Ladies and gentlemen, good morning and welcome to KONE's 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 Alahuhta. 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 Leppänen, 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.
After the break, we will continue with a presentation by Ari Lehtoranta, EVP for the Central and North European area. 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. 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. That presentation will be held by our CFO, Henrik Ehrnrooth. 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&A session.
There will be time for Q&A after each individual presentation, but more so at the very end of the presentations. A separate longer Q&A session there. 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 1:00 p.m., we'll have lunch here at the Finlandia Hall, and at about 2:00 p.m. or actually 2:00 p.m. sharp, we will have a short bus transport to the HI Design Expo where you will have a chance to see and test ride a couple of elevators from our brand-new elevator offering. Without any further introductions, let's get the day going. Matti, the stage is all yours.
Thank you, Karla. Good morning and welcome to our Capital Markets Day. Yesterday, we announced our new global product offering. 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. As Karla 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 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. 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.
Heikki Leppänen then after me will go much deeper in telling you about that important new launch. 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. Let's start by first taking a look to our quarter one development, where, as many of you well remember, the biggest positive news was that our order intake growth in quarter one was very high. It was more than 30%. 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%. What comes to profit growth.
This year, as you know, we are amortizing a lot of the intangible assets from the Giant KONE consolidation, hence the most illustrative comparison here is in EBT before amortizations. Here you see that the growth was 15.8% and the difference in the relative performance compared to the first quarter last year was minus 0.2%. Also, cash flow was strong at almost EUR 250 million. I would take a longer perspective and show how the rolling 12 months performance in orders received, sales and operating income has developed from 2005 to the first quarter of 2012. First, orders. Here you see that although 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 seven years in our order intake.
In sales, we have been continuously growing, 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%, that the average annual growth in Asia Pacific from 2005 to 2011 has been 23%. 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%. Just to comment that the average annual growth in operating income has been more than 18%.
Here you see how the operating income has almost tripled from 2005 to 2011, 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. That briefly about the development of our competitiveness so far. Now let's take a look at how we estimate the size of the market last year and what are the comments regarding our markets 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%, 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 see that China, in terms of volumes, was 64% of the global market volume last year. It is of course a very high number. Its share went up by 4% points from 2010. The share of Europe, Middle East, and Africa went down by 2% points to 18%, the share of North America remained at 3%. As I mentioned, we consolidated Giant 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 the new equipment market.
About maintenance. We estimate at the end of last year, the maintenance base globally was 11 million units. You see that Europe, Middle East, and Africa continued to be more than 50% of the market. Its share went down by 2% points to 51%, whereas the role of China market increased also here, so that its share increased from 15% to 18%. In new equipment, we have been able to improve our market positions quite significantly since 2005. I 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. We have been able to further strengthen our positions clearly, and now in 2011, we were either number one or number two in all of these three important geographical areas.
In Russia, we continue to be number four, our market share has clearly increased also there. In Russia, we are number two outside the domestic players, so about the non-domestic players. In Asia Pacific, the progress has been even faster. In China, we have moved from number eight position to number four in 2009, then to become the second largest company in new equipment in China last year. In India, we have moved from number two position to the leading position. In Southeast Asia from number five to become the third largest company in new equipment there, in Australia from number two to number one. In North America, we continue to be number four, our market share is clearly higher than what it was in 2005. Of course, these market positions, they give us a very strong starting point when going further.
In maintenance business, our average annual growth from 2005 to 2011 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 We have invested in acquisitions much more in 2010 and 2011 than in the previous years. About this 6.7% growth, roughly two-thirds has come from organic growth and one-third from acquisitions. This about the performance development and global market size and our market share development. Now I will move to how we have been developing and accelerating the development of our competitiveness. I think that this picture is familiar already to many of you.
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 mega trends that are driving growth in our industry. The most important of all of this is urbanization. Three and a half years ago, we defined ourselves a vision based on the urbanization mega trend. This says that in the more and more urban world, KONE delivers the best People Flow experience. This vision has two 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 two parts. First of all, we differentiate from competition by delivering the best user experience and the best customer experience. At the same time, we all the time strengthen our competitiveness by developing our people and our processes. Every three years, we define that what are the five most important major development programs that put our strategy best alive in that situation and help us to move towards our vision and continue profitable growth. One could ask that how come three years is not that a very long period. The reasons are the following. First of all, three years is a long enough time to develop some, let's say, permanent strength. 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 five development programs, we have three high priority areas that we take into account in everything we do, and these are safety, quality, and simplification. As the basis for everything, we have KONE values, which we develop all the time and measure the development of course also here. We have our common way to work globally, which is the KONE Way process architecture. These are the five development programs which we have been working with from the beginning of last year and will continue to work another 18 months. 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 five at the moment. 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. 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 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. This also means that we have been moving more and more to value-based selling.
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 second development program. Many of you remember that already four 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 continue to have the good spirit at KONE everywhere, even in a very difficult economic environment. 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. Of course, we are now even more active than earlier in promoting wellbeing, 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 People Flow, of course, our development of our new global product offering has been 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.
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 processes 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 big impact area as well. 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. Finally, in delivery chain excellence, we are implementing Lean and Six Sigma throughout the delivery chain. We are developing our processes to get a faster ramp-up of new products. We are also developing business specific delivery chains. All of these five 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 2008, we chose an approach that we are still using, 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 four, let's say key factors.
First of all, strong differentiation from competition with our development programs. All of these five development programs, they help us to differentiate. Secondly, learn to know, understand the market development with better granularity and hence be able to focus even in weak markets to growth opportunities and geographically and segment-wise. Thirdly, continuous improvement of quality and productivity and the fourth 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 program, they are very integral part of KONE, very central part of KONE. If I would call that this has been and will be very fundamental in our approach, I believe that what I will now say is even more fundamental.
Our objective at KONE is to develop KONE to become, in the long term, as strong company in this attractive industry as possible, as strong especially what comes to market position and absolute operating income. 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 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. Every year, we want to get strong progress in sustainability.
If you think about these five, customer satisfaction, employee satisfaction, faster than market growth, good financial performance and strong performance development in 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. We are in a good path, but we have a lot of potential to make KONE better. Typically, during the last seven years, we have had positive development in four or five of these areas. Always, if one, whatever of these five 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 again.
I would say that we have 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. This is fundamental in our orientation in how we develop this company. I have told you about our development in our business performance and about last year's market size and how our market size developed. I have started to discuss about how we have been accelerating the development in competitiveness at KONE, I go to the very essential element in that competitiveness, which is launching the 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 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 the time our investments in R&D. Now we have 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 totally new one. Hence, this full replacement is part of our modernization business. Of course, we have developed this new global product offering with the 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 have 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 improve our space efficiency, 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, which all makes us an even better partner to our customers. With the harmonized and modular technology, we will, when we get into more volumes, get even bigger economies of scale benefits. After me, Heikki Leppänen will tell about the new product offering much more. I just 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, then after that about the market and business outlook. Let's start from Central and North Europe and new equipment.
Many of you remember that in the first half of 2011, the development in new equipment markets in Central and North Europe was very positive. 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 markets have been stable or declined slightly. Markets are at a relatively good level at the moment in Germany, Austria, Switzerland, and the Nordic countries. On the other hand, markets are weak in Netherlands, which as we have communicated several times earlier, the impact of the recession started later than in many other country markets and the markets are going 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. Ari Lehtoranta 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 first quarter development 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. 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 a lower number of conversions to the maintenance space. I have here a combination of Middle East and Russia, where we see continuous growth. In new equipment in Middle East, the good growth has continued in Saudi Arabia. Then maybe a more interesting comment, because the first one was, I think, well-known, is that the development in United Arab Emirates show some signs of market recovery. The development in United Arab Emirates during the last five years has been such that before recession, the construction activity level was there very high.
There was a collapse at end of 2008. However, almost all of the projects have been continued after the first phases of recession, and now really, but the markets have been at a weak level. Now really we see some signs for more positive development. In Russia, the good growth has continued. In modernization and maintenance, the development has been positive both in Middle East and Russia. North America. The headline tells it all: gradual recovery. In new equipment in United States, the gradual recovery has continued, however, with regional variations. 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 weak 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 pricing environment is intense also here. Well, that's what is most essential 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 one market growth was 10-plus %. We said about quarter two that the market growth will be between 0% and 5%. This seems to be the case.
