Corporate Q&A

KONE’s ascent to the top

Meet the boss of one of the most successful foreign firms in China


Ehrnrooth: “China has been a huge success story for us”

Finnish elevator giant KONE has emerged as the market leader in China, which makes up more than 60% of the world’s market demand for new lifts and escalators. With over 20,000 staff across 600 Chinese cities and towns, the elevator and escalator behemoth has built a national footprint. A quarter of a century after it first set up operations in the country, KONE is unquestionably Finland’s biggest company in China and it must now rank as one of the most successful foreign firms in the Chinese market too. WiC spoke extensively to KONE’s Helsinki-based CEO Henrik Ehrnrooth to understand his firm’s winning formula and how he sees the Chinese market evolving.

There hasn’t been much business travel in the past 18 months as a result of Covid-19. When was the last time you were in China?

I was in China around mid-January 2020. I was there just before things started to happen – as late as one could have been, just before Chinese New Year.

Aside from Beijing and Shanghai, you must have visited a lot of cities in China over the years?

Usually I go to China four or five times a year, given the importance of our Chinese business to us. Usually Shanghai or Beijing is included in the trip but we always go to visit our inland operations and our customers in those cities.

We have over 20,000 people working for KONE in China today and we have around 600 different locations that we operate from.

That’s enormous…

You need to think about the context of our business. We install and service elevators and escalators and as such we cannot be too far away from them. So maybe the offices are very small, but that is kind of the way that KONE is set up. We don’t have very large offices: okay, our Shanghai office is quite large but we have to be spread out everywhere, because you cannot be too far from a customer and you need to have sales offices and depots for spare parts and things like that, all close to the projects.

When did KONE start to do business in China?

It was really in 1996 that we started in China. Before that, we were exporting via Hong Kong. We were not the first of the international players in China. On the contrary, some of our competitors were ahead of us. But we’ve clearly grown very fast and been the market leader for several years. That’s because early on we saw how important China was.

China has been a huge success story for us.

So what are the key factors that have made KONE such a successful company in China?

Let’s start with the context today that China is by far the biggest market for elevators and escalators in the world – it represents over 60% of the market in terms of installing new elevators and escalators. It will also soon be the largest market for the industry in terms of the service business. [Europe is currently a larger market for servicing elevators and escalators].

KONE has been growing fast in China since about 2004-05. That’s when we set up a specific China strategy. At the core of it was taking KONE’s global platforms but developing many of our more specific products ‘in’ China ‘for’ China. We also decided early on that we would bring the latest generation [of products] to China.

That’s one point. Secondly you need to have very localised management teams. Clearly we have some expats but the business is led and managed throughout the country by strong local Chinese leaders. You get a consistency and longevity with this approach that is different to when you have expats coming in and out.

Yes, you bring in expats for their specific knowledge and experience, but it’s the local team that delivers. We’ve spent a lot of time and effort developing local teams and we think it also demonstrates a long-term commitment to the country. We are here to stay, with local people and as a local part of society.

When it comes to deploying new technologies China is incredibly fast. But the services they are looking for are slightly different from what is required in the Western world. Early on, we saw that everything in China was about ‘mobile’. The rest of the world has gone there too now but China was the first place where practically everything was ‘mobile first’. That impacted on how we developed our services there. We came up with mobile solutions in China and then took these to the rest of the world.

The old mentality of many international companies has traditionally been: what we know in Europe or North America we will bring to China. But I think it has actually become the opposite now.

What is an example of a ‘mobile first’ strategy in China and how would it apply to elevators or escalators?

For example, it might be the mobile applications that our technicians use or the mobile tools for our employees. Then there are Internet-of-Things (IoT) services, where we have our KONE 24-7 connected services. With this, after we install elevators we can capture data on an ongoing basis to understand their working condition and to predict faults. That happens everywhere. But Chinese property developers often want specific services that suit their strategy. So you need to co-develop these with them.

The key point is it doesn’t work at all if you think you can manage China from afar. Luckily we’ve never tried that. You need to be very localised and very much part of the local community.

For a long time the story in China was all about installing elevators and escalators. As a result there’s a strong base of young equipment there. But our services business today is growing very fast. So much so that we are relocating some of our global services teams from Europe to China to develop more services there and dedicate more resources to that area.

Do your IoT solutions link into the ‘smart cities’ concept?

Indeed but for us it is very much about the ‘smart building’. The smart city comprises smart buildings, smart infrastructure, smart communities. We can help make buildings much smarter. If you think back to the period before Covid, the average skyscraper in major cities like Hong Kong had a common problem: they were quite crowded. That meant people often had to queue to get up to their offices in the morning or down during lunchtimes. The more intelligence we put into our elevators, the faster you can move people around with the same equipment. When we have smart solutions you can predict issues before they happen, so you don’t have unscheduled call outs, and we can optimise how people move around buildings.

Are there examples where an innovation in elevator hardware has happened in China and you have taken that to the rest of the world?

The core technologies we still develop in Finland, but we very much apply them in China and test them there.

