housing units. Now what's interesting for us is that we have not yet felt the full impact of the 2011 starts. There is a lag period. And as they were ramping up from towards the end of 2011, we're going to begin to now see that come to our to the elevator market to the elevator industry in the latter half of this year. So that's why we're saying that we see growth picking up towards the end of 20 12 particularly because of the affordable housing markets.
Now for us, for KONE, this means exciting news because A, there's going to be the demand and B, we have a great product that's targeted right at this particular segment. In 2010, we began working with Heke and his team R and D looking at what kind of product we needed for this specific segment. And by early 2011, we had launched the E Mini series, which is a really excellent product, very great design, the right kind of features for this market and it's at a great price as well. So we're quite positive to see this growth taking place. And our hope is that the percentage of the affordable housing market will be approximately 1 third of the total elevator market.
We think that this will help us also bring the affordable housing units that we sell as our mix as our portfolio up to about 1 third as well. Because right now affordable housing is a smaller percentage, but we see this as a growing percentage within our own portfolio. Touch a little bit on the competitive market. We in the new equipment side, with the China market being the single largest elevator market in the world, clearly all the global players are there. And the global players have brought their full portfolios high end to low end and most are in the have fairly good strong geographic coverage from the big cities to the smaller cities.
There are also quite a number of JV companies. This is local companies joint venturing with global companies. And they tend to focus on the mid and low tier markets and also on the mid and low tier end of the market, the product line. So they're in the 2nd and third tier cities and in the lower mid to lower end of the elevator market. Then you have the local companies and these tend to be companies that buy components from the marketplace, bring it together to create an elevator.
They have little or no proprietary technology or design and they're just more opportunistic. On the maintenance side, you can see that the global companies are taking a closer interest in the maintenance market as it's grown and I'll have a slide in a few minutes that will talk about the overall maintenance market growth. So they're beginning to focus on this. The joint venture companies are also looking at the maintenance market. However, I would say they're easily 3 to 5 years behind the global players.
And local competitors, local suppliers typically do not do maintenance. They allow the local company, local service companies to do that for them. Overall, there are about 430 licensed manufacturers of elevators and escalators in China. So it's a quite competitive arena for sure. One slide to talk about our offering in China.
And as Haki mentioned, the N mono space and the N mini space is a new series that we've launched. This is going to really improve not only our offering in terms of the quality, but also I believe in terms of our pricing opportunities. I know that's a question on people's minds, how is the pricing going in this market? We believe this new series is going to be a great boost to that. We've had some very strong momentum going forward and these products will continue that strong momentum.
The end mono space is going to help continue to emphasize our leadership in the China Machineraless segment. And in the end mini space that's going to also improve our competitive position in the mid rise elevator segment. So this is good news for us. In addition, we continue with the selling of the e Mini to the affordable housing market segment to make sure that we have a really good representation in that segment. One topic we haven't quite touched on yet, but we'll talk a little bit more also as well is Giant Kony.
And Giant Kony will continue to have its own product segment. We have already looked began to look at that more closely how we're going to work together with Giant Kony to make sure that its product offering is as competitive as the Kone brand as well. Now let's touch a little bit on the maintenance and modernization market. As you can see the lifts in service market has grown considerably since 2000 when we had 400,000 units in the market. By 2010, it had been 1,600,000.
It had grown to 1,600,000. And by 2011, it had already hit 2,000,000 units. So you can see this big growth in the new equipment market really is now feeding very, very nicely into the overall lifts in operation and that is a great potential opportunity for us in the maintenance business. Now overall, the maintenance market is very fragmented. OEMs really only take care of about 25% of the overall maintenance in this market.
Most of it is done by local players, local small scale companies. And there is quite a high degree of self maintenance among developers and management companies. But however, that said, we do see that there is increased regulation coming up within that market and I'll touch on that in a minute, because the government is taking a look very closely at as it builds this affordable housing, what kind of service and what kind of maintenance does this need to take place there. So we're also looking very closely at this market segment to make sure that we have the right kind of offering service offering for this at the right price and so that we can continue to make very healthy margins in our overall service business. I mentioned regulation.
The government clearly is seeing that it needs to tighten up the maintenance regulation elevator maintenance regulation situation. In some cases provinces have already begun to implement requirements for 2 man maintenance. 2 man maintenance is basically it helps improve safety for the maintenance teams as well as the efficiency of getting in and of buildings. This is good for us because overall 2 man maintenance allows us to provide a higher level of service. It gives us a chance to get in and out of the buildings more effectively.
And generally, it's a higher quality level of service. We've also recently been working with the central government to they've inquired how can they improve the overall maintenance program safety and quality. We share with them our modular based methods, explain to them how we go about doing our service, how we train our people and they've taken quite keen interest in that. And so they're also looking at how to improve the overall standards within the industry. Another interesting development that's taken place in a lot of the major a number of the key larger cities is remote monitoring.
The local municipalities want to understand how the overall elevators are operating. It's a safety and a security measure, so they can improve the understand their understanding and their control of the overall buildings that are in their cities. So how do we KONE in China look at the service business? Well, it is clearly an important focus for us, not just the new equipment business, but we also want to capture the maintenance side of the business. We have the highest conversion rate of any company in China.