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. 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. We expect that the markets within these 45 biggest cities will start to develop positively by the end of this year. Bill Johnson 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.
This is quite, let's say, typical behavior in the Indian market that after a stronger phase, the financing is made more difficult, and then it is released typically quite soon, and the positive cycle starts again. We have communicated earlier, it is estimated that the speed of urbanization will be double during the next 15 years in India compared to the previous 15 years. India is and will be a very interesting market. In Australia, the markets are declining due to long lead times in decision-making because of the weakened economy. In Southeast Asia, the growth has continued. In modernization, the market has been declining in the biggest modernization market in Asia Pacific, which is Australia. Hence the overall market development has now been flat. Whereas in maintenance, the market development has continued to be very strong in Asia Pacific.
This about market development this year so far, then market outlook. This is exactly the same as what we said in April. In the new build market, we expect that the growth will continue in Asia Pacific, but a significantly lower rate than in 2011. We continue to see some uncertainty related to the development in the second half of the year. The markets in Central and North Europe are expected to remain relatively stable or decline slightly, and the markets in South Europe are expected to decline from an already weak level. The market 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. In maintenance, we expect that markets will continue to develop well.
Also the business outlook is exactly the same that where we upgraded it to in late April. According to this, we estimate that sales will grow 10%-15% at comparable exchange rates as compared to 2011. The operating income will be within the range of EUR 750 million-EUR 800 million, assuming that the translation exchange rates don't materially deviate from the situation at the beginning of 2012. We have, as I see, eight minutes at this phase to your questions.
Thank you, Matti. Please do wait for the microphone before you ask your questions because we have the webcast, everybody on the lines can hear your question as well. We have two microphones at the back, 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. I wonder, what is the basis for you estimating that growth will continue in China this year? If we look at the building starts data.
The first point is that I did not say that. Later when Bill Johnson will tell much more about China, he will say that our full year estimate regarding the China market growth is positive. He will also say the arguments why. As I mentioned, we have to see China not as, let's say, a single country, but as a combination of different regions. Bill will give so much information related to this that I will not, let's say, take his message 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 area. Last decision was yesterday, when the interest rates were lowered by 0.25%.
Okay. Thank you. Let's wait for William, just as a note, I can see from the slide that you say that China continued growth this year, albeit at a slower growth rate.
Okay. I'm sorry. You were right.
Katri, I think there was a question. Elina wanted to ask a question here.
Yes. Hello. This might go into the same category. I have a question on China as well. 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 45 biggest cities versus the rest?
It's about half and half.
Okay. Thank you.
Please, you will get so much information of China later today that you can ask also from myself. No problem with that, if you have other questions now, maybe that is an opportunity.
This is Tom Skogman from Handelsbanken. A non-China question. You have not really discussed your long-term targets, which is quite typical at Capital Markets Day, I assume they are reiterated. I just wonder, is it possible to continue to improve the working capital rotation? 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, Henrik will have that as a starting point in his presentation later today. He will tell also 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. Our balance sheet has been very strong. We have been doing relatively well also in difficult times. We had higher dividends this year than earlier. Here we have this kind of flexibility, which I consider as very good for all.
Just a bit of a follow-up on that. Is it possible to do any moves between the top four 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 transactions 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 Erk from Swedbank. You're describing the modernization market both in 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 it's something else there as well?
Yes. Regarding Central and Northern Europe, Ari will tell about SNEL. Of course, SNEL is bringing potential. 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. Also in some of the countries in Central and Northern Europe. Just to remind you that how the modernization 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. In 2009, the modernization market went down by about 5%. 2010, 2011, it has been roughly flat. As we estimate now and have estimated all the time this year, this year will be flat or slight improvement.
Okay, thanks.
Good morning. It's Glen Liddy from JP Morgan. You gave some interesting comments about the development trends in each region. Could you give us an idea of what's happening pricing for new equipment? You gave it mostly for maintenance, pricing in new equipment and also pricing in China. You talk about the growth not the pricing environment in Asia generally.
Okay. Very good. 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. 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 Heikki to continue? Thank you.
Yes. Thank you, Matti. In fact, before we let Heikki 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 four 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 KONE MonoSpace 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 eco-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 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 KONE EcoDisc 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 first 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. 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, 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 the lobby to the elevators and beyond. The new KONE MonoSpace is what the elevator of the future looks like. It's the evolution of our 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 eco-efficiency and makes it even better.
All right. Good morning, I have pleasure to introduce this KONE latest development result and achievements. This video is telling the key message. We are now develop completely new volume range elevator offering. 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&D and technology. I still feel that this is really the celebration of the new babies. That is going to be my story next 30 minutes, then after that there will be a good time for discussions and comments, and questions. Sure. I hope that I can be able to carry you now through this good story. As we all know, KONE has been a very good company on technology.
We have been in pioneer to make the elevator technology in the next step. Everyone remembers this machine-room-less elevator technology, what KONE was making first in the industry. We have done a lot of new things over the years, and we are systematically developing our product competitiveness. It's question, what is a good product? What does it look like? What are the customers and users expectation needs today? 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 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.
This story has been like a learning curve for whole our development teams. Now this competitiveness is improving. Question is that what is now coming out on all this exercise? We have now launched two new platforms The MonoSpace platform and MiniSpace platform. MonoSpace platform is targeting for the market segment where is no need for machine-room. The MiniSpace platform is targeting the market where small machine-room is still applicable. This is the global release where we are really able to cover all the market needs and market areas. We are now able to apply the same components, both those platforms. It's really a big step for our technology development point of view. What are those key elements which will make this platform as the future of the elevator industry? There's three very clear reasons.
First one is this better eco-efficiency. I will go through that in more detail. Second 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. We have done now these things that we have been able to combine those all elements to the same design, same product. Even the best has been done even better. I will now go through what this offering is all about, what are those elements and more details in understanding about what is behind those elements, and then I will comment what these elements would mean for our product competitiveness. These new product platforms are going to cover 60% of our elevator volume in years to come, and it will go to cover about 90% of our full replacement product offering.
It will cover, as I mentioned, the machine-room-less and small machine-room market, It will be able to apply on the residential segment, in office, in hotel and retail. It's very wide coverage in that respect. These new product are called in European market, MonoSpace 500, and in Asia Pacific, KONE N MonoSpace and KONE N MiniSpace. It's based on the harmonized modular components and platforms. 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. This is now launch is happening so that we will start the sales activity second half of this year. Early next year, it will be starting in North America.
This is the single biggest release in 16 years if you looked at the whole scope of this release. We have been developing the eco-efficiency many years. Thanks for Hanna Uusitalo and her team. We have been able to do a great step already in the earlier. KONE was the first company who was introducing the A-Class eco-efficiency in 2010 in elevator industry. Since that, we have now been able to improve the eco-efficiency even further. It is now 35% better than 2010 level. We are also able to apply this A-Class energy efficiency in full entire volume range first in the industry. If you look little bit later what this energy efficiency means. Here you can see the European case where we have 2010, it was first in the industry, we have a leadership.
We have been able to reduce today 35% from 2010 level. Major improvement step on this eco-efficiency in the European case. Here are two cases from Asia. On the left-hand side, there is this Asian KONE N MonoSpace, where we have been able to reduce 28% from 2010 level. In this KONE N MiniSpace, we have been able to reduce 20%. We have to remember that or I want to remind that all these measurements are based on the third-party measurements in customer premises. They are not in R&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 KONE EcoDisc machine. There is 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. 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. The friction means always source of the energy consumption, and that is now minimized. Other one is this regenerative drive, what has been used normally in the mid and high-rise elevators, high speed elevators. We have been able to apply that fully on our volume range. When elevator is accelerating, it will consume the energy, it takes the energy. When elevator is decelerating and stopping, it will generate the energy. We are pushing back this generated energy to the power supply network.
That will mean that it is about up to 35% better efficiency Comparing the case where there is not regenerated ride. That is a big step on this overall improvement. Third one is this lighting system. We are now applying the LED lighting full range that we are able to reduce the energy consumption comparing halogen lighting about 80%. We have this advanced standby mode system, what means that when elevator is standing, like nighttimes and during the days, and there is no passengers entering. All the electrical components like door operators, controllers, signalization, lighting, they will go into standby mode. We are minimizing the energy consumption on that way. All these four elements are behind this up to 35% or up to 10%-8% or up to 20% reduction on our MonoSpace, MiniSpace energy consumption.
