Kone Looking at South America After 11-Year Break as China Cools

Kone Oyj (KNEBV), the elevator supplier to Dubai’s 1,080-foot Infinity Tower and London’s Shard, may reenter the South American market after an 11-year break as it prepares for a potential slowdown in China.

The return to the region would probably be made via an acquisition of a local company and Kone has identified a “few interesting targets that could help establish a position there,” Chief Financial Officer Henrik Ehrnrooth said in an interview. “We will only reenter the market if we find an attractive and sustainable model of entering.”

Kone is seeking to reverse course after its 2001 sale of operations in Brazil, Argentina, Venezuela and Chile to ThyssenKrupp AG (TKA) because they lacked scale. The units generated just 1 percent of sales at the time. The Helsinki-based company is budgeting for the boom in Chinese construction to tail off, and is seeking to secure as many after-sales service contracts as possible in preparation.

“In recent years, we’ve bought around 20 companies a year; most have been maintenance companies,” Ehrnrooth said. “That is definitely a high-focus area for us.”

Ehrnrooth joined Kone in 2009 from Goldman Sachs Group Inc., where he worked as a managing director in the investment banking unit. In his banker past, Ehrnrooth mostly had an advisory role in corporate acquisitions and capital market transactions, often working with industrial companies’ strategic development, he said Sept. 14.

Credible Return Needed

“As they’ve left the region once before, the return would have to be credible,” Pekka Spolander, an analyst at Pohjola Bank Oyj said. “It would require a significant move.”

China’s booming construction has been the main driver for new equipment, amounting to 64 percent of 610,000 elevators and escalators sold last year, Kone estimated in June. The company’s sales in Asia grew 31 percent last year, amounting to 27 percent of total revenue.

Years of Asian growth has left new equipment sales accounting for about half of Kone’s business, compared with 40 to 45 percent historically, Ehrnrooth said.

“Kone will rise or fall together with China’s construction,” Erkki Vesola, an analyst at Swedbank AB (SWEDA) said by phone. “China’s share has been so incredibly large that whatever happens there will show up first in Kone’s order books.”

Emerging Markets

China’s economy, the world’s second largest, expanded 7.6 percent in the second quarter, the slowest pace in three years. Any slowdown in that market increases pressure on the company to expand in other emerging economies. Kone is struggling against record unemployment, tougher lending conditions and slumping construction in the euro area.

Europe’s construction meltdown is forcing elevator suppliers such as United Technologies Corp.’s Otis, Schindler Holding AG (SCHP) and ThyssenKrupp AG to adapt their businesses as government spending cuts, especially in Southern Europe, have reduced new residential building.

The focus on modernization and product innovation has grown in importance as businesses try to revive demand in markets that don’t need more elevators. Europe, the Middle East and Africa account for about 51 percent of elevators and escalators in operation, Kone estimated on June 8.

“Even though we’ve had a challenging market situation, we’ve invested significant resources and amounts in product development,” Ehrnrooth said. Kone introduced a new elevator range on June 7, “our most important product launch in 16 years,” according to Ehrnrooth.

Malaysia, Philippines

Schindler last week announced plans to build an escalator plant in India to prepare for future demand as the region’s urbanization develops.

“We do see South America as a market that offers interesting long-term growth opportunities,” Ehrnrooth said. Southeast Asian countries including Malaysia, the Philippines, Indonesia and India have similar prospects, both in services and new equipment, he said.

India’s market will continue to grow long after China has slowed down, Pohjola’s Spolander said.

“Hopefully, when the new equipment sales start cooling down, the maintenance side has grown big enough to compensate,” the analyst said.

To contact the reporter on this story: Kasper Viita in Helsinki at kviita1@bloomberg.net

To contact the editor responsible for this story: Christian Wienberg at cwienberg@bloomberg.net

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