One of our biggest test towers is in China. But when it comes to processes for the installation of elevators and escalators or processes for the supply chain, for instance, these have very much been developed in China.

So perhaps I’d say that while the core technologies still come from Finland, how you apply them and implement them is very much about how it is done in China.

How rapidly has KONE’s business grown in China over the past decade?

Business in China has gone through different phases. The construction and urbanisation boom started around the year 2000. It began to really gain pace around 2005. Between 2005 and 2015 the market grew about 20% per annum. In this period, KONE grew by 40% per annum in China. So we went from a small business to a very large business. Then over 2015, 2016 and 2017 markets slowed in China. But in the past couple of years we’ve grown at double digits again.

So today China is about 30% of our global business. If you go back 15 years we had a few hundred million in revenues from China and last year we had well over €3 billion.

Are revenues in Europe as a whole still bigger than those from China?

Revenues from Europe and China are about the same size. But the mix is very different. In China about 85% comes from sales of new elevators and escalators and only 15% from services. In Europe, the new equipment business is roughly 40% and services is roughly 60%. So you can see that one market has more of a services business model and the other more of an installation model. But if you think about the next few years, we believe the fastest growing market in our industry will be the China services business.

China is now transitioning. We don’t expect construction growth to be as fast in the coming years and that is obviously the driver for installing new elevators. But servicing all of the equipment that has already been installed will grow fast, in terms of maintaining and modernising the existing elevators. That is a huge growth market and that’s where we are putting a lot of our emphasis right now.

So in five to 10 years KONE will see a bigger proportion of revenues coming from services?

I don’t think we will go quite to the European or North American model of 40/60. New installations will always be important in China. But it will go more in the direction of that 40/60 ratio.

Japanese firms were first into China’s elevator sector, often starting out in the 1980s. How did you manage to overtake them?

It wasn’t only the Japanese. Some of our European and US competitors were also ahead of us. KONE’s story really started in 2004 when we put in place a slightly different strategy in China. Many of our international competitors were very focused on the big cities and the bigger high-profile towers and office buildings – the very visible projects.

But in our business, about 70% of new elevators go into residential buildings. We realised early on that it would not just be about covering the big cities, but all of China. The country’s development may have started in tier-one cities but it quickly spread to tier-two, three, four and even tier-five cities.

So early on, we developed a five-prong strategy. The first point was to think about having products that specifically fitted the needs of the Chinese market. That took great collaboration between our global teams and our China teams. We also decided that we needed the latest technology in China. At that time – back in 2004 – many foreign companies were selling China yesterday’s elevator technology. We decided, no, China must have the latest technology.

Point number two: how do you build up a very strong local team; how do you hire, train, and develop the organisation. In terms of services, one of the biggest success factors for us is we hire and train 2,000 new service technicians every year. So we focused on very active talent development: in China, for China.

Three, as I said before, was that we realised it was not just about the big cities, but expanding throughout the entire country. That’s why we have a nationwide footprint in services that is probably second to none.

The fourth prong was that we were the first company to start focusing on selling new equipment as well as services. The latter was not really a well-appreciated business opportunity in China. No one thought you could make money in it. Everyone just sold new equipment. But we realised that customers needed a reliable partner – and if they bought elevators from us they also wanted us to be able to service them. So we built a service network that is bigger than anyone else’s in China today.

The fifth point is that we saw there were two different markets. There were the global players and the local players. There are some very good local companies. We acquired a minority stake in a company called Giant Elevator, that then became Giant KONE. Then we developed a dual brand strategy. Giant KONE was better suited for affordable housing in tier-three and four cities, competing with the local Chinese elevator firms. KONE was still doing some affordable housing projects but was more usually competing against the global brands.

Under this dual brand strategy Giant KONE makes up around a third of our China revenues and KONE the rest. Frankly this dual brand strategy was copied by most players – although Otis did it before us but in a slightly different way.

So I would say we have very systematically built up our China business over the years. I am immensely proud of the leadership we have had in China in this period.

How do you retain your leadership talent in China, a market where ambitious staff have often tended to change jobs every couple of years?

When you build up a great team and you give those people empowerment and accountability they usually stay. They have been successful – at a personal level – in terms of how they have grown the business. I am pleased we had the courage to build a truly local Chinese team. Yes, there are a few expats there but that is to ensure we brought the best from our global development teams. It’s all about the trust you build with the local teams, especially when you sit far away in Finland.

Is it an advantage that KONE is a family-owned and controlled firm? Did that help when the firm devised its long-term China strategy 17 years ago?

In the end the most important thing was the fine job our local China teams did in collaboration with our global teams. Growing our profits gave us the ability to invest.

That said, I do think our strategy is all about being long term and consistent. Of course, it helps to have the kind of family ownership we have. I have only been with KONE about 12 years – I wasn’t here when the original China strategy was devised – but I think our approach is long term. Even between 2016 and 2018 – when China was a much tougher market – we continued to invest and when the markets recovered we came back very strongly. The recovery from Covid last year was quite amazing too.

Are you Finland’s biggest and most successful company in China?