This is the picture about this new machine. As I mentioned, it's totally new. There's a lot of important benefits. Eco efficiency, 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. Very many elements. Those who wants to visit on this our afternoon session, you can be able to see these things on real life. The second big theme on this new product is our ride comfort. The ride comfort is what the users, passengers will feel about on the moving, on the building. The feelings are part of that what kind of value and quality the building will reflect. Ride comfort is very essential. There's three elements on this ride comfort how to look it.
The first one, what is not normally coming in the 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. 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. Those three elements are the key, what we have now focused on. How we have done it, one is this, the hosting 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. There's a minimum source for any vibration inside the car. There's 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 source for noise and vibration. We are minimizing the source of the vibration by making very accurate centric hoisting. 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 that we have done in the new platform. It will be every elevator is taking those improvements now in the product in the next level.
Third 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, put lot of emphasizes to make the rigid car what will make a touch and feel impression in the good level. 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 will promise the quality what we are specifying. That is happening in all our installation. That is very fundamental improvement from customer perspective. Third theme, what is this visual design? The visual design has been also a very exciting story. We have developed design over the years.
KONE design team has won couple of awards already in the earlier years. 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 in the later, I think it's really impressive. What will make this design to be so great to our customers? It's not question that we are making something what is fancy or unique. We have really analyzed our customers' expectation, what are their needs? We have very wide design collections which will fulfill the expectation, different cultures in different building types, and taking into account the trends what customers are seeing.
We have wide design collection, up to more than 50 design versions, where customer can select Straightforward way how this design would fit on his or her building. Second one, there's always customers who wants to make their very own way, and on that purpose, we have now the widest collection, all materials and accessories, lighting systems, where customer can make the tailor-made own design. We have this easy-to-use CAD system for architects and designers who can see immediately what is the design solution for that. 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 here in the break time. These are really creating the very new taste, what is this elevator can look like in living building.
We have this design has got already a recognition outside this industry. We have got four Red Dot design awards for this design collection signalization. This Red Dot design award is the biggest international competition where over 1,800 companies were participating from 55 countries. KONE design was able to get four awards on this. I think this is really good recognition for our design team. That is the picture where I mentioned this car design, that every customer can have online tool where she or he can select what kind of lighting, what kind of door, wall panels, finishing patterns, what kind of walls and ceilings and floors can be put on his case. That is helping our customers very much on this design optimization. There are some examples about the design collections, about the car design, and the signalization.
There's plenty of different kind of variation on these. These three elements, eco efficiency, ride comfort, visual design. They are valid for all customer groups around the world. They are the, how to say it, these are the drivers in every market, every customer group. There's requirements in specific customer segments. For example, this whole replacement market in Europe, this space efficiency is very vital part of that market requirement. We have now been able to also apply that this new product will cover these space efficiency requirements in a very good way. If you look to Europe market, there's 2.5 million elevators which are more than 25 years old. This market demand for space efficient elevators is growing.
This new MonoSpace, as well as it's giving this kind of eco-efficiency, ride comfort, design improvements, it will also be able to now cover 80% of existing European elevator shaft sizes. We are able to apply this product in the existing shaft 80% of the cases, and then we can be able to put the bigger car on the existing shaft sizes. That is a very big driver for future. In cases where we have very difficult space requirements, we are using our existing great products like MiniSpace and those. This new product is going to be as a platform to cover the major part of the whole market need. These are, let's say, the elements on behind those. What that is all about? What that would mean for our product competitiveness?
Is it just that is nice to have or is it really valuable and important? I want to give this explanation about using this picture. This picture is our own view about where we are. These dotted lines are our existing position, and I want to remind that our product portfolio today is good, it's great in many ways. As I said, we can always look at how we can do it better. We are already today leader on the eco-efficiency, because of these new great improvements, we are able to make it even stronger. We are clearly saying our leadership in the eco-efficiency will be in the market in the top. 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 the KONE as a leadership also in these two areas from product performance point of view. The space efficiency is important, we are really making a good improvement there. At least we are in the par if you compare the best possible alternatives in the marketplace. We are now really creating value. We are minimizing our customers' total cost, that's where we are also improving our life cycle value for our customers. Installation has been always our strength. Now these improvements are even making better. These are the big picture. If you look from customer angle, the good great products are good, 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 building planning phase. They are looking the solution which will make the construction time, construction phase better. Then we look how we will use the product in the normal use. 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. 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 cost and benefits. We have design tools where customer can really online select their own design alternatives. They can choose different alternatives.
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. 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 make the building construction time easy and we don't have any difficult interfaces between elevator and the construction company. We have developed our installation processes that we are taking into account the construction constraints on the site to ensure that we are always in the quality, we are punctual, we have taken into account temporary electrification on the buildings and so on. In handover and there we guarantee the quality that we are really able to say that we are delivering what we are promising every case.
These are the big things and also from top of the products. If you look now this picture. These three elements, I repeat, eco efficiency, right product design, they are valid for all markets, all segments. The phase efficiency is important in dedicated segments like for replacement in Europe, it's very important. We have these processes support tools to make our customers processes efficient, easy. Then we have these global products, global components, technologies we have been able to apply in full range. That sounds very clear, but being long time in this design world, R&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.
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 into one harmonized product portfolio that we are able to really make the step improvement on the competitiveness on the products. 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. Of course, we believe that this is also the foundation where we can really improve our competitiveness further on.
That is really my point, that this is not one item, this is combination of the elements which will make our competitiveness better. 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, Heikki. The same principle applies. Please wait for the microphone.
Michael Hagmann at HSBC. Two questions. First, if you could give us a more granular picture of the rollout pattern for the product. You already mentioned you are starting in Europe, then you go to the U.S. How long will it take in the different regions to roll out the product? 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 how we are now ramp up and roll out this. We have now released that internally in Europe and Asia. It will cover all the other markets this year. North America will start early next year. We have country specific implementation plans. 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. If you look at the time span, what that would mean that If the architects and developers are looking the new projects, they are of course making the big plan first, and they are asking the different suppliers, like elevator suppliers, to tender. From tender to the order is typically, in European case, it is about three months.
From order to the installation, it is typically six months. It can be nine months. Before these real volumes will go up, it will take easily, let's say, from tender phase to the installation phase, about six to nine months. That is, let's say, the European view. In Asia, in China especially, this is much more faster. Coming back on this question that what that would mean for benefit and cost. I first repeat what I said about this. We are now harmonizing the KONE technology portfolio to cover both machine room and machine-room-less elevator by using the same components globally. This will take time until these new platforms are fully replacing our existing products.
That way it will have a certain transition, how to say, work and impact, at the end of the day, it will be simplifying our total product portfolio, our delivery chain processes, our training processes, our maintain our existing product technologies and so on. It will be in mid and long term a very big improvement for total cost and value. That's my answer. Thank you.
Hi, Riel Freie 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.
Okay.
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? The final question is: when it comes to new equipment, I can understand how you improve your product portfolio and your cost base. When you go to maintenance, this actually makes it more complex for your engineers. Suddenly they have another product to service. Can you talk about how that works through, how that becomes a benefit?
Okay. How this new product is going to cover our existing portfolio, first let's look from the total. We are now covering the all geographical market areas, North America, Europe, Asia. We are covering our key market segments, residential segment, office, hotel in the low mid-rise area. We are covering partly the retail sector. It's a very big portion on our customer base. 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. Of course, we have this more demanding office segment, high-rise business, then escalator and medical sector and those. We have still, of course, those areas where we have different requirements.
This technology, of course, can also be applied partly on those products. In that way, we will get the benefit also in the component level in the wide range. This 60% was, let's say, looking from the customer market coverage point of view. 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. The other part of the question was-
The other part, one is-
Maintenance
how many products do you actually-
Right. Exactly. That is our total. Why we are making this harmonization is really simplifying our life cycle cost or our product portfolio in the maintenance, in the modernization and spare parts. 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. 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 KONE delivery product point of view. It will simplify our maintenance service business in the longer term.