And our retention rates, while not quite at the KONA global level, are very, very close. So we're going to continue to try to really focus on both of those key metrics. Our growth in terms of units under maintenance has been 36% since 2006 and we see that continuing to grow over the next several years in that at approximately the same growth. It's a little bit lag behind our overall growth, but that's because it's more of a timing issue. Part of our effort to grow the business has also been to make sure that we have the right geographic expansion or the right number of people in all these markets to support this growth.
So that's another thing that we look at very carefully. And it's also not just saying where do we need to be today, but where do we need to be tomorrow as well. Pricing. Not only do we look at pricing for our new equipment business, but pricing is also very key for our service business. Labor costs have gone up.
We need to make sure that we can continue to cover these costs. And we've been very optimistic. We've seen very good progress in this area and our service business. We've also looked at how that we can how to offer different types of maintenance services from the very high end customers to the affordable market, affordable housing market and provide different levels of service, so again to support our margins in that business. And key to this whole thing is making sure we get the right kind of people into the company and train them properly, both technically, safety methods, customer communications.
And so we're doing that by several methods. One is we're setting up our own regional technical training centers as well as also hiring recruits from technical schools across the country and bringing them in and then teaching them Koning methods. Modernization. Ari talked about European modernization quite a big market right now. The modernization market for China still is in its early days.
You can see as of 2010 only 80,000 units in China were 20 years or older. So you can see that it's still a very small market. But by 2020, it will be over 240,000 units. And I would also say this that the usage rates for elevators and escalators in China is typically a lot higher than in let's say in Western Europe or in the United States. In fact, it's probably in some cases double what it normally is.
So the wear factor, the aging factor of the units is a lot faster there. So this will I think this understates the number of modernization opportunities that really are out there. Also buildings go up very fast. The elevators when a new building comes up owners of existing buildings say, hey look my building is only 10 years old, but my elevators don't look as nice as the guys next door. What can you do to help us improve the look, the ride comfort, the design of the of my elevators?
So that's another excellent opportunity. But the key to this whole thing is making sure we have the right people. I already again touched on this. It's a different type of sale. It's a much more technical process and you've got to make sure you have the right kind of people installing so that your costs don't get out of control because it can happen very quickly especially when you're working on 3rd party equipment.
Okay. KONE in China and what we're looking forward to in the future. But let's look a little bit in the to what we've done so far. You can see that our growth has been very strong over the last 7 years since 2004. The market has overall grown 21% on average per annum since 2004, but KONE in China has grown 42% per year.
Interestingly, by the way, this figure only includes December 20 eleven's Giant Kone's figures. So we see great opportunity coming up in 2012. I think the success factors for us these past few years is very clear. One is having a great product portfolio that covers all segments and gives us great opportunity to show to improve the overall portfolio. So we've had because in 2004 when we started out, we had a fairly simple product offering.
The last few years, we've expanded that greatly to fill different market segments and to be able to go after that and the latest being of course the affordable housing. So by having a competitive product offering, we've really helped build our ability to address the entire market. We've also added much more geographic coverage to get to out to the market, out to the customers. You've got to have the operations out there to be able to sell. When in 2004, we only had 12 branches.
Now today with Giant Kona, we have over 87 branch offices. We have 34 sales offices and more than 200 service stations around China. So it's great coverage. Part and partial of this success, I think has also been we have a very strong management team and sales force as well as a very strong technical force. One of the characteristics of being successful in China is that customers want to have confidence that when they buy from you that you can install the product on time and with minimal problems.
So that's I think been a key part of our success is given the customers a lot of confidence that we can do that. In earlier this year, we met with one of our major customers. He had 2 elevator suppliers, 2 major companies, us and 1 other company. He had decided that he was going to drop that company and go and make us his exclusive supplier for elevators and escalators in China for the next 2 years. So I think that's a real testament to what we've been able to do so far.
When you look at our product portfolio, both the KONI brand and the Giant KONI brand, you can see we have great coverage across all market segments in terms of products, but also in terms of geography. And we expect to I'll just skip this slide. I'll come back to it. But you see when you look at the combined Giant KONE and KONE map, you can see that we are clearly we have very strong coverage. Remember I mentioned earlier about the Northeast segment, if you look there, we have very good strong coverage there in the Southwest as well.
And then along the coast, we have a very strong presence in many cities, not just the top 45, but also in many smaller high growth areas as well. Let me go back to Giant Kony. Giant Kony, clearly our plan is to we want to make Giancony a standalone brand. It has its own customers, its own offering, its own distribution. So we want to make sure that we can continue that to capture that market segment, which the KONI brand doesn't necessarily address fully.
It has its own product portfolio. We again, we want to continue to build on that and have that target at the lower end of the retail and the commercial segments as well as the volume residential. But at the same time, we want to take advantage of our total overall size in China and go for sourcing opportunity sourcing synergies and look at back office operations such as finance, HR, legal, communications, etcetera, so that we can really begin to save costs in that area. And finally, we want to bring more of the KONE business processes, the KONE way we call it, the business processes to GK and help them operate more efficiently. I talked earlier about our team.
We have a great team. I think actually I want to say that I believe we have the best management, sales and technical force in China of any of the brands. But it's not been easy. As you see that we've grown since 2,005 from 2,000 people to today or the end of 2011 to over 7,000 people. And it's been a this has been a real focus for us as a management team how to bring in this number of people, bring them up to speed, how to understand what their interests are, motivate them.