I guess we are the largest by far! China has been a real success story for us. That’s clear. But we don’t like to brag.

What is the revenue split between your elevator and escalator businesses in China?

The escalator market is around less than 10% of the elevator market. The really big market is for residential buildings and that’s where you sell the big volumes of elevators. Escalators are installed in shopping malls, airports and metro stations. The volumes there are much smaller but of course they still move a lot of people.

On the real estate developer side, does your business model see KONE partner with larger players like Vanke and Country Garden to help you win business on projects?

China has a more consolidated developer market than many other countries. As you know real estate is a very fragmented business around the world. But in China the top 100 developers are quite a big part of the market – and in the context of the China market the top 100 are huge. The biggest ones are the likes of Country Garden and Vanke and you need to be very close to them in terms of how you support them, through development of your product and the supply chain. If they’re not your strong customers and close partners you are not going to be successful in China today.

As things stand today, China’s economy has bounced back quite quickly from the impact of Covid-19. How do you assess market conditions when you look at your order book? Are you bullish?

Last year in 2020 we were able to ramp up our business quickly in the second quarter and had great collaboration with the local authorities. We made sure we had enough protective equipment for our partners and subcontractors too. The strong growth continued through the third and fourth quarters, and into the first quarter of this year. We expect the Chinese market to grow ‘somewhat’ this year following strong growth last year.

Most of your hardware – i.e. the elevators themselves – is produced in China for China?

Mostly it is local production. There is some specialised equipment we may bring from abroad. As I said earlier China is over 60% of the world elevator market. That means that all of us are dependent on suppliers in China and on the ecosystem that makes the components that go into the elevators. We export out of China too, for instance, to Southeast Asia and the Middle East. But by far the biggest volumes made in China are for the local market, with very little in the way of imports.

Speaking of the elevator equipment you export from China, have you been hit by the current congestion in global shipping, which has led to delays and big increases in freight rates?

We have been able to deliver to our customers based on promises made but the cost of that has been high and has increased a lot. The whole challenge this year is that raw materials like steel and copper are going up in price a lot. Semiconductor prices and shipping rates are all going up too. So this is the challenge for every industry today.

Are you able to pass on those costs to your customers?

While costs go up very quickly, when you sell an elevator there is a lag. From order to delivery can be six to 24 months, depending on what type of project it is. But costs go up immediately. If I look back at how these things have worked historically, in the short term you take it on the chin, but over time you get your prices to compensate. Of course, raw material prices may go down later too. So you have a tailwind at the back end.

How key is the concept of brand in your industry? Is it more about having strong relationships with developers and less about brand?

Brand is important for the developers because it is about your reputation and what you stand for. In fact it is becoming more and more important. If you are a big developer, you want to buy a good and reliable product from a partner. You also have to remember that when we install an elevator we come in reasonably late in the project. If we are delayed, we can delay the entire project. Elevators can also be critical for moving construction workers around. So we are important to ensuring the smooth progress of the building from the developer’s perspective.

That means that being a reliable partner is important. Do you always deliver on time, for instance? Do you cause hassle on the construction site? When we look at our customer feedback in China, what we find is that we are known for providing good products, but also for being a very reliable partner. Unless you have the combination of those two things you are not going to succeed.

Do global investors understand your China story?

Yes, very much. There is not an investor meeting that I have where China is not one of the big topics. We have a lot of investors who know China very well and understand our China business very well. They are usually quite comfortable with our China presence. The investors who don’t understand it also see how big the market is but they tend to focus more on the risks. But I often say the biggest risk in our industry is not being big in China.

How do you manage your credit risk vis-a-vis Chinese developers?

It is always something we monitor carefully. Of course, it has been more of a focus area since the government implemented the so-called ‘three red lines’ for developers. Ultimately you need to be clear on your payment terms and how much gets paid before you deliver. You also need to have a strong and clear dialogue with your customers, where both parties fully understand what the commitments are. It hasn’t been a major issue so far.

Which regions have the greatest potential for sales growth?

The government has been talking about three urban mega-clusters and I would say that we have seen a lot of growth in the satellite cities around the major cities in these areas. That’s where new rail lines and subways are being installed to make commuting into the mega-cities easier. Those are definitely a focal point.

The good thing about operating in China is that the government is very clear about what the objectives are. We see most opportunities right now in the satellite cities around the Beijing-Hebei region, as well as the regions around Shanghai and the Pearl River Delta.

Finally, ESG. How is KONE working in China to create more environmentally-optimal solutions in the projects it works on?

China now has a target of cutting carbon emissions by 2030 and going carbon neutral by 2060. So it’s a focal area for many developers and we can see that with the number of green-certified buildings going up. It’s a very strong growth area.

However, when we reflect on our growth in the past 15 years, one of the reasons our product became so famous in China is because we offer the most energy-efficient elevators. So we are known for being a firm that promotes energy efficiency. There is also the issue of how we can recycle materials [both for packaging and parts used in KONE’s elevators and escalators]. All of this is clearly becoming a bigger focus for Chinese developers and we think that is a good thing and something we are well placed to benefit from.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.