You are right, in the short term, it can have certain, let's say, transition time, cost, and efforts what are there. That is happening anyhow when to introduce the new product. This is of course the big thing for us to have a wide transition or wide coverage at same time.
Hi, Erkki 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 EUR.
Yeah.
How important is that?
Yes. That is the absolutely right question and every customer is asking it. Please tell what that would mean. That's why we have this energy calculation tool where a customer can calculate his case exactly in what that would mean in practice. I will give some kind of simplified case because that is maybe helping everyone of us to understand. If you will take today the Central Europe country, we will take the typical residential elevator case, weighs 630 kg, 1 meter per second, four floors, 50,000 or 100,000 stops per year, which is very typical low duty case.
If you will look this new product, if you compare average product in the market in Central Europe, 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, which we are now telling today, is paying back the whole elevator price. That will give the point. It's remarkable. Also, we have to remember, the energy costs, I don't believe they are going downwards, they are more upwards. I think these benefits are going to be very remarkable. I'm more than pleased to show how this is calculating, whatever case we want, whatever country we want. It's really valuable. You are right, if you count the short-term, the annual or monthly, we speak about EUR 500 or x hundred EUR.
It's not the big thing. If you look at lifetime, it will be a major thing. I would say that this energy efficiency is not option. It's mandatory. It's a prerequisite that the companies who are going to do this is going to be leading on the market.
Okay. Thank you. How does the new product line perform versus competition in terms of energy consumption?
We have done several hundreds of measurements in the marketplace, but of course, we don't want to give any comments about our competitors. We are focusing what we are able to do ourselves, what we are able to improve ourselves. As I said already, we are market leader today, and this is even going to be strengthening our position in the eco-efficiency.
Okay, thanks.
Hello. Elina Riutta from Evli Bank. How is the pricing of these new products versus what you have in the market currently?
Of course the market pricing very much depends on the local situation, local segments. Of course, when we look that if this product will, as we really see, we will give for our customers better value, we will make the more valuable building, we will make the more, how to say, quality in the building and user experience in the building. I am sure that this has a positive impact for the pricing. I do not want to give any definite numbers or speculate. It will be, of course, very much up to local market situation. I am very optimistic.
Thank you.
Do we have further questions to Heikki at this stage? Patrick Rudolph had a question here.
Sorry, just one more links a bit on the cost base. If you standardize this across the globe, your cost price for the various regions, is it quite comparable?
Cost price?
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?
If you look already our existing situation today, we have a global supply delivery centers. Already today we are using, of course, our supply units in optimal way. Taking into account the total cost, the currency rate, logistic cost, product cost, and so on, installation cost. Installation cost are always a local issue. It's a question about the country and the installation things on the each area. In this new product, I don't see any major change what we are doing already today concerning our supply chain and the cost. We have a supply unit in each continent. We are very much balancing if there's some changes, drastic changes between the continents or currencies, we have freedom to select those kind of things. We have to remember that our product total cost, the major part is coming from our suppliers.
Our supplier network is very important part of the whole, let's say, total cost development. 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 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. Please note that there are tables, we put tables also outside now that the weather is so nice. You can use the tables outside as well. However, as a practical remark, do not use please, these doors here. These are emergency exits. 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 10:30 A.M. Thank you.
Waiting patiently in the sun. I don't know why I didn't come. I left you by the house of fun. I don't know why I didn't come. I don't know why I didn't come. When I saw the break of day, I wished that I could fly away. Instead of kneeling in the sand, catching teardrops in my hand. My heart is drenched in wine. You'll be on my mind forever. I would cross the endless sea. I would die in ecstasy. I'll be a bag of bones, driving down the road alone. My heart is drenched in wine. You'll be on my mind forever. Something has to make you run. I don't know why I didn't come. I feel as empty as a drum. I don't know why I didn't come. I don't know why I didn't come. I don't know why I didn't come.
Spinning, laughing, dancing to her favorite song. A little girl with nothing wrong is all alone. Eyes wide open, always hoping for the sun. She'll sing her song to anyone that comes along. Fragile as a leaf in autumn, just falling to the ground without a sound. Crooked little smile on her face. Tells a tale of grace that's all alone. Fragile as a leaf in autumn, just falling to the ground without a sound. Spinning, laughing, dancing to her favorite song. Well, she's a little girl with nothing wrong, and she's all alone. A little girl with nothing wrong, and she's all alone. I've tried so hard, my dear, to show that you're my every dream. Yet you're afraid each thing I do is just some evil scheme. A memory from your lonesome past keeps us so far apart. It's your cold heart.
Another love before my time made your heart sad and blue. My heart is paying now for things I didn't do. In anger, unkind words I said that made the teardrops start. Why can't I free your doubtful mind and melt your cold heart? There was a time when I believed that you belonged to me. Now I know your heart is shackled to a memory. The more I learn to care for you, the more we drift apart. Why can't I free your doubtful mind and melt your cold heart? The sun just slipped its snow below my door. I can't hide beneath my sheets. I've read the words before, now I know. The time has come again for me. I'm feeling the same way all over again. Feeling the same way all over again.
Singing the same lines all over again. No matter how much I pretend. Another day that I can't find my head. My feet don't look like they're my own. I try and find the floor below to stand. I hope I reach it once again. I'm feeling the same way all over again. Feeling the same way all over again. Singing the same lines all over again. No matter how much I pretend. Oh. Oh. Ooh. Oh. So many times I wonder where I've gone. How I found my way back in. I look around a while for something lost. Maybe I'll find it in the end. I'm feeling the same way all over again. Feeling the same way all over again. Singing the same lines all over again. No matter how much I pretend. I'm feeling the same way all over again.
Feeling the same way all over again. Singing the same lines all over again. No matter how much I pretend. No matter how much I pretend. Oh. Oh. Oh. Come away with me in the night. Come away with me, I will write you a song. Come away with me on a bus. Come away where they can't tempt us with their lies. I want to walk with you on a cloudy day, in fields where the yellow grass grows knee-high. Won't you try to come? Come away with me, we'll kiss on a mountaintop. Come away with me, I'll never stop loving you. I want to wake up with the rain falling on a tin roof while I'm safe there in your arms. All I ask is for you to come away with me in the night. Come away with me.
Summer days are gone too soon. You shoot the moon and miss completely. Now you're left to face the gloom. An empty room that once smelled sweetly. Of all the flowers you plant and find, you knew the reason. Why you had to each be lonely. Was it just a season? Now the fall is here again. You can't begin to give in, it's hard. When the snows come rolling through, you roll in too with some new love. Will you think of times you told me that you knew the reason? Why we had to each be lonely. It was just a season. Will you think of times you told me that you knew the reason? Why we had to each be lonely. It was just a season.
Welcome back. Let's continue right away. Our next presenter is Ari Lehtoranta, who's the head of our Central and North European business. 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. 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 finish with proudly presenting some of our latest references. Not only to present the references, 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. All the German-speaking countries, 5 countries in Eastern Europe, all the English-speaking countries, then the Scandinavia, Finland, and Baltics.
We have in our area about 2 million existing elevators and escalators running. In the new equipment, we represent about half of the EMEA areas 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 second 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.
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 what kind of maintenance and scope needs to be there in place. New equipment market had a very good development last year. We have been estimating that the earlier part of this year, including now April and the May timeframe, 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.
On the other hand, we have had some delays on the decisions in Netherlands, some decline. 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, Hungary and Slovenia, having some challenges. We grew our market share last year in our area. One of the main reason was our good success in major project segments that was developing very well, especially in U.K., as many of you have seen. 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 two 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 new equipment customers for maintenance. We have also a very good retention rate, which then tells about our competitiveness in the maintenance. 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 third-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. We have therefore main segments. We have the repairs.
We have in our area clearly over 50% of the 2 million units are already over 20 years, there's a lot of repairs needed. We have the modernization for various different reasons. We have full replacement segment where we are then replacing the whole elevator or escalator units. We have a specific segment which is for the buildings, existing buildings which don't have yet elevators and elevator shafts. We are delivering both. The market have been strong in Sweden, especially strong in Sweden. Austria has started to grow this year, the market because of the SNEL 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. Going for these three different businesses and what we are doing. I start with the new equipment and I continue from Heikki's presentation and tell you what is the impact of this new product for our area. Several messages on this slide. First of all, it's good to note that this new product offering covers most of our segments in a great extent. 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 very extensively. 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 we feel that are the most positive in terms of future prospects. 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 kind of importance of the benefits varies a bit. For hotel segment, for example, the ride 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 of our impact coming from this platform also on the modernization in full, specifically on the full replacement area. We are extremely excited. I had my sales guys in training here one or two 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. Now we are able to bring this new offering on the discussion table. It feels very good. 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. Organizing the customer launch events.
