The elevator is the razor. The service contract is the blade.

Today, I'm digging into KONE (trades on Nasdaq Helsinki, under ticker KNEBV).

They're the Finnish company that makes elevators, escalators, and automated building doors, then (hopefully) maintains them for the next 25+ years. Just like my last profile, Otis.

KONE is one of the big four in the space, alongside Otis, Schindler, and TK Elevator.

Housekeeping note: KONE reports in euros, so I've converted everything to US dollars at today's rate of 1.14.

A few things that stood out to me:

• Similar to Otis, they sacrifice new sale margins for higher-margin required maintenance contracts.

• Customers fund the operation. Builders pay advances and progress payments, so KONE runs with negative working capital and CapEx of only about 1.4% of revenue. Return on capital employed is north of 40%. (Negative working capital is one of the holy grails of financial management…more on that in my next report)

• The demographics of the installed base are a quiet tailwind. Roughly 10 million of the world's ~25 million elevators are 15+ years old, and KONE's modernization sales grew almost 20% in 2025.

But it's not all gum drops and lollipops:

• China was the golden goose for new equipment, and that market keeps shrinking. New building solutions in China declined again with no recovery in sight.

• The market has de-rated the whole elevator complex. KONE's total return is -12.8% over the past year even though profits grew, and the stock sits near its 52-week low.

The key takeaway for me after looking at KONE and Otis is that the razor-and-blades business model is incredibly powerful, especially when combined with the great cash flow dynamics of these businesses. But the one thing that's sticking out to me is I wonder how durable the margins in the ongoing maintenance are.

It's pretty easy to see the margin structure that comes with that ongoing maintenance and service work. So I would venture to guess that there is more and more competition on the service side of the business but I need to look into how these maintenance contracts are structured. Intuition tells me that a certain level of maintenance delivered by a certain contractor is required to keep a warranty in place.

More on negative working capital on Thursday!

Nick

TL;DR

• KONE is one of the world's big four elevator and escalator companies, founded in 1910 and still anchored by Finland's Herlin family.

• They sell new equipment roughly at cost of competition, then earn the real money maintaining and modernizing an installed base for decades; service plus modernization is ~65% of sales.

• FY2025 revenue was $12.8B with operating margin up to 11.9%, both records, driven by service and a nearly 20% jump in modernization.

• The balance sheet is effectively net cash once you count $1.9B of cash and money-market investments, and they paid out ~$1.0B in dividends (a ~93% payout). Otis runs the same model with $7.7B of net debt.

• The stock hasn't followed the fundamentals: -12.8% total return over 1 year, though that beat Otis at -25.2%, and the 10-year return is +56.8%.

• Operator takeaway: structure your pricing so the recurring layer is the profit engine, and let customer prepayments fund your growth.

The 30,000-Foot View

KONE makes and installs elevators, escalators, and automatic building doors, then services them through a global network of technicians in more than 60 countries. The business has three engines: New Building Solutions (winning equipment into new construction), Maintenance (the recurring annuity), and Modernization (upgrading aging units, often KONE's own).

The economics hinge on the installed base. A new elevator is a competitive, spec-driven sale to developers and contractors. But once the unit is in the shaft, the maintenance contract attaches and tends to stay for the life of the building. Elevators are safety-critical and code-regulated, so buildings can't skip upkeep even in a downturn. That's why the whole industry chases new installations at thin margins: they're buying the annuity. Maintenance is also a route-density game, and more units per technician per mile structurally favors the biggest players in dense cities.

For scale, Otis did $14.4B of revenue in FY2025 to KONE's $12.8B, and the two have converged on nearly identical shapes: Otis is now 65% Services and 35% New Equipment, the same 65/35 split KONE hit in 2025. Both got there the same way, with new-equipment revenue shrinking (Otis's fell from $6.4B in 2021 to $5.0B in 2025) while service ground higher. The whole industry is aging into its annuity.

Under CEO Philippe Delorme, who came over from Schneider Electric at the start of 2025, the "Rise" strategy leans further into service, smart maintenance, and modernization as China new-build demand fades.

Revenue mix (FY2025, approximate):

• Maintenance: ~40%

• Modernization: ~25%

• New Building Solutions: ~35% (service + modernization together were ~65% of sales)

Key Stats

• Market cap: ~$28.5B

• FY2025 revenue: $12.8B

• FY2025 gross margin: 57.7%

• 1Y total return: -12.8%

• Employees: ~64,000

• Industry: Industrial machinery (elevators and escalators)

Company History

• 1910: Founded in Helsinki. KONE literally means "machine" in Finnish.

• 1924: Harald Herlin buys the company. Four generations later, the Herlin family is still the anchor shareholder, with Antti Herlin as chairman.

• 1960s-1970s: Serial acquisitions (Asea-Graham, Westinghouse's European elevator business) turn a small Finnish player into a European leader.

• 1994: Acquires Montgomery Elevator to scale up in North America.

• 1996: Launches MonoSpace, the world's first machine-room-less elevator. It created a whole product category and freed up rentable space for building owners.

• 2005: Demerger splits off Cargotec, leaving KONE as a pure elevator and escalator company.

• 2013: Introduces UltraRope, a carbon-fiber hoisting cable that enables 1 km elevator runs, later spec'd for the world's tallest tower projects.

• 2017: Launches 24/7 Connected Services, predictive maintenance built on IBM Watson IoT.

