Lift Report

The objective of the Industry Report is to provide a well-founded inventory of the status and development of the lift and escalator industry in Germany taking into account market and innovation trends, and to arrive at a statement regarding corporate strategies. The study is based on an evaluation of economic and employment- related data and on industryrelated publications. By conducting qualitative interviews, the study also takes stock of current developments in the industry’s companies, primarily with a view to ascertaining the challenges facing the industry and its players, and elaborates points of approach for securing Germany’s position as an industrial location and safeguarding jobs in the German lift and escalator industry.

Even the question of the technical terms used to describe lifts is fraught with controversy and something of an emotional minefield among elevator and left technicians and trade experts in Germany. Terms such as “Fahrstuhl” – a word for lift or elevator frowned upon by specialists – are commonly deployed in general usage and in the financial press to describe a vertical method of transport, as demonstrated recently during extensive reporting on the Lift Cartel which was generally referred to in the press as the “Fahrstuhl Kartell”. A similar situation applies to the different terms “Rolltreppe” and “Fahrtreppe” used to describe escalators.

Since the beginning of 2006, the lift and escalator industry has been set on a course for growth following a number of leaner years. With the reviving fortunes of the building sector, the order situation in the lift industry has shown healthy development, with orders received in 2006 alone representing a massive 9 % increase. According to German Mechanical Engineering Industry Association VDMA, this figure represents the first positive growth rate for six years. Taken overall, the lift and escalator sector represents a significant branch of German industry, encompassing the new installation, modernization, servicing and repair of lifts, escalators and travelators. No detailed data is available indicating employment and turnover in the industry. A cautious estimate indicates a workforce of around 18,000 working in the lift and escalator industry. There are around 800 companies registered in Germany as being involved in the field of lift and escalator repair, maintenance, installation, modernization and production, with annual turnover lying at around 2 billion Euro.

The structure of the industry is characterized by the presence of the so-called Big 4 (Kone, Otis, Schindler, ThyssenKrupp Elevator) and their holding companies which dominate the market alongside a large number of small and medium-sized enterprises (SMEs represent a collective market share of around 40 %). The Big 4 are at the same time the only companies operating in the German lift and escalator sector which fall into the over 1,000 employee category. The Big 4 are the industry’s four biggest corporations, not only in Germany but worldwide. They offer both lifts and escalators, and apart from them only few companies still exist which extend their activities to both these product groups.

The majority of small and medium-sized enterprises active in the industry work in lift construction. These SMEs frequently occupy their own market niches and/or are primarily regionally oriented. Alongside their regional strength, their success lies in their flexibility and customer proximity. In terms of their size/their nationwide presence, among the SMEs the names Schmitt & Sohn (Nuremberg) and OSMA (Osnabrück) are counted the biggest. In addition to these are a large number of “regional top dogs” whose activities are primarily oriented towards specific regions of varying size. Alongsidethese companies forming part of the core industry, the wider field includes manufacturers and suppliers of components for lifts and escalators and also smaller firms involved purely in the installation and servicing sector, some of them employing only one.

For “lifts and escalators”, which fall within the NACE classification “manufacture of lifting and handling equipment”, there are no official statistics on the number of jobs. According to our own surveys, a workforce totalling around 18,000 may be assumed throughout the industry.

Over recent years, however, the number of jobs has diminished significantly. One reason is the closure of two major escalator plants by Otis and Kone as well as other production centres in the lift construction industry, another is a general cutback of permanently tenured staff in many companies (such as the installation and servicing departments in the Big 4).

A significant process of concentration is taking place in the worldwide lift and escalator sector, which may be see as the consequence of the global presence of lift and escalator producers: The six biggest manufacturers Otis, Schindler, ThyssenKrupp, Kone, Mitsubishi and Hitachi account for 84 % of the world market share, and also the lion’s share of the European market. In the international arena, the competitive situation is dominated by these global players, despite doubts raised by the cartel infringements uncovered by the European Commission. In the specific markets of the various world regions, the competition pool is extended to include the respective national and regional suppliers who attempt to stand up to the global players in the battle to gain market share.