As I said, we start tendering and selling in early autumn time. We went through already some of the phases that from the tenders to the actual orders, it takes certain months. We start manufacturing, we start shipping, we start the actual construction and installation. There is a certain construction time usage typically. Handing over the maintenance. Volume-wise, we are ramping up the impact next year, but the full volume benefits in terms of deliveries will take place 2014 with full scope at that time. Okay, moving on to modernization. Here I'm going to talk about growth. Modernization is a market where we have many drivers to provide us good growth opportunities. I said one of the drivers is this existing installed base. Clearly 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. Truly, there are some very old elevators existing. There was a question about the SNEL. I will come back to that in a while. That's one of the drivers. The safety norms are pushing, in some of the countries, lots of activities in our customer base. 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. 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 aging. Many other things like, for example, brand image of the office buildings. When you are having a new office being built close to you need to be able to modernize and increase the brand of your own building. One of the best ways is to modernize the elevators. The eco-efficiency, environmental friendliness is pushing for modernization. All this makes it a little bit more difficult, really, to estimate the size of the market in these different segments. We are shooting for growth. One of the best ways to start the growth is to increase the number of opportunities. We are having lots of new educational campaigns, awareness campaigns with our customers. We are much better utilizing the third-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, we have developed ways to support our customers on the asset management planning. On the third-party products or non-KONE customers, we are extending our reach, having more customer visits and having better capabilities on addressing their 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. 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. 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 more time with customers, visit them more often, and consult them better than in the past. This way, we are able to address the opportunities without dramatically increase the 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. 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. We also train our dedicated installation teams to handle the specific packaged repairs, making it very effective. Of course, we do the same for the maintenance. We are creating centralized engineering teams to be able to address this very specific, typically customer-specific design and planning work for the modernization. The fourth 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. We are working constantly on developing our offering for escalator modernization, for existing building lifts segment, and then for these new packages and components, including also the high-rise modernization and new destination control offering.
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 recent changes. Sweden has had a very good growth in the past few years. The Snell deadline is now at the end of this year. 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 late the next year when the inspections will be done by the TÜV organization for those units who have not been modernized. What will be the force? What will be the impact of, for example, the insurance companies? We will see then, but clearly a positive one already. In Switzerland, the situation is about the same. 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 base 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 scattered to the wide geographical area.
You have very many different types of activities and levers that you need to work on. 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 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. 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 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 as correct, and then they are as efficient as possible. You want to reduce the hours that are so-called indirect hours.
This includes, for example, travel time and so on. Density naturally is an important booster of the productivity. 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 the each of the fitters. Call-out rate, we have had a constant good development of reducing the call-out rate. Call-outs 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 second key area of the productivity.
You want to optimize 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, which will then, together with increased value and base, will result to the better profitability of the 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. Shard, you have seen this growing now, and then it's coming now for opening. 5th of 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. Renzo Piano is the architect, developed by Sellar Properties together with Qatar Investments. Specific features from our side in this particular reference includes a heavy use of JumpLift 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 two other great buildings that are now you see them going up at the moment. Richard Rogers designed the 122 Leadenhall, nickname is Cheese Grater. You can understand why. Will 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.
Then 20 Fenchurch Street, Land Securities and Canary Wharf Group, originally designed for 200 meters, now reduced to 160 because of the impact to St. Paul's Cathedral, but still a high building, nickname Walkie Talkie. Again, no wonder why it will be opened at about the same time. Rafael Viñoly is the architect for this build. 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 retendering, and we will, of course, naturally try to get that one as well. 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.
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. Then it's much more than the product. It's also the capability to support the customers in construction. I mentioned the JumpLift already. It's about our capability to plan and simulate the People Flow in those buildings so that the 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. 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.
We welcome questions to Ari about his presentation and area.
Lars Albert from Keva. I have actually one question about the new elevator, as 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 go to a little more technical stuff, Heikki may need to help me. You need to be able to have a kind of good quality electricity, same sine curve when you feed it back. In several countries, you will not be able to get any saving in terms of your meter rotating to the other direction. There are countries where we can do that as well. Then, of course, the other natural way is to feed it back to the actual building. From the buildings, the lift system uses about 2% to 10% of the electricity of the whole building. Typically, you can feed it back to the building. That area is developing constantly when we are having these opportunities to regenerate electricity from the elevator system.
Michael Hagmann, HSBC. On the maintenance business, you were mentioning the third-party servicing. How many of the elevators or what percentage of the elevators that you service is now third party? How much would that have been, say, five years ago? What is it going to be going forward?
We don't reveal the exact numbers, 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. 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 elevators, you have a mix. There is a big difference on different products. We aim to have a good profitability from all of our maintenance base. That's why we need to develop. We have developed, for example, this third-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. You need to be able to look at. For example, we start naturally from the bigger volumes of the third-party equipment, or we may decide to go for the hydraulics knowing that they will be replaced anyway and then later on.
This drives, again, this kind of intelligent selectivity of the opportunities
I just had a question about the full replacement within your modernization. What proportion of your modernization revenues actually goes towards full replacement?
It varies a lot in different countries, and it seems to be so that the richer the country is, the more they do full replacement. That happens, for example, in Austria and Switzerland, to a great extent also in Netherlands. In some of the countries, like East Europe, that's more package and then component replacement.
Can you maybe give us a context in terms of how old they are on average? 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 lift lifetime. 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.
Hello, Tom.
How many elevators do you really have in the service base in this area? 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 million units overall in this market. Again, segment specific differences. In the residential side, the contracts typically are very small. The average size is only a few elevators for the maintenance contracts. When we go to the retail and office, typically we get then tens or even in some cases we have hundreds of units under the same contracts. The biggest ones are even up to a few thousand when we talk about, for example, some facility managers or some big city organizations.
The reason I'm asking, 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, again, it's only in certain segments. For example, facility managers combine for their bids, they typically combine more units. Maybe the cities do the same. Again, in some of the other segments, in residential, you don't see that. Retail has been there already for quite some time, 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, assumably a lot of questions after this one as well. 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, Karla, 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. 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, of course, is sustainable growth. We've had a great story over the last seven 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.
We'll look at, just briefly, the new products that Heikki mentioned this morning, and I'll give you a little bit more context how they're going to work for the China market. We'll talk about the maintenance and modernization opportunities as well. Finally, we'll talk a little bit more about what the future looks like for KONE and how we're going to move forward from there. Let's go right into some of the macroeconomic data. Matti talked a little bit earlier about the interest rate cut that China announced yesterday. We need to keep some of this in context, keep that in mind as we're talking about some of these figures here. 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 million people, according to McKinsey & Company. It's a huge portion of the overall GDP. We look at this number quite closely. You can see that the GDP has slowed down from 2011 in Q1 of 2012. 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, et cetera. 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 two years, the rate, but it's still growing. It's still growing at a quite healthy pace. 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 in a sort of aggregate sense without. You have to look a little bit more deeply in terms of the geographic distribution of the growth. 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 and 2011 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 two 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 onto the market to keep prices in line. On the demand side, the government has continued to limit second and third 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. They still 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 a monetary policy side, they want to continue. 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. As you can see, they have just done a third cut of the reserve requirement ratio for banks recently. 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 climb. In 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.
Let me show you a chart that shows you the geographic distribution. If you look at this chart, you can see that some of the big changes that have taken place from 2011 to 2012, as you see the north province there and the two western provinces, that investment has significantly slowed down there. Now, the good news is that these are very sparsely populated provinces. Interestingly enough, you see that growth has taken place up in the northeast and down in the southwest. Also you're seeing that we're seeing steady investment still taking place in the central provinces, moving from the coastal cities towards the inland in this effort to rebalance. The government has made this a very clear objective of theirs, and it seems to be working so far. 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 2012 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%, 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 a negative growth. In the next 45 cities, there'll be some additional growth there taking place. 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 be affected mostly will be the commercial residential market. That will slow appreciably. A lot of that, of course, is taking place in the top 45 cities, where the market is a little less price sensitive. That will be the area that will be most effective going forward in 2012. We mentioned the affordable housing in 2010. The China government made the announcement that it intended to build, over the next five years, 36 million affordable housing units. Now, there has been some recent discussion whether or not that will be a total of 36 million units or maybe around 32 million units. Nonetheless, the effort is very clear.
