PROJECT REPORT

(Managerial Economics)

Economic Analysis of Elevators designed, manufactured, supplied and commissioned by KONE Elevator India (P) Ltd.

Submitted to Faculty: Ms. Simran Sethi

Lal Bahadur Shastri Institute of Management, New Delhi

Date of Report submission: 20-08-2009

Submitted by,

Group 9, Section-ADr. Daman Walia (13/09)Koustubha Bhutra (25/09)

Ashank Dayal Mathur (29/09)Abhinaw Shrivastava (67/09)

Harsh Khemka (117/09)Sunanda Mitra (149/09)

Trimester I, PGDM I Yr. (2009-11)Lal Bahadur Shastri Institute of Management, New Delhi

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Contents:

1. Acknowledgement

2. Introduction

3. Objective of the project

4. Methodology adopted

5. Importance of the study

6. KONE Sales Data for past ten years

7. Analysis of Sales Data and Demand Forecasting

8. Market research for finding Determinants of demand and supply of elevators

9. Economic Analysis of results- Determinants of Demand and Supply of elevators

10. Market structure- Market type

Appendix- Questionnaire on KONE Elevators

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1. Acknowledgement

This project, “Economic Analysis of Elevators designed, manufactured, supplied and commissioned by KONE Elevator India (P) Ltd.” was done as a part of our course curriculum of “Managerial Economics” at KONE Elevator India Pvt. Ltd, 16, Barakhamba Road, New Delhi- 1 and at various Real Estate companies at New Delhi who are or have been the clients of KONE.

We are highly grateful to our Department for sanctioning the grant to carry out this project.

We express our sincere thanks to Ms. Simran Sethi, Faculty- Managerial Economics at Lal Bahadur Shastri Institute of Management, for her encouragement and support in pursuing this project.

We are highly grateful to the Sales team at KONE Elevator India Pvt. Ltd, New Delhi and the Project Heads of Real Estate Companies at Delhi, for sparing time out of their busy schedules and for giving us important insights into the various factors determining the sales and demand of the elevators and the performance of the elevator industry as a whole.

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2. INTRODUCTION

The End-term project of Managerial Economics, “Economic Analysis of Elevators designed, manufactured, supplied and commissioned by KONE Elevator India (P) Ltd.” was carried out at KONE Elevator India (P) Ltd. The study involved the analysis of the elevator industry in India at present, the sales figures of KONE elevators in India and prediction of sales using demand forecasting techniques, KONE’s competitors in the industry, the market type of the elevator industry, and the various factors affecting Demand and Supply of elevators in India.

KONE in brief:

KONE Corporation is headquartered at Helsinki in Finland. KONE is present in 50 countries worldwide and has eight production units in all main markets and seven global R&D centres.

KONE’s objective is to offer the best people flow experience by developing and delivering solutions that enable people to move smoothly, safely, comfortably and without waiting in buildings in an increasingly urbanizing environment. It provides its customers with industry-leading elevators, escalators and innovative solutions for modernization and maintenance, and is one of the global leaders in its industry.

In 2008, KONE had annual net sales of EUR 4.6 billion and approximately 34,800 employees. KONE class B shares are listed on the NASDAQ OMX Helsinki Ltd.

KONE’s key customers are builders, building owners, facility managers and developers. In addition, architects and consultants are key parties in the decision-making process regarding elevators and escalators.

KONE has segmented the markets according to the purpose of the building. The main segments are categorized as residential, office and retail, as well as public transportation and airports. In addition, KONE serves hospitals, leisure centres, hotels and industrial properties.

KONE has approximately 250,000 customers worldwide, of which the majority are maintenance customers. Maintenance contracts vary from one-elevator residential buildings with yearly contracts to large international accounts with long-term service agreements.

During its more than 98 years as an industrial engineering company, KONE has been involved in businesses as different as textile manufacture, medical technology and the design of hydraulic piping systems. The company's main focus, however, has always been the elevator and escalator business.

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KONE in India:

KONE's presence in India dates back to 1984, when it formed a joint venture called Beacon KONE with Best & Crompton Engineering Ltd., a large and diversified company based in Chennai. Beacon KONE opened a factory in 1987 near Chennai. In 1992 KONE purchased Best & Crompton's interest in Beacon KONE, and KONE India became a 100% subsidiary of KONE Corporation. The Head Office of KONE in India is situated at Chennai.

KONE India has regional offices in four major cities in India with 41 branches throughout the country. KONE India also covers the markets of Nepal, Bangladesh and Sri Lanka.

KONE India has obtained ISO 9001:2000 Quality certifications for its factory at Chennai and for seven major branches. It is in the process of extending ISO certification to rest of the branches.