For a number of decades, the industry’s structure and dynamic have been characterized by mergers and company takeovers, in particular in respect of the Big 4. A quote from the website of the Association of Medium-Sized Enterprises speaks for itself: “In 1970, the buyer of a lift corporation is quoted as saying: In five years there will only be five lift companies left in Germany. He was wrong” (www.vma. de). For the multinationals, the takeover of SMEs is linked to a strategic goal of taking control of maintenance agreements and so expanding their own servicing business. The integration of SMEs generally runs according to a similar pattern: The production is closed down in the short to medium term, leaving at best only a small workshop. On the other hand, there continue to be new small company formations, often from the basis of existing lift construction companies whose business is largely concerned with servicing and/or installations. The resulting pattern is described by some as a “cyclical economy” in the industry.

The competitive pressure to which the lift and escalator industry is exposed in both the international and the national arena is enormous. Aggressive competitive strategies and tough price-cutting polices have resulted in a significant collapse of pricing levels over recent years for companies in all three main business sectors: New installations, modernization and now also repairs and maintenance. Many medium-sized lift construction companies in particular do not have the capacity to withstand predative competition, which alongside other factors not infrequently results in a takeover bid and integration into one of the Big 4. Seen overall, there is an unmistakable trend towards the concentration of the German lift market, where company buyouts have effectively concentrated the range of goods and services on offer over recent years.

Service orientation within the lift and escalator sector is very high, for manufacturing in general, and for the mechanical engineering sector in particular. Many companies operating in the sector have long since adopted a policy of offering customers the complete spectrum from the industrially manufactured or manually crafted product through to servicing. Linking products and services is becoming an ever more important trend among mechanical engineering firms and a number of other sectors of industry in Germany. The lift industry may claim to be something of a pioneer in a mechanical engineering industry characterized by a growing orientation towards the service sector; it has been a precursor in the shift of classical branches of industry away from manufacturer to service provider. As long as 20 years ago, Johannes Schmitt, today the CEO of Schmitt & Sohn, entitled his dissertation “Development in the Lift Sector from Manufacturer to Service Provider” (Schmitt 1988).

Services represent a powerful growth area within the industry. The “Repair of lifts and escalators” has only been captured by the production statistics since 2002, but in the brief interval of just three years since these statistics have been recorded, the proportion of total production accounted for by services has leapt from 36 % to 48 %. This statistic also reflects the high strategic significance of the expanding service business for lift constructors. Development within the industry is primarily dependent on building investment and is subject to cyclical fluctuations. New installation business was under pressure up until 2005 due to sluggish investment activity, while the ever more important service sector remained relatively resistant to cyclical economic pressure. It was particularly during the recent crisis period of the building industry up until 2005, in other words when demand was suppressed, that the service sector emerged as an essential mainstay for beleaguered manufacturers to compensate for loss of earnings from new installations. Taken overall, the service sector is largely resistant to cyclical economic pressures, and to date has also proven financially more lucrative for the companies involved. Consequently, producers are frequently willing to compromise on price for sales of new lift and escalator installations, provided the deal includes a long-term service contract. However, since 2005 prices in the service sector have also been subject to immense competitive pressure, serving to also the shrink contribution margins to be gained from maintenance contracts. This development is placing the policy of subsidizing new installation business (to gain access to lucrative maintenance contracts) increasingly under question as a business strategy for producers.

The overriding strategic aim of the Big 4 can be neatly summarized by the term “growth”. Each of the four corporations aims to grow its service business faster than its competitors and to increase the number of maintenance contracts it holds. This is expressed in corporate directives and strategies such as “Leadership through Service” (Schindler), “1st in Service” (Otis), “Global Service Strategy” (ThyssenKrupp) and “VISION” (Kone).

It is practically only possible to gain market share in the lift and escalator sector by company takeovers. The most important growth strategy is consequently the acquisition of other lift constructors and their maintenance contracts.