• 2024: September capital markets day unveils the Rise 2025-2030 strategy; Philippe Delorme announced as CEO.

• 2025: Service becomes the largest business; service plus modernization reach ~65% of sales.

Show Me the Money

Standout financial features:

• Steady grower, expanding margins: revenue crept from $12.4B to $12.8B over three years, but operating margin went from 9.5% to 11.9%. Attributed to a six shift toward service is doing the heavy lifting.

• The company is sitting on roughly $1.0B of net cash after all debt and lease obligations.

• They are a heavy dividend payer. ~$1.02B paid out in 2025 against $1.33B of free cash flow, a payout ratio around 93% of earnings.

• CapEx of ~$0.18B on $12.8B of revenue. For an "industrial," KONE is remarkably asset-light because customers' advance payments fund the work in progress.

• The Otis contrast is a lesson in capital structure, not operations. Otis earns a higher operating margin (14.8% vs. KONE's 11.9% in FY2025) but carries $7.7B of net debt and negative shareholders' equity from years of debt-funded buybacks. KONE runs the same razor-and-blades model with net cash and mails ~93% of earnings out as dividends. They have the same business model with different philosophies when it comes to balance sheet management.

Financial Data

Stock Performance

Dividend-adjusted total returns for the ADR (USD):

1-year head-to-head vs. peers:

The long run and the short run tell opposite stories here. The decade return of +56.8% was earned almost entirely before mid-2021, when China's construction boom peaked; the past five years are negative even with dividends reinvested. And the past year has been rough for the whole elevator complex, with KONE roughly in the middle of the pack while Otis fell hardest. Operators should notice what the market is repricing: it's not the annuity, it's the China new-equipment engine that used to feed it.

The N.O.O.B. Nine - Competitive Powers

The Nerd Out on Business Nine is made up of Hamliton Helmer's famous "7 Powers" of competitive advantage (Scale Economies, Network Economies, Counter-Positioning, Switching Costs, Branding, Cornered Resource, and Process Power) combined with two of my own (Data Flywheel and Distribution Advantage).

Average Score: 3.3/5 - an installed-base moat built on switching costs, route density, and brand, not on network effects or a disruptive model.

Memorable Marketing

KONE markets like an engineering company that figured out branding. The moves that work are category creation and flagship proof, not ad campaigns.

Notable campaigns / tactics:

• "People Flow" positioning (ongoing): KONE doesn't sell elevators, it sells the smooth movement of people through buildings. Inventing the category language forces buyers to evaluate everyone else in KONE's terms.

• MonoSpace launch (1996): The machine-room-less elevator was marketed on rentable square meters saved, translating an engineering feat into developer economics.

• UltraRope (2013): A carbon-fiber rope enabling 1 km rises became a brand halo, attached to the world's most iconic tower projects.

• 24/7 Connected Services with IBM (2017): Co-launching predictive maintenance with the Watson brand borrowed tech credibility an elevator maker couldn't claim alone.

Tactical takeaways:

1. Name the category you want to win; whoever frames the problem picks the scorecard.

2. Translate technical superiority into the customer's P&L (space saved, downtime avoided), not spec sheets.

3. Use lighthouse projects as marketing; one landmark building outsells a hundred brochures.

4. Co-brand with a credible tech partner when you're selling a capability outside your reputation.

AI Uses & Opportunities

Current exposure:

• 24/7 Connected Services has run AI-based predictive maintenance on IBM Watson IoT since 2017, monitoring 200+ parameters per unit to fix faults before they strand anyone.

• Smart people-flow products (KONE Destination, Office Flow) already use algorithms to cut waiting times and group passengers.

Future opportunities:

• Technician copilots that diagnose faults from equipment telemetry and history before the van rolls, lifting first-time-fix rates on a ~64,000-person workforce where labor is the biggest cost.

• AI-generated modernization surveys: scan an aging shaft, auto-produce the upgrade proposal, and compress a weeks-long sales cycle.

• Route optimization that dynamically re-clusters maintenance visits, since density is the margin lever.

• Computer vision on door systems, the single most failure-prone elevator component, to push predictive accuracy further.

Bumps in the Road

• China built KONE's growth story, and new equipment demand there keeps contracting with no recovery signal; the pivot to service and modernization in China has to outrun the decline.

• Maintenance is a wage-inflation business. Tens of thousands of technicians in Europe make labor costs a persistent margin headwind.

• Independent service providers and property-tech firms keep attacking the maintenance annuity with cheaper contracts and open IoT retrofits.

• A ~93% dividend payout leaves little retained buffer if earnings wobble.

• The market has already de-rated the stock 31% from its 52-week high; sentiment on anything construction-adjacent in China is fragile, whatever tomorrow's H1 print says.

Your Swipe File

• Price the entry product to win the annuity. But be sure that your competitive position in delivering the annuity is strong, as the last thing you want is to get underbid on that part of the business.

• Get customers to fund your working capital. Advance and progress payments mean KONE grows with negative working capital and minimal CapEx.

• Bolt a sensor and a data service onto a physical product. Connected monitoring turned KONE's maintenance into a stickier, upsellable subscription.

• When new-unit demand dries up, sell upgrades to your own installed base. Modernization grew ~20% in 2025 while new equipment shrank. Your past customers are often the easiest to market to.

• Own the category language. "People Flow" makes KONE the default frame for a purchase most buyers only make a few times in a career.