One of the key tools for us has been using the employee engagement tool and we take this very seriously and look at the feedback from this. It's been a great tool to help us understand what are the key drivers. And as a result for us that has been we have the lower than market turnover of our employees. China is a very active market right now and skilled employees get scooped up very fast by competitors or outside companies. I've been very proud to say that we've had very low turnover rate in that area.
And I think part of it is our good we provide lots of opportunities for our employees and good understanding of what motivates them. But it's still not over. We have to do a lot of recruiting. We have to do a lot of training. We collaborate with many technical schools around China to bring in good talent on a routine basis.
And we also provide our existing employees with lots of ongoing training, sales training, leadership, technical training. This is a huge part of our daily effort to make sure that we're keeping up with this part of the business. Let me conclude by saying that we look forward to sustaining this growth going forward. KONI in China today is number 2. And our objective going forward is to continue to grow faster than the market.
We want to continue to grow in a profitable way. We want to build the market leading service portfolio in the China, which we are today. We're number 1 in the service aftermarket service business in terms of units. Key areas going forward, clearly, we want to continue to work with Hakey's team to make sure our product offering is the best in the industry. We want to look at pricing and make sure that we're getting the right price, not just for our products, but for our services and our ability to deliver on our commitment.
We believe we can get a premium for that, because we can assure the customer that they if they come with us, they're going to have a very reliable supplier. Productivity. I'm sure Henrik will talk a little bit more about this because it has to do with fixed costs. But this is something that he and I are constantly talking about how to raise the productivity within the company, so that we can control our growth. As we grow very rapidly, we want to make sure that our fixed costs remain slower than our overall growth.
And finally, talent. That will be the key to the future. And I just talked to you a little bit about that. I think that's going to be the key to us maintaining this very strong market position. With that, I think I'll take any questions that you might have and let's see what they are.
Carla?
Yes. Thank you, Bill, very much. And now we are open for questions to Bill about China.
Mike Harkmann at HSBC. I was wondering about labor cost inflation and how you're dealing with it when it comes to new equipment, but of course also on the maintenance side. Is there a built in ratchet on the maintenance contract, which allows you to pass on labor cost inflation?
That's a very relevant question for us. We're constantly dealing with that. I think looking at it from 3 sides. 1 would be one of the big costs for us was installation prices. We were probably a bit slow on that in 2010.
But in the last year or so, we've been really catching up with ensuring that our installation prices are now at or certainly higher than what they much higher than what they were before and able to cover this cost increase. On the maintenance side, we have in some cases clauses in our contracts, which allow for increase in labor costs, not across the board, but this is something that we constantly raise with our customers. Interestingly enough, I would have to say that our customers when it comes to talking about raising prices due to labor costs, they understand because they're all facing the same issue. So it's not a question of why, it's a question of, oh, we also are facing the same situation. So you can have a pretty good discussion about that.
And certainly, there's issues how much, but it's not something that you get very strong pushback in terms of principle.
This is Tom Skouma from Handelsbanken. You have been operating in a market that has been characterized by extreme growth for many years and that growth is now clearly fading off. And we have understood that the profitability on New Elevator has been much better for Kona in China than in other markets. Of course, you get a bit worried that the margin that you get at the moment is not sustainable. What can you do to defend this?
It seems that all competitors are also building up more capacity in the country. So if you look like 5 years ahead, can you have the same margin on new equipment as today?
I think that I think what we're seeing in the market is clearly there's still some growth in the market. I think if you look long term picture, the new equipment business is going to grow for another generation clearly. How that translates in terms of margin if you are the customer base is asking for better products all the time. They're asking for better services. When you have that kind of situation, you can command a premium if you are able to satisfy that requirement, which I believe we're able to.
I also think that Kony, we have a great momentum going forward and our brand image has gone up as a result of our good success in the past. So I think it's a combination of brand image, good products and services and reliability, so that we can begin to ask for a premium from customers. It seems to be working. We're raising.
Hasn't that been the case also in all other markets? I mean, in other markets, the margins have come down to quite low levels and you make money on unservice. That's at least the general perception in the market.
I can't speak for other markets, but
Tom, this has not been our message. You are now propagating.
Okay. We have a question for Dirk here.
Just a question. Please.
I didn't attend last year, so maybe you got the question over the last year a couple of times.
But if you could
just spend one minute on what do you think are the biggest differences between Otis where you spend a whole lot of time and Kona culturally and business model wise, etcetera, if there are any?
Well, I think I'll let Otis talk to you about what their culture is like. I can talk to you a little bit more about what the KONI culture is like. I think Maki's earlier slide on our values, our vision and how we go about looking at our business is very relevant to what we do in China. KONI China follows that model very, very closely. I think that speaks a lot for what we believe in China and particularly customer service, employee engagement all those key values are very important to us.
So I think that's the clear picture for us on the KONI side.
Yes. Jan Kajal, Nordea Markets. Just on the growth outlook for China, I mean, looking a little bit beyond this year into next year and thinking of what's happening this year and will that have implications for next year. I mean in affordable housing you say that you're getting a little bit of boost of this year because or towards the end of this year because of the lag in terms of the startups being skewed towards the end of last year and so forth. You have a positive momentum from that for this year, but then it would fade away.
