Selling elevators has all the characteristics of an attractive business: a highly-regulated, oligopolistic industry structure, high barriers to entry, and a razor-razorblade model with great visibility of high-margin recurring revenue.

Safety and reputation are both key to installing new equipment. The market is concentrated between Otis, KONE, Schindler, and TK Elevator. Each company has the experience, technology, and capital to design and install elevators for residential and commercial buildings. And they all compete heavily to win installations and get access to high-margin service revenue.

Although the revenue mix is roughly 50/50 split between installations and maintenance, ~75% of an elevator company’s EBIT is from servicing the elevators. The maintenance market is more fragmented with local service companies, typically run by former OEM-employees, offering cheaper servicing for non-proprietary equipment. Historically, it’s proven difficult for service companies to scale and the majors routinely make acquisitions to knock out local competition.

Otis is the market leader and most profitable vendor with ~15% EBIT margins, 200-400bps higher than KONE and Schindler. This is mainly due to a higher maintenance revenue mix. The segment breakdown below shows the importance of maintenance operating profit to overall margins.

We interviewed a Former Schindler Regional Manager, who has over 40 years of experience in the elevator business, to explore the unit economics of servicing elevators. This was one of the most interesting calls we’ve hosted this year.

The major takeaway was that every elevator company may be over-earning on maintenance.