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UTX’s Otis Elevator Beats Out Competition in China

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UTX’s Otis Elevator makes gains in China 

In its investor presentation on September 28, 2016, Finnish elevator maker KONE Corporation (KNYJF) stated that it expected its elevator sales in China to fall as much as 10% in 2016, with the fall expected to stretch into 2017 as well.

United Technologies’ (UTX) stock was essentially unmoved by this revelation, as the company has been gaining market share over KONE in recent quarters. These gains were reflected in its recent quarterly results. As KONE saw a 5% fall in its orders in 2Q16, UTX’s elevator bookings rose 4% in the period.

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This rise hasn’t come without its costs, as UTX fell 10% on pricing in 2Q16, revealing its willingness to take a hit in its margins in return for market share gains in key markets. KONE, on the other hand, has been reticent on this approach. Its CEO has stated that such a strategy doesn’t make economic sense for his company.

UTX said as much at the Morgan Stanley (MS) Laguna conference in September. The company stated that while its margins in China were ~20%, it was likely to face pricing pressures throughout 2H16 and the whole of 2017. The region represents $2.5 billion of UTX’s $12.5 billion Otis business, so it’s a key market that pressures margins.

The Otis segment’s operating margins have fallen steadily from 23% in 2010 to 19.9% in 2015. In 2016, the segment’s margins are expected to be around 18.8%. Its current margins still provide considerable room over the 14.3% margin of KONE and the 10.7% margin of Schindler (SHLRF).

Otis end markets have peaked

At the Laguna conference, UTX also stated that commercial construction (XHB) was probably at the peak of its cycle. The company’s backlogs in its Otis segment were slightly above their 2007 peak. Therefore, double-digit growth in the segment going forward could be unrealistic.

In the industrial sector, investors can also check out our business updates on Honeywell (HON) and Stanley Black & Decker (SWK).

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