I would guess next year you would have a flattish growth again or slower growth from that perspective going into next year. In other residential, you would need perhaps more positive pricing expectations for that market to have a pickup there. And would you be suffering from a lag next year there from perhaps the start ups turning into an elevator markets later on? And you're also looking for the commercial and infrastructure side, you're looking for clear growth this year in your graph. What does that look if you look at the start ups and the real estate market this year?
How would you look at the commercial and infrastructure market going next year? Do we need further stimulus or something to get growth also next year?
I think on the housing question you said, clearly the affordable housing, the unit, the demand for that is going to take place in 20122013. Remember this year, we're going to add another 7,000,000 units to that. For KONI's business on this side, we're still underweight in terms of our portfolio of the affordable housing. So I think there's still a long way for us to go in this segment. I think it's a positive opportunity for us.
On the more let's say infrastructure side, the recent analysis by the government to do this again, I think it's clearly they're going to try to restimulate the economy and move things up. We understand that a certain component of that will also include infrastructure. We've had very good results in that market as well. So we again going forward, we don't have any specifics at this point in time, but there are strong indications that that's going to happen. We've typically had very good success in that.
So I'm positive about those opportunities. Commercial residential, We'll have to see how that's going to develop. Again, that typically is in the top 45 cities. We see that top 45 cities are going to slow a little bit this year, but by the end of the year, it will have a pickup. And what that might mean for 2013, we'll have to keep a close eye on that.
So it's still early to speculate at this point in time. But I think that A, we have the products for it and B, we're our geographic coverage is quite extensive so that we can take advantage of any of the opportunities that come along at the time. Yes, I don't I can't read the future perfectly, but I can say that if the opportunities are there we're well positioned to take advantage of it.
Good morning. Alex Siedon for Exane BNP Paribas. Just a question about your strategy on the maintenance. I mean, we see that the density of the base is very important to get the profitability. How do you go after growing the base in a profitable way?
Do you go after certain geographies? Or is there another strategy that you've got maybe on the M and A side to bolster your density in certain geographies? Thank you.
Well, with our geographic coverage, really we're trying to get as many units under maintenance, our units under maintenance as possible. We do some third party business, but typically it's part of an overall package similar to what Ari's experience is that customers will say, can you handle my total portfolio? We're trying to really grow that business as quickly as we can. It takes time. Density doesn't just happen overnight.
It takes several it takes years to bring that up, but you have to start somewhere and we think we're way ahead of our competition in that regard. Our conversion rate again is the highest in the industry probably close to double what the number 2 company is. And so we're very clear that this is what we need to do. It may not be what we would like to see today, but in the years to come it just gets better.
The second question if I may. Please. I look at the comments from your U. S. Competitor.
They mentioned so being in a position or at least trying to regain market share so by adjusting their price downwards? And have you seen an impact in the market recently?
Well, we certainly look at what our competition is doing price wise. We also look at our own sort of offering and what we see we can command in the market. We very much focus on our offering and what we think we can get in terms of the value for what we're offering. As I mentioned, we have I think great momentum going forward in from these last few years. We've been able to command a premium in the market compared vis a vis all our competitors.
And so we hope to continue to keep in that good trend. And again, it's watching the market carefully. Yes, certainly watching what the competitors are doing, but taking a look at where the market the trends are growing with these new products the end series products that's going to give us additional competitive advantage. So that's really we sort of look at ourselves as much as anything else to make sure we get the best price possible.
Hi. It's Erik Kislas from Swedbank. Coming back to the affordable housing dynamics, what's the typical start to completion time frame? And at what stage within this time frame is the elevator typically ordered?
A typical affordable a lot of it depends on where it's located, who which developers are behind it and things like that. However, just sort of looking at sort of a typical case from the start of construction and this is not just for affordable housing, this is for a lot of the residential projects. It's typically about anywhere from 9 to 12 months after the job has been started. You'd normally have to wait till the building is topped off before they start to order the elevators. Then the tender to order process is anywhere from 5 to 6 months.
Then from order to delivery is approximately anywhere again from 3 to 6 months. It depends on the size of the project, but 3 to 6 months. And then installation is very rapid after that.
Thanks. That was very helpful.
Thank you very much, Bill, and thank you for your questions. Now it's time for the 2nd break of today. And after the break, we will continue at noon sharp. So please be back at noon. And again, refreshments outside and please feel free to use the outside area as well.
Thank you.
Hi. How are you? Where you've been?
Welcome back from the break. You may have noticed that we have placed feedback forms on your tables. We would greatly appreciate it if you could find a minute to fill in the feedback form as we are all the time trying to improve our IR services and it's of great value if we get your comments about on how we could continue to improve. Now our next presentation will be from our CFO, Henrik Enrout and Henrik will be talking about how we drive KONE's profitability development. Henrik, please go ahead.
Okay. Thank you, Carla. And hello, everyone. First of all, hope you have had an interesting day so far. At least, I must say that I get energized every time I listen to our new product, what it can bring us.
And also we heard it very clearly from both Ari and Bill what it means for our key markets. So I think that this is very exciting for us as a company. To wrap up today, I will talk briefly about how we are driving our profitability development with KONE, a little bit how we think about it and also touch upon cash flow and investments. And after that, we will wrap up with Q and A. So I'll start with talking how we drive profitability at KONE.
First of all, as was asked earlier already, we are maintaining our long term financial targets that we set in the beginning of 2011. So our objective continues to be to grow faster than the market and to reach an EBIT margin over of 16%. And in cash flow, our objective is to improve our working capital rotation. So this is our these are our long term targets. However, when we develop our business, I wanted to be also explain how we focus on our financial development in order to generate the best returns over time for our shareholders.