The affordable housing market is an objective by the government, and they're pushing that hard. In 2011, 10 million starts in this area were announced. In the Q1 of 2012, we've already had more than 2 million 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 the elevator market, to the elevator industry in the latter half of this year. That's why we're saying that we see growth picking up towards the end of 2012, particularly because of the affordable housing market.
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 Heikki and his team, R&D, looking at what kind of product we needed for this specific segment. By early 2011, we had launched the KONE E MiniSpace, 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. We're quite positive to see this growth taking place. Our hope is that the percentage of the affordable housing market will be approximately one-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 one-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. 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. The global players have brought their full portfolios, high-end to low end, and most 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. They're in the second and third-tier cities and in the mid to lower end of the elevator market.
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. It has grown, and I'll have a slide in a few minutes that will talk about the overall maintenance market growth. 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 three to five years behind the global players. Local competitors, local suppliers, typically do not do maintenance. They allow the local service companies to do that for them. Overall, there are about 430 licensed manufacturers of elevators and escalators in China.
It's a quite competitive arena for sure. One slide to talk about our offering in China. As Heikki mentioned, the N MonoSpace and the N MiniSpace 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 N MonoSpace is going to help continue to emphasize our leadership in the China machine roomless segment. In the N MiniSpace, that's going to also improve our competitive position in the mid-rise elevator segment. This is good news for us.
In addition, we continue with the selling of the E MiniSpace 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 GiantKONE. GiantKONE will continue to have its own product segment. We have already begun to look at that more closely, how we're going to work together with GiantKONE 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 1.6 million.
It had grown to 1.6 million, and by 2011, it had already hit 2 million units. You can see this big growth in the new equipment market really is now feeding very nicely into the overall lifts and 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. There is quite a high degree of self-maintenance among developers and management companies.
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's 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. We're also looking very closely at this market segment to make sure that we have the right kind of 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 elevator maintenance regulation situation. In some cases, provinces have already begun to implement requirements for two-man maintenance.
Two-man maintenance helps improve safety for the maintenance teams, as well as the efficiency of getting in and out of buildings. This is good for us because, overall, two-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. Generally, it's a higher quality level of service. We've also recently been working with the central government. They've inquired how can they improve the overall maintenance program, safety, and quality. We've shared with them our modular-based methods, explained to them how we go about doing our service, how we train our people, they've taken quite keen interest in that. They're also looking at how to improve the overall standards within the industry. Another interesting development that's taken place in 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 their understanding and their control of the overall buildings that are in their cities. 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, our retention rates, while not quite at the KONE global level, are very close. 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, we see that continuing to grow over the next several years and at approximately the same growth.
It's a little bit lagged 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, the right number of people in all these markets to support this growth. That's another thing that we look at very carefully, 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. We've been very optimistic. We've seen very good progress in this area and our service business.
We've also looked at how to offer different types of maintenance services from the very high-end customers to the affordable housing market and provide different levels of service. Again, to support our margins in that business. 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. 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 KONE methods. Modernization. I already 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.
You can see that it's still a very small market, but by 2020, it will be over 240,000 units. 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 U.S. In fact, it's probably, in some cases, double what it normally is. The wear factor, the aging factor of the units is a lot faster there. 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's only 10 years old, but my elevators don't look as nice as the guy's next door.
What can you do to help us improve the look, the ride comfort, the design of my elevators?" That's another excellent opportunity. 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 third-party equipment. Okay. KONE in China, and what we're looking forward to in the future, but let's look a little bit to what we've done so far. You can see that our growth has been very strong over the last seven years since 2004. The market has overall grown 21% on average per annum since 2004.
KONE in China has grown 42% per year. Interestingly, by the way, this figure only includes December 2011's GiantKONE's figures. 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 a great opportunity to improve the overall portfolio. 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. The latest being, of course, the affordable housing. 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 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 GiantKONE, we have over 87 branch offices. We have 34 sales offices and more than 200 service stations around China. It's great coverage. Part and parcel 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. That's, I think, been a key part of our success is giving the customers a lot of confidence that we can do that. 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. 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 KONE brand and the Giant KONE brand, you can see we have great coverage across all market segments in terms of products, but also in terms of geography. I'll just skip this slide. I'll come back to it. You see when you look at the combined Giant KONE and KONE map, you can see that we clearly have very strong coverage. And remember I mentioned earlier about the Northeast segment.
If you look there, we have very good, strong coverage there, in the Southwest as well. 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 KONE. Giant KONE, clearly our plan is to make Giant KONE a standalone brand. It has its own customers, its own offering, its own distribution. We want to make sure that we can continue that to capture that market segment, which the KONE brand doesn't necessarily address fully. It has its own product portfolio. 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.
At the same time, we want to take advantage of our total overall size in China and go for opportunity sourcing synergies, and look at back-office operations such as finance, HR, legal, communications, et cetera, so that we can really begin to save costs in that area. 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. It's not been easy. As you see that we've grown since 2005 from 2,000 people to today, or the end of 2011, to over 7,000 people.
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. As a result, for us, we have a lower-than-market turnover of our employees. China's 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 we provide lots of opportunities for our employees and good understanding of what motivates them.
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. 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. KONE in China today is number two, 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 a market-leading service portfolio into China, which we are today. We're number one in the aftermarket service business in terms of units.
Key areas going forward. Clearly, we want to continue to work with Heikki'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 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. 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. Finally, talent. That will be the key to the future. 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. Karla?
Yes. Thank you, Bill, very much. Now we are open for questions to Bill about China.
Michael Hagmann at HSBC. I was wondering about labor cost inflation, 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 contracts 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 three sides. One 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 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.
It's not a question of why, it's a question of, oh, we also are facing the same situation. 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 Skogman 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. We have understood that the profitability on new elevators has been much better for KONE 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 if it seems that all competitors are also building up more capacity in the country? If you look five years ahead, can you have the same margin on new equipment as today?
I think what we're seeing in the market is clear. 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, 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're able to satisfy that requirement, which I believe we are able to. I also think that KONE, we have a great momentum going forward, and our brand image has gone up as a result of our good success in the past. 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.
Hasn't that been the case also in all other markets? In other markets, the margins have come down to quite low levels, and you make money on service. 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 provoking.
Okay, we have a question for Didrik here.
Just a question.
Please.
I didn't attend last year, maybe you got the question over the last year a couple of times.
Fair enough.
If you could just spend one minute on what you think are the biggest differences between Otis, where you spend a whole lot of time, and KONE, culturally and business model-wise, et cetera, if there are any.
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 KONE culture is like. I think Matti'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. KONE China follows that model very closely. I think that speaks a lot for what we believe in China. Particularly customer service, employee engagement, all those key values are very important to us. I think that's the clear picture for us on the KONE side.
Yes. Jan Kalenor, Markets. Just on the growth outlook for China, looking a little bit beyond this year, in the next year, and thinking of what's happening this year and will that have implications for next year. In affordable housing, you say that you're getting a little bit of boost this year, 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, where 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.
Would you be suffering from a lag next year there from perhaps the startups turning into an elevator markets later on? You're also looking for the commercial and infrastructure side, you're looking for clear growth this year in your graph. If you looked at the startups and the real estate market this year, how would you look 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 2012 and 2013. Remember this year, we're going to add another 7 million units to that. For KONE's business on this side, we're still underweight in terms of our portfolio of the affordable housing. 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 announcements by the government to do this again, I think it's clearly they're going to try to re-stimulate 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.
Again, going forward, we don't have any specifics at this point in time, but there are strong indications that's going to happen. We've typically had very good success in that. 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'll have a pickup and what that might mean for 2013, we'll have to keep a close eye on that. It's still early to speculate at this point in time. I think that, A, we have the products for it, and B, 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 can't read the future perfectly, but I can say that if the opportunities are there, we're well positioned to take advantage of them.