KONE is the market leader in the industry in India at present. It has an installation base of more than 18,000 elevators, escalators and autowalks. It offers a variety of “People Flow” solutions to its clients in India. Some of KONE’s projects in India include the Delhi Metro Rail Corporation, the Hyderabad airport, Cochin Airport and major residential and commercial buildings of real estate developers like DLF, Omaxe, Parsavanath, ILD etc.

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3. Objective of the project

There were three major objectives of carrying out this project. They are mentioned below:

i. To analyse the performance of KONE Elevator in India by studying the sales record of the company for the past ten years and prediction of the sales using demand forecasting techniques.

ii. To understand the various determinants of demand and supply of elevators from KONE by carrying out a market-research of the various real estate companies which are or have been the clients of KONE.

iii. To understand the market type of the elevator industry in India.

Elevator from KONE was chosen as the product for our Economic Analysis project. The choice was made because of the following reasons:

i. Elevators have become a necessity in all the multi-storeyed buildings being constructed because the constraint of space and increasing population has made it imperative for the various real estate builders to construct high rise buildings which require elevators.

ii. With the increase in population, the demand for housing has increased tremendously, especially in urban areas. As the elevator industry is dependent on the growth of real estate industry, it has led to an increase in the demand for elevators too.

iii. There are multiple players present in the market; five of them apart from KONE are major ones. There are 600 odd small elevator manufacturing units from all across the country. The complexity of the market scenario necessitates the study of the product.

iv. Certain trends like urbanisation increase in infrastructure spending and income levels of consumers have led to increase in the demand for elevators. The study entails an analysis of these long-term trends and their effects on demand and supply of elevators.

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4. Methodology adopted

The project work was carried out in two stages as mentioned below:

i. In order to analyse the performance of KONE in terms of sales of elevators, visits to the company’s Delhi office were carried out and information about elevators’ sales and KONE’s current position as an Elevator company was collected by interviewing senior executives from the Sales and Projects Departments.

ii. In order to study the determinants of demand and supply, a market research was conducted and questionnaire (refer Appendix) was designed for the purpose. Senior Executives from the Projects Departments of the various real estate companies which are or have been the clients of KONE were asked to fill the questionnaires.

The analysis of the responses from KONE officials and the Executives from the various real estate companies helped us in studying the growth of sales volumes of KONE apart from identifying the various determinants of demand and supply of the product and the market type of the elevator industry as a whole.

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5. Importance of the study

The project gives a detailed insight into the various parameters that govern the demand of a high-involvement product like elevators. An analysis of the performance of M/s KONE Elevator India Pvt. Ltd. gives a reflection of the general trend present in the industry.

KONE had shown a steady growth in the sales figures of elevators for a period of ten years. With the use of demand forecasting techniques, a comparative study of the actual and forecasted sales can be done and the effectiveness of the various statistical methods in making predictions can be analysed.

Another important aspect of this study is that the elevator as a product and the industry on the whole are dependent upon the real estate sector. Hence, it becomes imperative to conduct a market research among the past and present clients of KONE in order to find out the various factors which determine the demand for the product. The relationships between various parameters like brand value, quality, price, customer service approach and aesthetics with demand for the product can be established based on the responses of the representatives of the clients. Furthermore, an analysis of the industry and the general trends of the economy provide additional information about the various determinants of demand and supply of elevators. The relationships thus established are essential for carrying out the economic analysis of the product.

Analysis of the market type is also a very important part of this project study. With inputs from the KONE Sales and Projects officials and from the representatives of the clients from the real estate companies, the market type of this product can be determined. In this case, it is Monopolistic Competition as most of the attributes of such types of markets are true.

Hence we observe that this project covers many important aspects of an Economic analysis of a product which is high involvement, customized and has to compete in a Monopolistic market scenario. Another important aspect to be noted is the fact that elevator alone is not a product which is directly in demand. The entire industry category to which the product belongs is actually dependent on the demand for another industry, the real estate sector in the country. Hence we can also observe the various characteristics of a dependent demand product.

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6. KONE Sales data for the past ten years

KONE ELEVATOR INDIA PVT LTD.

Summary of information for completed works year wise for last ten years.

Sl.No. Year Ending Total no. of elevators designed, manufactured and commissioned in each year

1 31-12-2008 42742 31-12-2007 41613 31-12-2006 33354 31-12-2005 28215 31-12-2004 17196 31-12-2003 14027 31-12-2002 11848 31-12-2001 8259 31-12-2000 75810 31-12-1999 852

Source: Sales records, KONE Elevator India Pvt. Ltd., New Delhi.

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Source: Sales records, KONE Elevator India Pvt. Ltd., New Delhi.

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7. Analysis of Sales data and demand forecasting

KONE ELEVATOR INDIA PVT LTD.

Summary of information for completed works year wise for last ten years.