So when it comes
to profitability, the most important focus area for us is the long term absolute EBIT growth. And why is that? Well, if you look at our business model, if you look over the past 12 months, our working capital has been on average negative of €388,000,000 So this business does not tie working capital. Also this is a business that generally does not require significant CapEx to grow. And as we can see that our tangible assets are only 216,000,000 or average over the last year.
So therefore, our objective is that how can we best grow our EBIT over the long term, not look in the short term what is the highest EBIT margin we can get to. If we'd only be focused on EBIT margin, we would definitely be making different decisions. But the most important one is to grow EBIT over time, but we do have an EBIT margin target in order to show that our objective is that we can grow our EBIT faster than our top line growth. So hopefully, this tells a little bit about the philosophy how we think about how we develop our profitability. Before we go to how we drive our profitability going forward and what the trends are at the moment, I want to provide some perspective of how our profitability has developed since about 2,005 when the EBIT margin was roundabout 8%.
We have clearly had a significant improvement from that period of time. And there are a few central themes that have been driving our profitability. I would say that the first significant change in the beginning was really an active work on harmonizing
our global business processes and
driving global business processes throughout the company. That really had a significant impact on our quality and productivity. And quality and productivity has since been a constant feature and one of the most significant drivers of our productivity. Also as we have grown, we have been able to get leverage out of our fixed costs. And that's as Bill also discussed that that's a very strong focus for us that when we grow, we want to make sure that we continuously grow our top line clearly faster than our fixed cost.
That's a clear approach of ours. We then had periods when we grew faster, our margin and periods grew slower. And for example, in 2,008, 2,009, we had clear raw material headwinds and then that turned to tailwind. Now we again have headwind. So hopefully, this provides some perspective of why our margin has developed as it has been developing over the past years.
So I would say at the moment, we have an interesting situation that we have several factors that are positive, but also we have perhaps stronger overall headwinds that we have had over the past years and I'll touch upon those also. So
first
of all, how do we plan to get from the margin of 13.9% that we had last year to 16% that is our target? 1st and foremost, growth and fixed cost leverage and I'll touch upon that. But that has been an important factor throughout. Improved quality and productivity. I think Ari discussed that in detail when he discussed our maintenance business.
But here is really how do we improve our maintenance method that way improve our quality of our maintenance and improve the ability to plan our maintenance. And the less we have unscheduled callouts, the better we can plan it. So that's on the maintenance side. On installation side, it's again methods and quality enables us to improve our maintenance efficiency and reduce the sorry, the installation efficiency and reduce installation times. So these are very important factors in our profitability.
Then pricing excellence. That has been touched upon in many of the speeches today. But here there are specific areas that we have been working on now for more than a year very proactively to improve our competencies in this area. We are looking at it for 2 different perspectives. First of all, as we have been doing already since 2,008, we have all the time built a more granular understanding of our end markets.
That enables us to understand that what are the specific values we deliver to customers in various segments and able to price accordingly. Secondly, we are also working on pricing competencies, really understanding training our people to understand that how can we understand the past historical patterns from our success rates in tenders and so forth and be more proactive and better in pricing. And the final one is value selling. So this is a very important area for us that understanding the markets better and improving our competencies. And then the last area is naturally our new elevator offering.
So that will bring us also opportunities again to improve our margins. These all are part somehow part of the development programs that Matti discussed, but we selected these because these are perhaps each factors that can have a clear impact on our margin development. And of course, our approach all the time is to grow the business with a long term mindset. So again, we are not optimizing the margin percentage in a short term. We are trying to build it in the best way over long term.
And I'll talk to them about also how we manage the headwinds in the meantime, because as we all know that there are always positive factors. These are how we're developing, but then we have to manage headwinds at the same time. So this is how we're developing it going forward. But if you look in the short term, it's clear that we have headwinds that are burning our business at the moment. I would say the first one I would mention is the business mix.
As you know, our new equipment business has continued to grow faster in the overall market. So we had had a strong growth in our new equipment business. And also we have acquired Giant Kone. So that will result in a situation where the share of our new equipment business is increasing. And this is a specific example again when I talked about we are not optimizing our margin in the short term.
So this has a slightly negative impact on our margin. But again, it is a profitable and good business and brings us good additional returns. A second burden on our margin in the short term is the consolidation giant KONE and intangible assets that we are amortizing as a result of the acquisition. And then we've been talking about the price pressures that we have in the market and labor costs in inflation in developing markets. And then on the positive side are the ones I discussed.
But in the short term, we have clear headwinds that we are facing. And I will talk a little bit also about how we are specifically managing some of these headwinds. So first off price competition. Here I talked about our pricing skills, but of course it's an improved competitiveness. So that's what Heikki discussed pricing and dosing combination.
One area that also has been a clear headwind for us has been fuel prices. That's part of our raw material spend. Here again, what is our approach? How do we manage our fuel price spend? And this is very much what Ari talked about.
When we improve our quality of our services, we reduce the unscheduled call outs, which means we can have better planning of our maintenance network, which means that our maintenance people are driving less. We also introduced a more energy efficient car fleet. So these are the key areas how we manage these areas. I will talk in more detail about wage and salary inflation, how we manage those and talk about material costs. So let me go first to material costs.
