The Signal Interview
“I don’t remember a time that we didn’t have uncertainty,” Judy Marks says of the five years since the $40 billion elevator and escalator group she leads spun off as an independent company.
Otis Worldwide was spawned from a break-up of United Technologies that investors pushed for because of the persistent underperformance of the parent company’s stock. It returned to the New York Stock Exchange a century after it first listed there at an unpromising time — April 2020 was just weeks into the COVID-19 pandemic, which played havoc with supply chains, the construction industry, and the occupancy of buildings tall enough to require Otis products. Five years later, however, shares in Otis have roughly doubled, narrowly beating the S&P 500 index and far outpacing listed rivals Schindler and Kone.
“What I tell our team is to remain calm, to focus on what we can control, and to remain resilient,” Marks says in an interview from her Connecticut headquarters, a 20-minute drive from the 117-meter tower where Otis tests new elevator equipment. “That, plus a very reliable, service-driven business model, has served us well.”
Finding a flywheel strategy
More than 170 years after the impresario P.T. Barnum helped Elisha Otis market his safety brake, which stopped elevator cabins from falling if a cable snapped, Marks’ company makes more than 60% of its revenues and 90% of its profits from servicing elevators rather than installing them. It’s a “flywheel” business model, she says, where each new product it sells unlocks a lifetime of recurring service revenues, cushioning it from jarring descents if the pace of new building slows.
“That’s the maturity we’ve gotten to from a strategy perspective that we didn’t have before we became independent,” says Marks, an electrical engineer and veteran of IBM, Lockheed Martin, and Siemens, who joined Otis in 2017 and was named CEO in 2019. Shifting its focus further towards repairs and maintenance has helped her keep investors calmer through moments of economic turbulence by recasting Otis as a business less vulnerable to short-term downturns than many industrial peers.
It has also driven 20 quarters of increasing profitability in the service business. Otis’ operating margins are just over 6% on new equipment, but almost 25% in its service business, which maintains more than one in 10 of the world’s elevators. That has delivered 60% growth in adjusted net income in the past five years, four times the pace at which its top line grew.
“We’ve fine-tuned the strategy to make sure everyone understands that new equipment is wonderful,” Marks explains, “but we are a long-cycle business.”
Riding the China cycle
Her strategy has been driven by necessity. The company, which reports first-quarter earnings next week, saw a healthy 6% increase in service revenues last year, but a near 8% drop in new equipment sales. The reason was a more than one-fifth fall in new purchases in China, a country whose construction boom once powered Otis’ new equipment sales but which has since suffered four years of decline.
Marks attended last month’s China Development Forum in Beijing and was in the Great Hall of the People when President Xi Jinping promised global executives a “predictable” business environment. Despite US-China trade tensions, she says, Chinese officials are still courting foreign investment. “They’re working to sustain an environment where you can do business … fairly, with transparency and with cooperation.”
“I’ve seen many cycles. This cycle is one of recovery in terms of consumption [and] confidence, and that consumer confidence obviously translates into the property market,” Marks says, adding that it still delivers 10 times the number of new elevators in China that it does in the US.
Even so, she expects further declines in new equipment sales in China this year and is restructuring its business there to deliver $30 million in annualized savings. “We’ve adjusted our strategy, we’ve adjusted our organization, and I think now we’ve found the right place for us to continue to grow,” she says — but the growth will be from servicing and refurbishing installed equipment rather than from any new construction boom.
The trade war hits the hoistway
Otis has seen strong growth elsewhere, from India to southern Europe, and no fall-off yet in construction in its home market, where it meets more than 90% of domestic demand from its plant in Florence, South Carolina. But the trade war between the US and China has injected more of the uncertainty to which Marks has become accustomed.
The dual sourcing Otis built up in its supply chain meant that President Donald Trump’s first-term tariffs cost it less than $20 million. Now that he has put 25% tariffs on imported steel, Otis’ largest raw material, Marks expects at least as much of an impact this time — “perhaps a little more.”
There will be other disruptions, too. Only one manufacturer can meet US regulatory requirements for the steel rails that guide an elevator through a hoistway, she notes, and it is in Canada. “Are we encouraging them to open a US factory? Absolutely. Will they? How quickly? Unclear.”
If Marks sounds confident in weathering such challenges, though, it is because of the fundamentals. About 8 million of the world’s 22 million elevators are now more than 20 years old, meaning they need more repairs and maintenance, and that number is growing by 500,000 units a year.
The industry has also pitched itself to regulators as a means to help decarbonize the built environment, but even in Europe, just 1% of aging elevators have been renovated to make them more energy efficient. That points to further demand for Otis’ service business, whatever happens to new orders.
The post-spin challenge
United Technologies stands alongside the likes of GE, Honeywell, and DuPont in deciding to break itself up. The move has paid off: The former conglomerate’s shares, like Otis’, have doubled since the split, while its former air conditioning business Carrier has advanced by 300%.
The thinking behind spinning off Otis was that a “pure play” business would be able to concentrate more clearly on growth opportunities, Marks recalls. “We’re not finished, but I think, over a five-year sustained period of a lot of headwinds, that we have proven that thesis because every day, you wake up totally focused on this market.”
Critically, Otis gets to decide “what we do with every dollar of cash we receive,” rather than having to send it up to a parent company. It repurchased $1 billion of stock last year, and the board authorized a $2 billion buyback program in January — something it couldn’t have done in its conglomerate days.
The bigger challenges were establishing an independent identity in the minds of investors, and a standalone culture internally. On the investor side, Marks notes that her company’s figures used to take up just a line or two in United Technologies’ securities filings. Now, it has “raised the bar” on transparent reporting, to the point where some of its rivals are also having to disclose more. “You had to add the need for accountability,” she says. “It’s not that we weren’t accountable under the parent, but there’s a whole different need when you know everything’s visible.”
AI calls the elevator
Marks has also sought to foster a culture of innovation among her 72,000 colleagues, who she motivates by telling them that they move 2.4 billion people a day. “It’s not the old oil-and-grease business it was,” she says.
Already, regenerative drives allow Otis elevator cabins to generate power for the buildings they’re descending through, and internet-of-things sensors alert the company to parts that need replacing before they break down. Otis apps let users summon an elevator to be ready when they leave their front door or desk. And its newer cabins can communicate with robots making deliveries to hotel guests, patrolling commercial buildings, and carrying hospital supplies.
But Marks sees bigger changes ahead, from passengers talking to their elevators to predictive artificial intelligence personalizing our arrival at work.
“We’re going to recognize you when you come through the access control point turnstile, either via biometrics or your phone, and we’re going to tell you where to go. And the elevator will be ready, and it’s going to know it’s you,” she says. “This is probably the greatest change elevators have gone through since our founder invented the safety brake.”