Over recent years, the emphasis of this acquisition strategy has been on the growth markets in Eastern Europe and Asia, although all of the Big 4 have also acquired a number of SMEs in Germany. The big players in the industry have been pursuing this strategy already for some time, and it seems set to be stepped up again over the coming years. One strategic area of particular significance in the service sector is that of socalled third-party maintenance. A core element of this new and expansive service strategy lies in contracts to service lifts from other manufacturers. For installers and fitters, maintaining older lift installations from other manufacturers is largely troublefree, as this work involves primarily mechanical components, while more recent installations present more of a problem due to their use of “closed control systems” which only authorized staff of the original manufacturer can access. But even these systems can be “cracked” using technical means by competitors: The training centres of the Big 4 selectively train installers in the workings of third party control systems. Alternatively, the maintenance company retrofits its own components. At the same time, third-party maintenance agreements are simplified by the fact that large-scale clients tend to specify the use of standardized control systems which are freely available for purchase on the open market in order to retain a greater degree of flexibility in the placement of maintenance contracts. In practice, the range of third-party maintenance contracts on offer represents something of a minefield for sales departments, in spite of the dedicated training courses now on offer and aggressive marketing campaigns making use of different marketing tools such as mail shots and cold calling campaigns. Not only the Big 4 but also SMEs from the lift construction sector are leaning ever more heavily on the third-party maintenance market, setting the tone for a paradigm shift: It used to be an understood codex within the industry that maintenance contracts were concluded primarily by companies for their own installations. This underlying principle is in the process of collapse. On the one hand, because demand is moving towards the specification of ever more complex packages involving lifts from different manufacturers, and on the other hand because the big suppliers are taking an ever more aggressive stance towards the acquisition of maintenance contracts for thirdparty installations. Although third-party maintenance has not (yet) been adopted as a strategic concept by many SMEs, and is currently the exception rather than the rule, the inhibition threshold is being successively lowered and the first steps are being taken toward stepping up marketing endeavours in this direction. A number of lift construction SMEs are now beginning to feature third-party maintenance services in their advertising.

The trend towards internationalization is very pronounced in the production sector. In the lift construction industry, internationalized production concepts have resulted in the shift abroad of all but a few large lift production plants, including the ThyssenKrupp lift plant in Neuhausen near Stuttgart as Europe’s single biggest lift producing location, and the plants belonging to the two key medium-sized manufacturers OSMA in Osnabrück and Schmitt & Sohn in Nuremberg. In the escalator sector, following relocations and closures over recent years (Otis in Stadthagen, Kone in Hattingen), only one major plant has remained: The Thyssen - Krupp escalator plant in Hamburg. The Big- 4 in Germany are part of globally operating corporations with branches and plants in all the relevant markets. Alongside expansion into Eastern Europe, the focus is on Asia, where the highest growth rates are currently being experienced. At the same time, the component markets have become internationalized and the lift construction SMEs have also extended their component purchasing activity at least on a European-wide basis.

Innovation is one of the focal aspects in the debate surrounding safeguarding future employment and company competitiveness in Germany.

The lift and escalator industry is no different from other sectors in that the aim of remaining competitive in the face of enormous international competitive pressure calls for on-going innovative endeavours. Innovation in this sector is inextricably linked to and regimented by European and national legislation, standards and directives. Within the European context, a new concept (as a contribution towards European deregulation) and the resulting legislative measures have brought about an upsurge in innovation dynamic over the past ten years in a sector which was once seen as conservative and lacking in innovation. Over recent years, a variety of innovations have exerted an substantial effect on elevator technology and on building design. The advent of machine roomless lifts (MRL) in particular has given rise to fundamental changes in the lift market. Taken over all, the introduction of the European Lift Directive and other standards, regulations and safety requirements have initiated and facilitated a whole series of product innovations. Strategic aspects of particular importance include the adoption of European standards in other countries, which has facilitated the opening up of new markets. As an example, the EN 115 (escalators and passenger conveyors) is now also applied in China, Australia, Africa, South America and Eastern Europe. The scope of the term innovation should not be restricted simply to that of technical product innovation. Alongside the products themselves, new forms of services, technical processes and organizational structures also belong under the heading of innovation. Consequently the extended version of the Industry Report looks not only at fundamental technical innovations such as the machine roomless lift, but also at product innovations in the service sector and process innovations in production and organization. The broader heading of innovation also includes issues such as on-demand maintenance, modularized maintenance, remote diagnosis, integral production systems, standardization and modularization as product strategies and so on.