Here first a snapshot of average prices of the key materials that we purchase. And as we can see in 2010 2011, we had clear increases in the raw materials that are important to us. These are now average prices in the markets. Our situation was not quite as significant as this, because we have proactively managed our situation by having a large part of fixed price contracts with our suppliers. So we can see that 2010, 2011 the material spend was clearly increasing.
And these are the average prices for the year. For us there's then a lag before it comes through in our profitability when this comes from our suppliers through a work in progress and to deliveries. Now we can see that the average prices so far this year are now at much better level or better level than last year. They are still at the high level because we have come 2 years significantly up, but at least we are seeing an improvement. So the worst quarters perhaps from us from a raw material headwind, I would say Q4 last year, Q1 this year still some headwinds in Q2.
But when we come to the second half, we're starting to see an easing of in the headwinds. If you then look at how are we then using this again difficult situation trying to make sure that this can be a competitive advantage for us. So we are working on of course with our sourcing to make sure that everyone of course in the market are facing the same headwinds. And we want to make sure that how can we develop it better than our competition. First developing sourcing partnerships.
This is of course to make sure that we develop components and parts of products together with our suppliers to make sure that we can improve our cost competitiveness. But a very important area in that one is of course quality. The better quality we can have we drive down of course our total costs. The 3rd area, which is clearly becoming more of an advantage to us is the aggregation advantages from volume. And this is perhaps the most significant synergy we have from the Giant Kone acquisition.
As Bill mentioned, we will keep those 2 companies separate. But one of the areas where we are working more and more and integrating our operations is on the sourcing side. So given our volumes, given our situation in the overall market, this is becoming an important factor for us and something we can take as an advantage. So perhaps these are the key areas that we're working on. And then of course, we have also been quite proactive in managing our sourcing costs by having fixed price contracts with our suppliers.
If we look at the past 2 years, we have had quite significant parts of fixed price contracts. This year, we have slightly lower levels, so it's less than half. And that was really a decision we made during the autumn when our many of our fixed price contracts started to roll off. We had a very high level of raw material prices. So we then did not fix so much.
Now we have started to gradually fix some of the material costs. And the main material costs that we have are in mechanics and machines and elevator cars and doors. And those two segments of our total direct material spend are where the majority of these lies. And our total raw material spend at the moment, if we take all of Kone including fuel and everything, it's very roughly around about €400,000,000 So if I then go to our fixed costs, how do we manage our fixed costs? So our approach is clearly to want to make sure that we have a consistent and long term management also of fixed costs.
So when we have, for example, growing markets, we are very focused on making sure that our fixed costs grow at a clearly lower rate than our sales. And why is this? Well, this is to make sure that if there are fluctuations in the market, we can adjust our operations without having to take very significant action. So our approach and aim is really to be able to manage this in a smooth way. Of course, that's not always possible, but this is how we try to do it as far as possible and not have constant restructurings within the company, because we don't think that that is a good long term way to develop the culture within the company and the operations.
So most important one is leverage fixed cost through growth. And I'll talk about that as an example how we manage our people in high growth areas to make sure we can achieve that. Then we have also what we discussed in connection with Q1 result, we are now we have now 2 specific initiatives ongoing also to manage our fixed costs. The first one is that we are developing our support functions. Here, the main objective of this program is to improve our support function processes and again make sure that we have our support function processes in such a shape that we can leverage them through growth and they can be supportive of our business and our growth.
So it's really main objectives there are simplification and improvement of our processes, not cost savings, although we will clearly achieve cost savings from this as well. And then we have some markets where we have had a very prolonged weakness in the markets. And here we will adjust our operations accordingly. We will again talk about the details of these. These programs are finished.
We have said they are ongoing in connection with our Q2 result in July. I then mentioned that one of the areas we want to manage are fixed costs. We all know that this is a business that is has a reasonably high labor content. And if you look at where do we have our people, half of our people are still in Europe, Middle East and Africa. But given the growth in Asia Pacific and the acquisition of Giant Conne, we now have 36% of our people in Asia Pacific.
And that's of course where we have the most significant labor cost inflation. So if I start with what is the labor cost inflation at the moment? As most of you know, Europe we still are at very moderate levels at low single digits same in North America. In China, it's about the 10% as Bill mentioned. And I think what we are proud here is that our accretion rates are clearly below what market rates are.
And in India, the labor cost inflation is somewhat higher than in China. Rest of Asia Pacific and Middle East somewhere above 5%. But what are we really doing now in these markets? So I would say that competence development is absolutely critical to us, so that we have these markets where we have labor cost inflation. And even though labor costs are still at a low level, we have a very strong focus on competence development and in particular performance management.
How do we manage our people? How do we manage the performance with our people? And one of the key areas here what we're seeing is really to have clarity of all of our people's roles. So very clear roles, so we can develop them in their functions, they become experts. And this is the way and this is very critical to us when we grow, because otherwise in these high growth markets, we will probably need to add as many people as we're growing top line.
But with strong competence management, performance management and providing clarity of roles, we have been able to make sure that this becomes a competitive advantage for us. So hopefully, that provides some perspective on how we're developing our profitability and how we're managing our philosophy on managing fixed costs. I'll then touch briefly on our cash flow and investments. So one of our financial targets is to improve the rotation of our working capital. And if we look at the development over the past 3 years, it has been a positive development for us.
