Failed marriages are giving China's market for elevators and escalators a much needed lift. According to some companies' forecasts, the market could shrink by as much as 10 percent in 2016, following two straight years of decline. And yet, the industry's largest manufacturers believe the world's biggest lift market could soon be back on its way up, thanks to some major societal changes underway in the country. Divorce is one, as the growing ranks of newly single need separate homes - and the elevators to take them there. China's ongoing urbanization drive and aging population provide additional reasons for optimism. These foreign manufacturers also see potential growth in the business of maintaining their machines, as about 75 percent of the elevator service industry remains dominated by small companies.

An elevator installed outside an apartment building in Hangzhou, East China's Zhejiang Province. Foreign elevator manufacturers believe the world's biggest lift market could soon be back on its way up. Photo: CFP

Things are looking up for elevator companies as China's growing number of single-person households and the impact of urbanization underpin the industry's longer-term outlook for the world's biggest lift market, despite a recent slump.

China's 4 million elevators dwarf the 900,000 in the US. By value, China accounts for two-thirds of the world's new installations each year, Berenberg analysts estimate.

For the past 10 years, overseas brands have had control of about 80 percent of China's elevator market, according to domestic media reports.

The world's biggest elevator and escalator manufacturers - Otis from the US, Finland's Kone, Germany's ThyssenKrupp and Switzerland's Schindler - dominate the Chinese market.

Kone is king, with 20 percent of total market share, followed by Otis. Schindler and ThyssenKrupp are fifth and sixth, trailing Japan's Hitachi and Mitsubishi.

These companies are betting heavily on opportunities rising from China's evolving social fabric.

Driven by divorce, urbanization

For elevator and escalator manufacturers, one of the most important social changes in China has been the growing number of single-person households.

China's National Bureau of Statistics has reported that the proportion of such living arrangements has increased threefold since 1990.

Divorce is one driver of the change. With the number of divorces rising 27 percent in China between 2011 and 2014, Schindler Chief Executive Thomas Oetterli said that more singles need separate lodging and lifts to get them there.

"The divorce rate is a driver of our business," Oetterli said. "With the changing social environment, there are also changes for our industry that can be a stimulus for growth."

China's ongoing push for urbanization presents another reason for optimism. By 2020 the Chinese government wants 60 percent of the nation's 1.4 billion population living in cities, where many reside in towering apartments.

Along those lines, a nascent recovery in real estate investment could result in better elevator orders and deliveries later in the year, Credit Suisse analysts said.

Moreover, the Chinese government no longer forbids elevators in buildings with fewer than 12 floors, Schindler said, as a population in which one in three people will be aged over 60 by the middle of the century demands more creature comforts. 

Stalled in the shaft

The bright prospects might come as a surprise to people who follow the industry's recent struggles in China.

With the Chinese economy growing at its slowest pace in 25 years, the market for new elevators hit the down button, shrinking by 5 percent over the last two years. A drop of up to 10 percent is possible in 2016, companies have said.

"It was a new situation for everyone and competition for market share is tough," said Kone Chief Executive Henrik Ehrnrooth, describing "intense price pressure."

With the market's fundamentals intact, however, the companies are positioning themselves for an expected upturn that could accelerate as elevators installed in the early 2000s near the end of their service lives and require modernization.

ThyssenKrupp doubled its Chinese venture stake last year, Kone has built a 236 meter test tower in Shanghai's suburbs and Schindler has added escalator and elevator factories.

 Otis, meanwhile, is streamlining its business and has shaken up Chinese management.

Service opportunity

Elevator makers also see an opportunity in the contracts for maintaining their machines. The companies have noted that accidents - often recorded on closed-circuit cameras, then shared via the Internet - have amplified concerns about safety.

China's General Administration of Quality Supervision, Inspection and Quarantine said that 46 people died in 58 elevator accidents last year.

Consequently, big European and American original equipment manufacturers (OEMs) are counting on tougher government scrutiny to help business, including their small but fast-growing service operations.

"That's one argument for the big four, that some smaller players struggle to live up to rising quality demands," said Zuercher Kantonalbank analyst Martin Huesler.

Only a quarter of China's elevators are serviced by large OEMs, Otis President Philippe Delpech said in March, with the remaining 3 million maintained by 7,000 "mom and pop" service providers.

"That's not the usual profile of a service industry," Delpech said. "There are too many accidents and the vast majority of these accidents come from units maintained by a small company. That will benefit OEMs."

Schindler is similarly optimistic about a regulatory boost.

"We see this as a big opportunity that may lead to further market consolidation," Chairman Silvio Napoli said late last year. "It will not be easy, based on what we've seen, for some of the small players to adapt."

Western manufacturers generally have expanded Chinese service businesses in concert with new installations.

Kone and Schindler, for instance, boast of converting 60-65 percent of new installations into dependable service contracts.

"When you sell a new lift with a service contract, you can pretty much expect that if nothing goes wrong it will be renewed virtually in perpetuity," said Martin Flueckiger, a Kepler Cheuvreux analyst.

Kone's service business grew 20 percent in China last year, though it remains comparatively small, producing less than 10 percent of the company's 3 billion euros ($3.39 billion) in Chinese revenue.

The situation is similar for rivals, buoying optimism that the ride up in China, while changing, is far from over.

"The maintenance market in China is very fragmented with lots of small service firms," said Emma Falck, a Kone China executive. "This market is expected to grow further."

Reuters - Global Times