Sl.No. Year Ending Total no. of elevators designed, manufactured and commissioned in each year

1 31-12-2008 42742 31-12-2007 41613 31-12-2006 33354 31-12-2005 28215 31-12-2004 17196 31-12-2003 14027 31-12-2002 11848 31-12-2001 8259 31-12-2000 75810 31-12-1999 852

Yr Ending sales a = 0.2 F(T) a = 0.4 F(T) a = 0.6 F(T) a = 0.8 F(T) a = .9 F(T)

31-12-1999 852 852 852 852 852 852

31-12-2000 758 852 852 852 852 852

31-12-2001 825 833.2 814.4 795.6 776.8 767.4

31-12-2002 1184 902.048 805.104 804.216 812.352 818.394

31-12-2003 1402 946.11 961.437 1037.0745 1111.694 1148.0339

31-12-2004 1719 1075.35 1191.0773 1291.291 1355.5 1379.84

31-12-2005 2821 1256.344 1452.8678 1574.486 1652.1403 1859.878

31-12-2006 3335 1643.3 2063.992 2357.077 2597.9256 2712.208

31-12-2007 4161 2170.072 2754.077 3055.17232 3223.277 3282.51

31-12-2008 4274 2754.6 3456.2677 3785.8275 3991.333 4077.875

Predicted

31-12-2009

2851.504 3952.49637 4168.7724 4244.613 4261.86

( F)2)1/2 480.476 258.589 154.373 89.387 62.020

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KONE ELEVATOR INDIA PVT LTD.

Summary of information for completed works year wise for last ten years.

Sl.No. Year Ending Total no. of elevators designed, manufactured and commissioned in each year

1 31-12-2008 42742 31-12-2007 41613 31-12-2006 33354 31-12-2005 28215 31-12-2004 17196 31-12-2003 14027 31-12-2002 11848 31-12-2001 8259 31-12-2000 75810 31-12-1999 852

Sl.No. Year Ending Total no. of elevators designed, manufactured and commissioned in each year

Predicted figures through trend analysis

1 31-12-2008 4274 4107.557

2 31-12-2007 4161 3668.788

3 31-12-2006 3335 3230.019

4 31-12-2005 2821 2791.25

5 31-12-2004 1719 2352.481

6 31-12-2003 1402 1913.712

7 31-12-2002 1184 1474.943

8 31-12-2001 825 1036.174

9 31-12-2000 758 597.405

10 31-12-1999 852 158.636

Predicted value for 31 -12 -2009 is 4546.326

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8. Market research to find determinants of Demand and supply of elevators

The questionnaire for carrying out the market research is attached in the appendix. It was designed in such a manner that the various parameters and trends affecting the demand and supply can be analysed from the economic point of view. Each parameter or the trend had to be ranked in a scale of 1-5. The top executives from the Projects Department of the Real Estate companies which are or have been the clients of KONE were requested to fill the questionnaires.

The questionnaire had four sections. The explanation of each is given below:

I. Rating KONE on pre-purchase parameters. (1-poor, 5-excellent):

The respondents had to rate KONE on the various parameters as mentioned in the questionnaire. All these factors are important for the clients before finally awarding the tender to any of the elevator companies and the rankings given by them helped us in establishing the relationship between that parameter and quantity demanded for KONE elevators.

II. Rating the level of satisfaction with KONE on certain performance attributes. (1-extremely dissatisfied, 5-completely satisfied)

The assessment of satisfaction levels of the customers also gives an insight into the quantity demanded of elevators as all the attributes in the questionnaire signify quality which is a very important determinant of demand

III. Rating the likelihood of reordering and recommending KONE. (1-least likely, 5-most likely)

The respondents had to rank the probability of giving repeat order and recommending KONE to other builders. A study of these attributes gives an indication of the satisfaction levels and the loyalty of the customers towards KONE Elevators.

IV. Rating some trends as growth factors for the industry. (1-least important, 5-most important)

The respondents were asked to rate the importance of certain long-time trends which affect the demand and supply of elevators. These trends have been identified as important ones by KONE Corporation and the survey was meant to seek justification of their relevance.

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9. Economic Analysis of Results- Determinants of Demand and Supply of Elevators

Determinants of Demand

Own Price: There is an indirect relation between price of the commodity and quantity demanded. Asked to rate the importance of Price in their decision to purchase a Kone elevator on a scale of 1 to 5, customers on an average gave price a rating of 3.5.

Brand Value: There is a direct relation between Brand Value of the product and its quantity demanded. This means that other things remaining constant, an increase in brand value of a product will increase the quantity demanded of it. In response to our question, customers gave brand value a rating of 2.7.

Quality: Again, there seems to be a positive relation between quality of a product and the quantity demanded. An increase in quality of a product will result in an increase in the quantity demanded of it. The average rating given was 3.83, which is the maximum of any of the other determinant.