So you first look at the asset side. The inventories, we have continuously been able to improve our inventory turns. So here you see the overall inventories and you can see it there at a lower level than in 2,009 despite a significant growth in our new equipment and modernization business. Our accounts receivable have grown in absolute terms, but if we look at that as a percentage of sales that has stayed reasonably stable. And I would say going forward, we see that this is a clear opportunity for us.
This is something where we think we can do a better job and we can improve our working capital. If you then think about the liability side, that's where I think we have been one of our main improvements in our working capital. And that has not been through management of our payables, but really a management of our advanced payments received. So where we have a very strong focus all the time is to ensure that our payment terms remain good. And that is, of course, a key form of risk management to make sure that we continuously have more advanced payments received from our customers than we have inventories tied up in projects.
And this is how we manage our risks. And this difference we've been able to improve over the years. And the reason for this has been good focus on payment terms, but also the sharp growth in Asia Pacific where we have also where we have good payment terms overall. So this has led to, of course, a strong cash flow and the fact that we have had a continued positive cash conversion from EBIT, so higher cash conversion than EBIT and that is, of course, something that we our objective is to continue to drive it that way. Now if we then look at our investments.
As you know, we have had a high focus on acquisitions over the past years, because we believe that this is an attractive additional way for us to grow our service business to provide density to provide productivity and additional growth to us. So over the past years, we have clearly increased the amount of acquisitions. So we have now in the past 2 years been at over €160,000,000 now last year 185,000,000 and this is something that we continue to focus on. It's of course we all know that this can be lumpy, but as we see that these acquisitions are very few larger ones and they are spread over many acquisitions. This is clearly an area that we continue to focus on and put efforts on.
If you look at our capital expenditure, as we have mentioned that our normalized capital expenditure in this business is around about €60,000,000 Now in the past 3 years, we've been between €44,000,000 to €52,000,000 So we've been at the lower level. And that is something that has been quite low and our normalized level is still around €60,000,000 Now in the next couple of years, it will increase because as you know, we are currently finalizing our new factory in Kunshan something that we have announced earlier. So this is something that we are completing partly this year. So the factory part, the office part will be ready this year and some of the R and D facilities will be ready next year. So this will now over this year and next year over the 2 year period increase our capital expenditure at about €60,000,000 net above the normalized level.
So that will be on top of our normal CapEx. And then we have also decided which is a new information that we will have decided to build a new factory in Chennai in India. So we have a factory in Chennai in India, but we're planning to build a new larger one. That is something we will start later this year the project. And the objective is that that will be operational in 2015.
So that will of course then also bring somewhat higher CapEx. It is a smaller investment than the China one, but clearly also will bring some additional CapEx over the coming years. But other than that our kind of base CapEx should remain more or less at historical levels. If I then just as the final slide go through that what is this new factor we have in China in Kunshan. So here is a picture of the site what it will look like when it's all finished.
We have today already we have started to move over production to the new facility and the office building will be ready towards the end of this year. So this new facility will have twice the capacity of our previous factory and total area of production area will be about 51,600 square meters. So this is a again an exciting new development for us that we will have this new factory. Again, will be an important driver for our growth and an important driver for us to continue to develop our competitiveness in that area. So this is a very important also development for us and will support all the things that have been discussed earlier today.
So I'll finish here. We have time for some questions and then we go to the more general Q and A.
Thank you, Henrik. And now questions for Henrik before we move to the general Q and A session.
I just had a question about the Chennai plant. Can you talk a bit about the economics behind that? So is this purely just expanding because the urbanization rate is going up and there'll be great opportunities going forward so getting ready for that? Or is there something else going on there that this is a cost dynamic or there's something else you're doing from a returns perspective?
I think perhaps it's best that Heikki answer that question because he's
All right. So this India SEMA factory, we have the factory what has been since from 'eighteen. So it's very I'd like to say in the city area and the land is very limited. We have to expand anyhow and that's why we are now making that this work will be in next 2 years that we will have a new site near Chennai area. And then of course in that stage, we are also looking at this new site will be possible to start to export also into certain product types and certain market areas.
But that is still under planning phase what is the total plan. But it will be good for our long term future.
So currently the current India site is really manufacturing for the local markets. So this would be then a change to that.
Any other questions for Henrik? Yes, Alexi has one.
Henrik, if I look at the guidance for the year, which level of raw material were you assuming? And is it better than expected at the moment?
I think that more or less we are going in line with what we thought in connection with Q1. Now of course, we have some volatility, but since we came out with a Q1 result and gave our guidance, not very significant changes since
that.
Falkland Gutschman from Helvea. On your slide with the headwinds, I haven't seen any mention about the new product launches. So if I understand correctly everything what's been said
now about the product launches, the new ones,
it covers quite a beginning this has a negative impact on margins not just due to the launch cost, but generally they start at the higher end of the learning curve and go then over time steeply downwards. But at the beginning does that not impact your margins?
I would say that I think our approach here is that as we discussed that it's not something that will happen from one day to another that we will start tendering this launch and then we will ramp up and that is our plan. Perhaps Heikki can explain a little more detail how we think about that. Yes.
