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Morningstar | Schindler's Upside From Closing Margin Gap With Peers Still Has Room To Go

While a top three competitor globally in elevator and escalators, Schindler faces slowing demand in China while trying to gain scale in the market. Although a well-established European competitor with a number-two or -three market position, Schindler is the fifth-largest player in China, trailing Kone, Otis, Hitachi, and Mitsubishi, and is seeking to improve its position. As the largest elevator market in the world, China is important to any global elevator company’s future earnings. China has made up at least two thirds of the global demand for new installations. While new installations have slowed, in the medium term the Chinese market should grow through maintenance contracts, where companies with a large installed base will have a competitive advantage. Customers tend to favour original equipment manufacturers in taking maintenance contracts, and the more contracts a company can get within a service footprint, the greater its cost advantage and ability to price the contracts more competitively. With a smaller scale and slowing new installation market, we think the company faces a challenging road. With half of Europe’s elevators now 20 years old or older, we expect Europe’s revenue mix to shift toward lower-margin modernisation sales and moderately away from higher-margin service contracts. However, Schindler's program toward greater modularity in its production process should more than offset this dilution and bring it closer to peer Kone's 14% EBIT margin over the longer term. The roughly 200-basis-point margin spread between the two should narrow as Schindler reduces the number of components spread across its elevator models. This should improve productivity, shortening assembly times, and increase economies of scale with the company ordering higher volumes of a smaller set of components.