Payment Terms: The more liberal the payment term, the more the quantity demanded. Thus, there exists a direct positive relation between payment terms and quantity demanded of a product. The average rating given was 3.5. It should be noted though that the company cannot be completely liberal with its payments terms because of costs constraints.

Maintenance Contracts: Again, the more liberal the maintenance contract, the more the quantity demanded. But, the company again, cannot be completely liberal with its maintenance contract because of cost constraints. In response to our question, customers gave it a rating of 3.08.

Adherence to Project Completion Schedule: There is a direct relation between adherence to project completion schedule and the quantity demanded of the product. So, the better the adherence, more the quantity demanded. The average rating given in our survey was 3.5.Interiors of Elevators: There is a direct relation between interiors and quantity demanded. The better the interiors more will be the quantity demanded. The average rating given was 3.41.

Note: In the following observations, an increase in demand may not imply an increase in quantity demanded by an individual, but by the market as a whole. So, an improvement in quality may lead to potential consumers entering the market or existing consumers shifting from another brand.

Observations:

Since fifty percent of the sample has rated Quality at 4 on a scale of 5, it shows the responsiveness of demand to a change in quality of the product is high. Thus, a small change in the quality of the product can bring about a proportionately greater change in demand.Similarly, fifty percent of the sample has rated Adherence to Project Completion Schedule at 4 on 5. Therefore, even a marginal lapse on the part of the company in completing the project can lead to a sharp fall in demand.

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Fifty percent of the sample has rated Price and payment terms at 4 on 5. Thus, the majority of the people will respond to a small fall in price or more liberal payment term with an increase in demand.Seventy five percent of the people have rated Brand Value at 2 on 5. Therefore, the response of demand to a change in brand value is not significant.

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Determinants of Supply

Urbanization: According to a survey conducted by Kone, increase in urbanization is one of the factors which have led to the increase in supply of elevators. The more the urbanization, more will be the quantity supplied of elevators.

Population: As the population is increasing, the demand for housing is also increasing rapidly. Due to constraints of space, the demand for high–rise buildings is continuously on a rise and hence its an important determinant for supply of elevators.

Technology: There is a direct relation between improvement in technology and the quantity supplied of the product in question.

Rise in Income Level: As the income of an individual increases, the quantity demanded of the product also increase (other than inferior goods), thus, leading to an increase in supply.

Infrastructure Development: A strong infrastructure will lead to construction of more buildings, thus, increasing the demand of elevators and eventually increasing the supply.

Note: The above mentioned determinants of supply were given by Kone itself after extensive research.

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Market Structure

The elevator industry exhibits features of both Monopolistic Competition as well as those of Oligopoly. The reason is that although there are a large number of firms in the industry (as is the case with Monopolistic Competition), the market is still dominated by a select few as is the case with Oligopoly.

Monopolistic Competition: It is the combination of Monopoly and Perfect Competition. In monopolistic competition, there are a large number of firms producing similar commodities. There is product differentiation and existence of selling costs.

Oligopoly: In oligopoly there are a few large sellers of the commodity, producing homogeneous or differentiated products and intensely compete against each other.

Features of Monopolistic Competition:

1. Number of Sellers: In monopolistic competition, the numbers of sellers are large. In the elevator industry, there are a select few “Big Companies” but there are a large number of smaller, local companies.

2. Degree of Monopoly Power: Monopolistic firms tend to enjoy limited monopoly power because of the presence of large number of firms. Same is the case with the elevator industry.

Features of Oligopoly:

1. Nature of Product: Products offered in oligopoly might be homogeneous or differentiated. In case of the elevator industry, products from companies like Kone, Otis and Schindler are NEARLY homogenous. Whereas there is a clear product differentiation between Kone and Classic, which is a local company.

2. Entry Barriers: There are barriers to entry mainly in the form of huge capital requirements.

3. Price Policy of the firm: Large firms like Kone, in the elevator industry have considerable control over prices. As a result, prices tend to remain rigid.

4. Size of Market for each firm: Firms like Kone have huge market share. This is a distinguishing feature of Oligopoly where firms have large market share.

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Measures of Oligopoly:

Four-Firm Concentration Ratio: This measure expresses the market share of the four largest firms in an industry as a percentage.

Market forms can often be classified by their concentration ratio. Listed, in ascending firm size, they are:

Perfect competition, with a very low concentration ratio, Monopolistic competition, below 40% for the four-firm measurement,

Oligopoly, above 60% for the four-firm measurement, (Example automobile manufacturers)

Monopoly, with a near-100% four-firm measurement.

In case of the Elevator Industry, the top four companies and their market share are as listed below:

Kone: 26% Otis: 23%

Schindler: 20%

Mitsubishi: 9%

If we add the respective market shares of the top four companies, the total is 78%. Thus, clearly the market is oligopolistic in nature but it also shows some features of monopolistic competition that were mentioned above.

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