There was the same question in the break that what that would mean in practice in next couple of years. So we have to remember we are all the time updating our product portfolio if you looked up years. So we are our organization is very well, how to say, focusing on this kind of change management. And we will that's why we are making this new product launch in the very, very blended phases according in the different market areas and so on. We are not saying that we want to now make overnight because our existing product portfolio is very, very competitive and we want to do this and this is going to be the great product launch from day 1.
And we are now very dedicated programs to make that happen in all supply units and installation. So we need to have installation say training done until we have this kind of operational delivery will start.
Okay.
Thank you. Thank you, Henrik, and thank you for your questions. And now Matti, could I please ask you to join me here and we will have some time for further questions from basically anything you are interested to ask about. So please direct your questions to Matti and Matti might then direct the question forward as need be. And also would you please ask one question at a time and then continue as need be with further questions?
Thank you.
Yes, indeed. Today, we have had many interesting topics. Naturally, above all, we have discussed a lot about our new global product offering. We have been giving updates about 2 different kind of markets and our market development approach there. These are China and the Central Northern European markets.
You have heard also about how we are approaching and working with profitability growth, what are the key drivers there and then also about our balance sheet related questions. So now we have time for, let's say, all possible remaining questions we have had. We are very happy that we have had such an active discussion and active questions after the presentations and also during the breaks.
Hello. Elena Ryota from Everly Bank. A question still on China and the market situation and the tough competition. Do you see that this is going to lead to consolidation in the market? And what would you expect to see say over the 5 year horizon?
I will at least start and if you have Bill something to add then please do that. It has been quite interesting to follow that what have been the progress of the biggest companies in the market and when and what has the progress of the very high number of small local players. And now I think that the let's say general trend is that the very small local players have had more difficult times than the bigger players. But I think that it's impossible to make any let's say hard conclusions, because as we have seen over the years the Chinese market is moving in waves. So that always when the growth phase is really becoming very strong.
China has started China starts to take actions to slow down growth. And then again now in the current situation, the actions to again accelerate new growth started already in end of November last year. So difficult to say any major statement.
Thank you. I've got a follow-up question that links very well with that first one. The affordable housing market starts have gone from 10 to a target of 7 this year. But considering you underweight there and maybe there are more local competitors in that market, this move from 10 to 7 if you look out 18 months, do you think that can create some friction and maybe a bit of a fallout within that specific market?
Maybe you Bill answer this.
I think there is certainly a movement within the market itself towards the joint venture and the global players from the smaller players. I think the affordable what we're seeing in the affordable housing is that their requirements are typically for companies that can really support the business. They're not really typically going after the smaller companies. So I think the affordable housing market is still very a good opportunity for the global players and the joint venture players. I don't see the local players being able to be sustainable in that market segment.
This was in line of what Bill mentioned earlier that our market share at the moment is in the affordable housing slightly lower than in the Chinese market all together, although it is becoming stronger. Our share is becoming going higher.
It's Erik von, Swedbank. We have not talked too much about the North American market. Just asking whether you're still in the geographical expansion mode out there. How do you see your market share evolving going forward? And how does the new equipment pricing environment look like?
The progress in the new equipment pricing this year has been positive. So we have been able to continue to increase prices and this positive development started already in the second half of last year. But it started at a low level. Before that, we really saw the impact of the in the marketplace of the market in the U. S.
Being at a very low level for quite a long time. And still today we have to remember that size of the market level is about maybe about 40% lower than what it was in 2,007. Then what comes to the geographical, let's say, best growth areas, the situation is pretty much what it was in April when we communicated about our quarter one results, the best development we see in the East Coast and West Coast and then in the central parts of the country.
And you're still expanding your foothold in especially in the U. S. Market, I assume?
Well, we have you mean foothold in terms of geographical coverage?
Yes.
We have a pretty good network of branches and service offices. So that is not really expanding.
Thanks. Perte Altone from Lamy. How attractive you see the Latin American market?
Latin America in terms of market size is now very roughly, but roughly the same size as what the Indian market is. So that puts that into scope about the attractiveness in terms of size. It has been growing, not with a significant spirit, but still growing. As you know, we at Ascona, we divested our businesses in Latin America about 10 years ago, slightly over 10 years ago. And at the moment, as we have said, we have been studying how to reenter that market.
This is not something that where we would feel high urgency. But we are watching the developments there more closely. And whenever opportunities will pick up, we will take those study those seriously. I will say that in 3 to 5 years' time, it would be great to be again a player in Latin America. Just because of our overall progress, it would have it would feel good to have a truly global reach everywhere.
Do we have further questions to Matti or any of the other speakers? If not at this stage, then we would like to thank you for your active participation. And the next thing that will happen is lunch. So all of us get food. Lunch will be served a couple of stairs upstairs, so a couple of flight upstairs you will need to take to get there.
And the important thing to note about lunch and those of you who will join us for the afternoon event at the High Design Expo is that the bus transport will leave at 2 p. M. Sharp. There will be 2 buses, one of which will take both will go to the High Design Expo, but one bus will continue from the High Design Expo to the airport at quarter past 3. So when you enter one of the buses now here, for those of you who are going to the airport after the High Design Expo, please make sure that you enter the one that's going to the airport.
It should be clearly marked, but please just make sure. At this stage, please take your belongings with you from this room. You can leave them upstairs. You don't need to bring them over to lunch. We will show you where.
And for those of you who have been following the webcast and in the lines, at this stage, we would like to thank you very much for your attendance and participation in this event and wish you a great weekend. Thank you very much.