Okay. Thank you.
Good morning. Alexis De-Ane for BNP Paribas Exane. Just a question about your strategy on the maintenance. We see that the density of the base is very important to get
Yes
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 got maybe on the M&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 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 two company is. 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.
Okay. Very good. The second question, if I may.
Please.
If I look at the comments from your U.S. competitor, they mentioned being in a position or at least trying to regain market share by adjusting their price downwards.
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 from these last few years. We've been able to command a premium in the market compared vis-a-vis all our competitors. We hope to continue to keep in that good trend. Again, it's watching the market carefully. Yes, certainly watching what the competitor's doing, taking a look at where the market, the trends are growing. With these new products, the N-Series products, that's going to give us additional competitive advantage.
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 Erkki Vesola from Swedbank.
Yes.
Coming back to the affordable housing dynamics, what's a typical start to completion timeframe, and at what stage within this timeframe is the elevator typically ordered?
A lot of it depends on where it's located, 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 nine months-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. The tender to order process is anywhere from five months-six months. From order to delivery is approximately anywhere, again, from three months-six months. It depends on the size of the project, but three months-six months, and installation is very rapid after that.
Thanks. That was very helpful.
Thank you very much, Bill. Thank you for your questions. Now it's time for the second break of today, and after the break, we will continue at noon sharp. Please be back at noon, and again, refreshments outside, and please feel free to use the outside area as well. Thank you.
Play the little songs you give. You've got things to say. Mind if I play you? Let's make music and love. I know My heart is locked and you've got the keys. A simple harmony and we will see why I need you and you need me. Hi, how are you? Where you been? Anybody let you play the little songs you give? You've got things to say. Mind if I play? Say, do you mind if I play? Let's make music and love. I know the two of us can paint the colors of sound. Do you mind? My heart is locked and you've got the keys. A simple harmony and we will see why I need you need me. Hi, how are you? Where you been? Anybody let you play the little songs you give? You've got things to say. Mind if I play?
Say, do you mind if I play? Do you mind if I play? Do you mind if I play? Done it all, still he's done nothing at all. The sweet loving great pretender. Got his name on the wall and every field. Filled with nothing at all. The way simply to surrender. Swallow hearts and soul. Now he's in a different place, sees a different face as he sees himself from above. Had it all, still he had nothing at all. The mad charming little spender. Always living above, heading down here. Straight up hitting the wall. Self-fate was his main contender. His reality call. Now he's in a different place, sees a different face as he sees himself from above. Seen it all it seems. He's seen nothing at all until evening of November. Through the colors of fall like a spine chill. All what he can recall insane.
All he will remember is the magic of all. Now he's in a different place, sees a different face as he sees himself. Now he's in a different place, sees a different face as he sees himself from above. Went looking for a book today. The kind you read at night. Put it on your pillow light. You put it on your pillow and turn the pillow sideways like you do.
I play that song you always play when it gets dark at night. I open wines that we would drink. I taste and ask you what you think.
There is no one there to even smile that loving smile that you would smile before me. Look into my eyes and let your eyes adore. Travel straight into my soul and then explore me. I just wonder where you are. You know the dress you bought for me. I'm wearing it tonight. I've let my hair out just because you like to watch my hair let out. I run my fingers through it like you do.
I've lit the candles we would light when we are all alone. I serve your favorite dish and wait for you to make your favorite wish.
There is no one there to even smile that loving smile that you would smile before me. Look into my eyes and let your eyes adore. Travel straight into my soul and then explore me. I just wonder where you are. Smile that loving smile that you would smile before me. Look into my eyes and let your eyes adore. Travel straight into my soul and then explore me. I just wonder where you are. I just wonder where you are. I just wonder where you are. I've been kind of fine all this time, but I should have written you some time ago. I just can't deny how I cry 'cause I never thought that I would miss you so.
I will never say bye to the pictures that I have of you. What can we do? I hope that you see pictures too. Pictures of little things we used to do. Used to do. Little things we used to do.
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 on how we could continue to improve. Our next presentation will be from our CFO, Henrik Ehrnrooth. Henrik will be talking about how we drive KONE's profitability development. Henrik, please go ahead.
Okay. Thank you, Karla, 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. 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. After that, we will wrap up with Q&A. 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.
Our objective continues to be to grow faster in the market and to reach an EBIT margin of 16%. In cash flow, our objective is to improve our working capital rotation. These are our long-term targets. However, when we develop our business, I wanted to also explain how we focus on our financial development in order to generate the best returns over time for our shareholders. When it comes to profitability, the most important focus area for us is the long-term absolute EBIT growth. 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 a negative of EUR 388 million. This business does not tie working capital. Also, this is a business that generally does not require significant CapEx to grow.
As we can see that our tangible assets are only EUR 216 million on average over the last year. 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. The most important one is to grow EBIT over time. 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. Hopefully this tells a little bit 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 wanted to provide some perspective of how our profitability has developed since about 2005, when the EBIT margin was around 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 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. Quality and productivity has since been a constant feature and one of the most significant drivers of our productivity. As we have grown, we have been able to get leverage out of our fixed costs.
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 had periods when we grew faster, our margin and periods we grew slower. For example, in 2008, 2009, we had clear raw material headwinds and then that turned to tailwind. Now again have headwind. Hopefully this provides some perspective of why our margin has developed as it has been developing over the past years. 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 than we have had over the past years, and I'll touch upon those also.
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. First 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 it's really how do we improve our maintenance method, that way improve our quality of our maintenance and improve the ability to plan our maintenance. The less we have unscheduled call-outs, the better we can plan it. 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 installation efficiency and reduce installation times. These are very important factors in our profitability. Pricing excellence.
That has been touched upon in many of the speeches today. 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 from two different perspectives. First of all, as we have been doing already since 2008, 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 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. The final one is value selling.
This is a very important area for us that understanding the markets better and improving our competencies. The last area is naturally our new elevator offering. That will bring us also opportunities again to improve our margins. These all are somehow part of the development programs that Matti discussed. We selected these because these are perhaps each factors that can have a clear impact on our margin development. Of course, our approach all the time is to grow the business with a long-term mindset. 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. I'll talk then 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, we have to manage headwinds at the same time. This is how we're developing it going forward. If you look in the short term, it's clear that we have headwinds that are burdening 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 than the overall market. We had had a strong growth in our new equipment business. Also we have acquired GiantKONE. That will result in a situation where the share of our new equipment business is increasing. This is a specific example, again, when I talk about we are not optimizing our margin in the short term. This has a slightly negative impact on our margin.
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 of GiantKONE and the intangible assets that we are amortizing as a result of the acquisition. We've been talking about the price pressures that we have in the market and labor costs in inflation developing markets. On the positive side are the ones I discussed. In the short term, we have clear headwinds that we are facing. I will talk a little bit also about how we are specifically managing some of these headwinds. First of all, price competition. Here I talked about our pricing skills, but of course it's improved competitiveness. That's what Heikki discussed, pricing and those in combination.
One area that also has been a clear headwind for us has been fuel prices as part of our raw material spend. Here again, what is our approach? How do we manage our fuel price spend? 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. Our maintenance people are driving less. We also introduced a more energy-efficient car fleet. 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. Let me go first to material costs. Here first, a snapshot of average prices of the key materials that we purchase.
As we can see in 2010 and 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. We can see that 2010, 2011, the material spend was clearly increasing. 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 our work in progress and to deliveries. We can see that the average prices so far this year are now at a much better level than last year.
They are still at a high level because we have come two years significantly up, but at least we are seeing an improvement. 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 off 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. We are working on, of course, with our sourcing to make sure that everyone, of course, in the market are facing the same headwinds. 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. 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 third area, which is clearly becoming more of an advantage to us is the aggregation advantages from volume. This is perhaps the most significant synergy we have from the GiantKONE acquisition. As Bill mentioned, we will keep those two companies separate, but one of the areas where we are working more and more and integrating our operations is on the sourcing side. 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.
Perhaps these are the key areas that we're working on. 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 two years, we have had quite significant parts of fixed price contracts. This year we have slightly lower levels. It's less than half. That was really a decision we made during the autumn when many of our fixed price contracts started to roll off. We had a very high level of raw material prices, we then did not fix so much. Now we have started to gradually fix some of the material costs. The main material costs that we have are in mechanics and machines and elevator cars and doors.