Like the Big 4, there are a large number of small and medium-sized enterprises active in the industry who are also in the throes of restructuring processes. These are moved largely by the ever more prevalent predative competition in the new installation and modernization business, and also in the service sector. Tough competitive pressure and a process of concentration have been making their presence felt in the industry for years. A particularly damaging development for lift construction SMEs was the movement of the Big 4 towards standardization. This sealed their domination of the volume market, helped also by the advent of MRL concepts and the decline of the hydraulic lift. This trend has forced many lift construction SMEs into a decline over recent years, which in many cases ended in a major corporate crisis. Small and medium sized enterprises had no alternative but to respond, for instance by focusing more intensely on the niche strategies or streamlining and outsourcing production, often in the context of specialization on individual components and the increased external sourcing of other parts.

Standardization and modular systems have now become an indispensable fact of life also for small and medium sized lift constructors. The larger players in this sector generally have their own “standardized basic range”. Smaller lift constructors, by contrast, frequently tend to turn to complete installation suppliers among the component manufacturers. An ever greater number of component manufacturers are following the market trend for purchasing everything they need from a single one-stop source and evolving into system suppliers. However, modular systems are only one side of the coin: The other at least equally important side, particularly among small and medium size lift constructors, is the manufacture of custom-produced lifts.

Lift construction SMEs are generally specialized in a specific region (“regional top dogs with a good reputation and image”) and/or have strategically aligned themselves to specific fields (niche strategy). Among these enterprises, particularly those with their own production capacity or with a relatively high vertical range of production, tend to concentrate on oneoff, bespoke solutions. Their speciality lies either in areas such as batch size one production, or they gain a reputation in specialist areas such as panoramic lifts, ships’ lifts, inclined lifts etc. In some cases, this type of niche strategy constitutes a primary business unit which is supplemented by standard lift construction as secondary mainstay. All in all, the fortunes of many lift construction SMEs are determined by their customer proximity. They benefit from extreme customer focus and an enhanced capacity to respond to individual customer requirements and enable detailed specification of the product. Their benefits also include their flexibility, their capacity for fast response and their reliability. Another point in their favour is their use of qualified sales staff acting in the capacity of technical advisors who are able to directly address any requested modifications and integrate these into the product design.

A sector of the lift and escalator industry which is gaining increasingly in importance is that of the component manufacturers and full range suppliers. The greater the reduction in the vertical depth of manufacture among traditional producers, the higher the proportion of the production processes taken on by component manufacturers, which are becoming established increasingly on both a European and worldwide basis. One starting point for the development of the component industry were the international production concepts and component specialization strategies of the Big 4. The independent component manufacturers initially concentrated on individual parts such as doors, hydraulic drive systems, controls and so on. Among some component producers, there is a noticeable move towards the role of system supplier. For some years already, supply companies already existing in the lift construction sector have been moving increasingly towards the supply of construction kits and system solutions reaching well beyond their original supply sector. This type of full component range supplier has succeeded over recent years in achieving a significantly greater market presence. There are now a whole series of full range suppliers who offer for instance small lift installation firms (without their own planning department) entire lift installations complete with documentation.

The number of jobs provided by the lift and escalator sector is receding, largely due to the plant closures of recent years. Job cuts are the logical consequence of the demographic shift in manufacturing over recent years, in particular in the production sector. For this reason alone, there is an unmistakable trend under way towards a higher proportion of white collar workers, not only over the industry as a whole but also on a plant-related basis within the remaining producing locations. Alongside redundancies as a result of closures, among the Big 4 there has also been a creeping cutback of jobs in many areas. A distinction must be made among the installers: In purely quantitative terms based on the number of jobs, the employment level appears to have remained steady over recent years seen across company boundaries. However, there has been an immense shift here in terms of the quality of working conditions: The number of new lift installers have been drastically reduced among the key players, and their function largely farmed out to subcontractors under less favourable working and pay conditions.

Among lift construction SMEs – if we factor out “erosion as a result of acquisition by the Big 4” – there are many companies who despite tough times up until 2005 have succeeded in largely maintaining their workforce size. However, some were forced to make cuts in response to the crisis which resulted in redundancies for operational reasons. These job cuts affected primarily shop floor employees, frequently unskilled or temporary staff working in production. From today’s perspective, particularly among service installers, overtime and a full work roster are the order of the day.

