As main­land China slows, so does Otis El­e­va­tor


As main­land China’s econ­omy has grown and sky­scrapers have sprouted in cities ex­tend­ing ever west­ward from its coast, Otis El­e­va­tor Co. went along for the ride.

But with China now in a slump and the value of its cur­rency the most re­cent ca­su­alty, Otis and other man­u­fac­tur­ing com­pa­nies stak­ing much on Asia’s big­gest econ­omy now face a mo­ment of reck­on­ing. Af­ter say­ing for years that in­creased ur­ban­iza­tion would pro­pel growth in China, par­ent com­pany United Tech­nolo­gies Corp., based in Hart­ford, cut its ex­pected rev­enue and profit for the year, due partly to the slow­down across the Pa­cific.

“It’s tough to get this bad news out,” Greg Hayes, chief ex­ec­u­tive of United Tech­nolo­gies, said in a call with in­vestor an­a­lysts July 21 when sec­ond-quar­ter profit and rev­enue re­sults were re­leased. “The slow­down in China is worse than what we had ex­pected.”

Ex­ec­u­tives at Otis, based in Farm­ing­ton, Con­necti­cut, de­clined to com­ment for this ar­ti­cle.

Con­struc­tion in China in re­cent years was dra­matic, with “cranes ev­ery­where,” driven by na­tional pride de­mand­ing ever-taller sky­scrapers, said Siva Yam, pres­i­dent of the United States of Amer­i­caChina Cham­ber of Com­merce. The re­sult, he said, was price spec­u­la­tion for land that could not be sus­tained, par­tic­u­larly as growth slowed.

For Otis, the fall has been steep and em­bar­rass­ing.

Otis was founded in 1853, in­stalled its first el­e­va­tor in Shang­hai in 1900, has six fac­to­ries that make el­e­va­tors and es­ca­la­tors for mar- kets in China and else­where, and op­er­ates en­gi­neer­ing re­search and de­vel­op­ment cen­ters in two Chi­nese cities.

Sales have slowed this year over 2014, fall­ing 7.5 per­cent in the first six months of the year com­pared with the same pe­riod in 2014. In con­trast, rev­enue had jumped 4 per­cent, to about US$13 bil­lion, last year over 2013.

Other man­u­fac­tur­ers re­ly­ing on con­struc­tion also re­port a tougher re­cep­tion in China. Cater­pil­lar cut its rev­enue forecast for the year. Lower con­struc­tion-re­lated sales in China and Brazil are among the prob­lems. El­e­va­tor and es­ca­la­tor man­u­fac­turer Schindler said Aug. 14 it ex­pects lim­ited strength in the global mar­ket this year, with China “at most ex­pected to achieve min­i­mal growth” in 2015.

“Most com­pa­nies dou­bled down on China, think­ing it was go­ing to be a huge mar­ket for them, and now they’re stuck,” said Lawrence T. De Maria, an an­a­lyst at Wil­liam Blair & Co. fi­nan­cial ser­vices who fol­lows Cater­pil­lar.

More than 60 per­cent of com­pa­nies that be­long to the Amer­i­can Cham­ber of Com­merce in main­land China re­ported in­creased rev­enue in main­land China last year, but down from 71 per­cent in 2013 and 2012; 42 per­cent re­ported in­creased profit mar­gins in 2014, down from 48 per­cent in 2013. And 31 per­cent said they had no plans to in­crease in­vest­ment in China this year, the most since the re­ces­sion year 2009.

“Growth is clearly slow­ing in China,” said John Fris­bie, pres­i­dent of the U.S.-China Busi­ness Coun­cil. “Com­pa­nies are see­ing a slow­down in their rev­enue growth.”

For Otis, ris­ing com­pe­ti­tion, par­tic­u­larly for the lu­cra­tive re­pair and main­te­nance busi­ness, also is un­der­min­ing its Chi­nese mar­ket.

Just this May, Hayes told in­vestor an­a­lysts that Otis main­tains and re­pairs 1.9 mil­lion el­e­va­tors world­wide, cre­at­ing a “phe­nom­e­nal” stream of in­come and mak­ing Otis “the jewel of the UTC port­fo­lio.”

But Euro­pean el­e­va­tor man­u­fac­tur­ers are com­ing on strong in China, fol­lowed by Ja­panese and Korean com­peti­tors, said Lee Gray, who stud­ies el­e­va­tors and es­ca­la­tors as an ar­chi­tec­tural his­to­rian at the Univer­sity of North Carolina at Char­lotte.

Ri­vals have learned from Otis, which be­came a house­hold name by ag­gres­sively mar­ket­ing it­self and ab­sorb­ing com­peti­tors in the 19th cen­tury.

“Where in the early 20th cen­tury Otis was mak­ing sig­nif­i­cant in­roads in Europe, in this cen­tury it’s the re­verse,” Gray said.

The com­pe­ti­tion and other fac­tors are tak­ing a toll. Hayes told an­a­lysts last month that in the past 10 or 15 years, “we’ve seen a con­tin­ued ero­sion of Otis’ mar­ket share” in the pur­suit of wider profit mar­gins.

The de­cline in Otis’ mar­ket share in China, to about 15 per­cent from 25 per­cent a decade ago is “shock­ing,” par­tic­u­larly be­cause un­til re­cently China rep­re­sented as much as 75 per­cent to 80 per­cent of all new global el­e­va­tor sales, Ni­cholas Hey­mann, an an­a­lyst at Wil­liam Blair & Co., said in a July 21 note to clients.

“Of­ten this type of ex­tended grad­ual ero­sion of a com­pany’s busi­ness fran­chises takes more than cost re­duc­tion to fix,” he said.

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