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 EUR 400 million. If I then go to our fixed costs, how do we manage our fixed costs? Our approach is clearly to want to make sure that we have a consistent and long-term management also of our fixed cost. 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. Why is this? It is to make sure that if there are fluctuations in the market, we can adjust our operations without having to take very significant action.
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. Most important one is leverage fixed cost through growth. I'll talk about that as an example, how we manage our people in high growth areas to make sure we can achieve that. We have also what we discussed in connection with Q1 result. We have now two specific initiatives ongoing also to manage our fixed cost. 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. It's really main objectives there are simplification and improvement of processes, not cost savings, although we will clearly achieve cost savings from this as well. 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 this. These programs aren't 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 our fixed costs.
We all know that this is a business that has a reasonably high labor content. If you look at where do we have our people, half of our people are still in Europe, Middle East and Africa. Given the growth in Asia Pacific and the acquisition of GiantKONE, we now have 36% of our people in Asia Pacific. That's, of course, where we have the most significant labor cost inflation. If I started, 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 10% as Bill mentioned. I think what we're proud here is that our attrition rates are clearly below what market rates are. In India the labor cost inflation is somewhat higher than in China.
Rest of Asia-Pacific and Middle East, somewhere about 5%. What are we really doing now in these markets? I would say that competence development is absolutely critical to us, so that we have these markets where we have labor cost inflation. 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? One of the key areas here, what we're seeing is really to have clarity of all of our people's roles. Very clear roles so we can develop them in their functions, they become experts. 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.
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. 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 touch briefly on our cash flow and investments. One of our financial targets is to improve the rotation of working capital. If we look at the development over the past three years, it has been a positive development for us. If you first look at the asset side, the inventories, we have continuously been able to improve our inventory terms. Here you see the overall inventories, and you can see that they're at a lower level than in 2009, despite a significant growth in our new equipment and modernization business.
Our accounts receivable have grown in absolute terms, if you look at that as a percentage of sales, that has stayed reasonably stable. 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 think about the liability side, that's where I think we have been one of our main improvements in our working capital. That has not been through management of our payables, but really a management of our advanced payments received. Where we have a very strong focus all the time is to ensure that our payment terms remain good.
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 project. This is how we manage our risks. This difference we've been able to improve over the years. The reason for this has been good focus on payment terms, but also the sharp growth in Asia-Pacific, where we have good payment terms overall. This has led to, of course, a strong cash flow and the fact that we have had a continued positive cash conversion from EBIT. Higher cash conversion than EBIT, and that is, of course, something that our objective is to continue to drive it that way. If we 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. Over the past years, we have clearly increased the amount of acquisitions. We have now in the past two years been at over EUR 160. Last year, EUR 185 million. 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 EUR 60 million. In the past three years, we've been between EUR 44 million-EUR 52 million. We've been at the lower level. That is something that has been quite low and our normalized level is still around EUR 60 million. 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. This is something that we are completing partly this year. The factory part and office part will be ready this year and some of the R&D facilities will be ready next year.
This will now over this year and next year, over the two-year period, increase our capital expenditure at about EUR 60 million net above the normalized level. That will be on top of our normal CapEx. Then we have also decided, which is a new information, that we have decided to build a new factory in Chennai in India. 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. The objective is that will be operational in 2015. 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. Other than that, our kind of base CapEx should remain more or less at historical levels.
If I then just as a final slide go through that what is this new factory we have in China, in Kunshan. Here is a picture of the site, what it will look like when it's all finished. We have today already started to move over production to the new facility, and the office building will be ready towards the end of this year. This new facility will have twice the capacity of our previous factory and the total production area will be about 51,600 square meters. This is 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.
This is a very important development for us and will support all the things that have been discussed earlier today. I'll finish here. We have time for some questions, and then we go to the more general Q&A.
Thank you, Henrik. Now questions for Henrik before we move to the general Q&A session.
Hi, I just had a question about the Chennai plant. Can you talk a bit about the economics behind that? 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, this India Chennai factory, we have the factory what has been since from '80s. It's very, how 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 this work will be in next two years that we will have a new site near Chennai area. 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. That is still under planning phase, what is the total plan. It will be good for our long-term future.
Currently, the current India site is really manufacturing for the local markets. This would be then a change to that.
Any other questions for Henrik? Yes, Alex, you has one.
Hi, 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. Thank you.
Volkmann Gerstmann from Berenberg Bank. On your slide with the headwinds, I haven't seen any mention about the new product launches. If I understand correctly, everything that's been said now about the product launches, the new ones it covers quite a wide range of your products. Now, looking back into history of many companies that go through such a process, we see often that at the beginning, this has a negative impact on margins, not just due to the launch cost, but generally they start at a higher end of the learning curve and go then over time steeply downwards. 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, there's a launch, and then we will ramp up. That is our plan. Perhaps Heikki can explain a little more detail how we think about that.
Yeah. There was the same question in the break that what that would mean in practice in next couple of years. We have to remember, we are all the time updating our product portfolio, if you looked at years. Our organization is very well, how to say, focusing on this kind of change management. That's why we are making this new product launch in the 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 competitive, and we want to do this, and this is going to be the great product launch from day one. We are now a very dedicated programs to make that happen in all supply units and installation.
We need to have installation site training done until we have this kind of operational delivery will start.
Okay.
Thank you. Thank you, Henrik, and thank you for your questions. 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. Please direct your questions to Matti, and Matti might then direct the question forward as need be. 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 two different kinds of markets and our market development progress there. These are China and etc. , 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. Now we have time for, let's say, all possible remaining questions. We are very happy that we have had such an active discussion and active questions after the presentations and also during the breaks.
Hello, Elina Riutta from Evli 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? What would you expect to see, say, over the five-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 what have been the progress of the biggest companies in the market and what has the progress of the very high number of small local players. 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. 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 starts to take actions to slow down growth. Then again, now in the current situation, the actions to, again, accelerate new growth started already in end of November last year.
Difficult to say any major statement.
Thank you.
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 seven this year. Considering you underweight there and maybe the more local competitors in that market, this move from 10 to seven, 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's certainly a movement within the market itself towards the joint venture and the global players from the smaller players. I think 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. I think the affordable housing market is still 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 what Bill mentioned earlier, that our market share at the moment is in the affordable housing slightly lower than in the Chinese market altogether, although it is becoming stronger. Our share is going higher.
Hi, Erk from Swedbank. We have not talked too much about the North American market. Just asking you whether you are still in the geographical expansion mode up 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. We have been able to continually increase prices, and this positive development started already in the second half of last year. It started at a low level. Before that, we really saw the impact in the marketplace of the market in the U.S. being at a very low level for quite a long time. Still today, we have to remember that the size of the market level is maybe about 40% lower than what it was in 2007.
What comes to the geographical, let's say, best growth areas, the situation is pretty much what it was in the April when we communicated about our quarter one results. The best development we see in the East Coast and West Coast than in the central parts of the country.
You are still expanding your foothold, especially in the U.S. market, I assume.
Well, you mean foothold in terms of geographical coverage?
Yes.
We have a pretty good network of branches and service offices. That is not really expanding.
Okay, thanks.
Pertti Aaltonen from Blomi. How attractive do you see the Latin American market?
Latin America, in terms of market size, is now very roughly, but roughly the same size as the Indian market is. That puts that into scope about the attractiveness in terms of size. It has been growing, not with a significant speed, but still growing. As you know, we at KONE divested our businesses in Latin America about 10 years ago, slightly over 10 years ago. At the moment, as we have said, we have been studying how to re-enter that market. This is not something that we would feel high urgency, but we are watching the developments there more closely and whenever opportunities will pick up, we will study those seriously. I would say that in three to five years' time, it would be great to be, again, a player in Latin America.
Just because of our overall progress, 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, we would like to thank you for your active participation. 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 flights of stairs you'll need to take to get there. The important thing to note about lunch and those of you who will join us for the afternoon event at the HI Design Expo is that the bus transport will leave at 2:00 P.M. sharp. There will be two buses, both will go to the HI Design Expo, but one bus will continue from the HI Design Expo to the airport at quarter past 3:00.
When you enter one of the buses now here, for those of you who are going to the airport after the HI 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. 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.
Thank you for your active participation.