A relatively new and ever more prevalent trend is the growth of unsecured forms of employment. The use of contract workers in production and assembly and farming out the installation of new and modernization projects places regular secured employment under an ever greater threat.

At the same time, working conditions among installers are becoming more extreme. New maintenance concepts and shrinking time allowances are resulting in enormous intensification of work among service installers.

Simply looking at the number of registered accidents which occur as a result of using lifts and escalators or working on these installations clearly shows the extreme importance which needs to be attached to the issue of occupational safety in the industry. This intrinsically high quality rating does not always translate into practice. Reports are prevalent of enormous problems and infringements against occupational safety among subcontractors used in both in the construction of new installations and in modernization projects. But also in general terms, occupational safety measures and ongoing persuasion are necessary among installers. On the subject of occupational safety, particular attention should be paid to the ever more widespread use of machine roomless lifts. Due to the absence of a machine room, and the now frequent occurrence of a foreshortened shaft overhead / pit, MRL installations involve a work impediment which is inherent in the design and which compromises the safety of personnel working in the service area . The risk of injury or accidents is far higher than is the case with old drive concepts.

Hazards for service installers result from restricted access to components, and the foreshortened shaft overhead which can quickly result in crushing in the event of an emergency. MRL installations consequently require some improvement in a number of essential areas. If this necessity is not addressed purely for reasons of cost, the spread of new types of lift can easily result in an unexpected rise in the incidence of accident victims among employees working on the servicing or installation of lifts (cf. Lift-Report 4-2006, p. 4-8).

The lift and escalator industry has been characterized over recent years by a marked dynamic in terms of employment, market and innovation trends, and this situation is set to continue in the future. The combination of pricing competition and growth strategies is set to encourage the existing process of concentration. Globalization strategies in terms of both production and procurement will continue to affect the development of the remaining production capacity. Strategies to enhance the technical and organizational capacity for innovation in terms of both products and processes are essential, particularly for lift construction SMEs, in order to withstand the growing competitive pressure. Standardization and modularization will also remain decisive topics, although these should not be pursued at the expense of individual solutions and flexibility; the aim here must be to implement challenging and qualitatively superior concepts. A factor of particular significance is the on-going transformation in the service sector, where the pressure to implement change may be expected to affect the type of work to be performed, waiting times, work facilities and also the self-image of installers. In terms of employment, there is every reason to fear a further move away from the classic normal employment relationship, with unsecured employment concepts involving contract work and outsourcing shaping the nature of employment policy in the future.

This development will entail employment risks in two different ways: Quantitatively speaking, the risks inherent in the employment situation in the industry will culminate in further job cuts in production, administration and servicing as a result of outsourcing, relocation abroad, streamlining and work intensification. Further acquisitions by the main players entail the risk of further radical cuts to an already exorcised production workforce in the acquired companies. In qualitative terms, the result will be increased severity in terms of working conditions for employees, and further polarization into highly qualified positions which will continue to be remunerated as before and simpler posts which will be classified lower down the scale. The tendency in both production plants and in the service sector is already reflecting this development. More widespread use of contract working arrangements will place permanently tenured workforces under even greater pressure.

Appraisal of the current economic situation and the outlook for continued economic development by those questioned as part of the industry survey is fundamentally positive. One representative of the lift constructor SME sector reported a “superb order book situation” in 2006, describing his company’s struggle to adhere to delivery dates and keep up with prompt installation of new lifts. Alongside the gratifying order volume, the profit situation in the industry has also taken a turn for the better.

The improved competitive situation means that moderate price increases for new installations are now once again on the cards. Although competition is still described as tough, prices are on the move again to a certain degree due to the current shift in the ratio of demand to supply. But (according to a questioned trade expert): “There will not be a return to the pricing levels we were able to command in the past. There are still a number of black sheep who try to undercut by 20 to 30 % below our tightly calculated contribution margin!” The moderate price rises have been flanked by exorbitant increases in the cost of materials (by 100 % for some types of stainless steel). Whether or not the current high demand for lifts and the positive order book situation are likely to endure for the medium-term, or are just a fl ash in the pan in the wake of a building activity boom will depend largely on further developments in the building industry and also on the degree to which the industry is able to market the lift as a value-enhancing investment in the property market.

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