In Conversation: Judy Marks, Chair, President & CEO, Otis Worldwide Corporation
MANAGING CRISES
How has 170-year-old Otis navigated economic downturns like the 2008 global financial crisis and the recent Covid pandemic?
Otis’ resilience lies in its service-driven business model. The service business, accounting for 60% revenue and 90% profit globally, ensures continuity and reliability during crises. We made a commitment to our people that even if sale of new equipment slowed, service business will give us the base(1). It did during the 2008 global financial crisis as well as Covid.
How are developed markets, particularly U.S. and Europe, faring?
Factors like interest rates and inflation have impacted the real estate industry in U.S. In Europe, Spain and Italy are progressing well, while Germany and France have slowed down. Middle East is showing high demand for new equipment(2). The service market is vibrant globally.
There is talk of a possible recession in U.S. How can that impact your business?
It is not clear whether U.S. will be hit by a recession. However, historically, the service business has thrived during slowdowns because maintenance is critical for safety. It has grown every quarter since Otis spun off from the parent firm, United Technologies, in April 2020.
Does the company start generating service revenue immediately after installation?
We transition to maintenance services post-installation, akin to a subscription model. Our service contracts ensure maintenance, compliance and prompt repairs. Elevator modernisation, which becomes necessary after about 20 years, offers another revenue stream. Margins from services match or exceed margins on new equipment. We are aiming for 10% margins in modernisation, surpassing the 7% on new equipment. Our service margins are typically in mid-20s.
Otis has cut annual sales view on slowdown in construction in China and U.S. What are the reasons behind this?
The revised guidance projects 1-3% top-line growth, down from the initial forecast of 2-4%. This reflects slowdown in China’s property market affecting new equipment sales. However, our businesses in U.S. and EMEA (Europe, Middle East and Africa) are contributing to growth, with Asia Pacific, particularly India and Southeast Asia, emerging as key growth regions.
In China, there has been a shift from predominantly new equipment sales to service. Over past four years, the service business in China has doubled, with 70% now coming from new equipment and 30% from service. China, as a large rapidly developing market from 2000 to 2020, was mainly a new equipment market for most major original equipment manufacturers. In comparison, we have a healthy mix in India. While new equipment sales dominate, service business is a significant contributor.
INDIA FOCUS
Otis built its first manufacturing unit in India in 1971. How well can it leverage the country’s economic growth?
Our first installation in India was in 1892. That elevator in Kolkata is still working. So, India has been a vibrant part of Otis for a long time. Everything we do in India is for India; we export a small portion from here. It has been a hub for decades. We are excited with economic growth here. The manufacturing unit in Bengaluru is one of our 17 global facilities. In addition to manufacturing elevators, we design and build escalators at the plant. We have set a local supply chain.
The China market is still the largest for elevators and escalators but new equipment sales have been declining there for the last three years. Sales peaked at 6.9 lakh units a few years ago and have stabilised at 4.25 lakh units. India is the second-largest market for elevators and escalators and is expanding. It is about 70,000 units a year, probably two and half times the American market. However, India and China are vibrant service markets. Population growth, urbanisation and rise of multifamily buildings will keep demand for elevators buoyant in India.
What factors support India’s elevator and escalator market?
The Indian market is witnessing growth in public infrastructure projects like metros, airports and railways. Additionally, private sector developments, including high-rise buildings, residential complexes and commercial spaces, are on the rise in major cities. The multifaceted growth in infrastructure, commercial and residential sectors presents a robust opportunity.
What is the India strategy?
Our team has doubled the orders in last three years. This has put a lot of demand on our Bengaluru factory. We are obviously expanding it. We have a global R&D centre in Hyderabad. Localisation is another critical area. We have surpassed the 50% mark in localisation. We want to localise almost everything. We should be getting to 90% localisation over time
Another point is technology upgrades. We are going to invest, expand and apply digitalisation to everything we do. We are introducing IoT solutions and AI to improve safety. India team is the first in the world of Otis to have put together a system that allows the buyer to order an elevator online; 13-15% of our orders in India come from digital sales. We have been using AI for a long time. We have got nine lakh out of 2.3 million units connected with Otis ONE and IoT solutions. Our Compass 360 system algorithm uses AI(3). Our API (application programming interface) helps robots control the elevator.
How do you intend to expand overseas using the India hub?
We have some unique products—‘Gen2 Prime’ and a few other offerings — that we manufacture only in India. We started exporting those products to Middle East and Southeast Asia two-three years ago. We will continue to expand exports to Africa and parts of Europe.
What are the challenges from India’s point of view?
If government doesn’t allocate sufficient capital for infrastructure, it will be a challenge. Our internal challenge is to invest in attractive markets. And right now that is India.
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