Schindler has become lethargic

Schindler apparently has a bigger structural problem than previously assumed. Rising costs cannot be offset by price increases, competitiveness has declined and the group’s structure has become so complex that profit margins suffer. The rip cord was therefore pulled a few weeks ago.

Business is superficial

The figures for the 2021 financial year published on Wednesday actually look good at first glance: both incoming orders and sales have increased compared to the previous year. The profit margin on the EBIT level has even improved by 70 basis points. The pre-corona level has been reached again, the order situation is good.

But behind the scenes, certain trends have been going in the wrong direction for some time. The owner families, who control a good 70 percent of the company via voting shares, evidently no longer want to stand by and watch as Schindler loses competitiveness compared to its competitors Otis and Kone.

At the end of January, the company separated from its CEO Thomas Oetterli. He will continue to act as an advisor to the board of directors, saving face.

Crisis manager with a dual mandate

Silvio Napoli has been sent forward as crisis manager. The 56-year-old Italian was CEO himself for three years and has chaired the board of directors since 2016. For the next three years he will manage Schindler in a dual mandate, he said at the presentation of the annual results. That’s how long the fitness cure will take. After that, the previous structure will be returned, i.e. a separate CEO will be appointed again.

According to Napoli, Schindler faces several challenges, which are not new, but which are cumulative. Napoli calculated that since 2008 the strong Swiss franc alone would have cost 3.8 billion francs in sales and 507 million francs in operating profit.

Rising procurement costs, rising wages

At the same time, costs have skyrocketed over the past few months. For logistics, they have increased fivefold since the beginning of 2020. Although Schindler takes care to manufacture locally as much as possible, 80 percent of the components come from external suppliers. In the same period, raw material costs have also increased by 47 percent. The price of a semiconductor chip for an elevator control device has climbed from CHF 1.40 to CHF 36. Schindler had to raise an additional CHF 150 million for the material in 2021.

On the cost side, the company is also confronted with rising wages. According to the chief financial officer, wages at the group, which now has more than 69,000 employees, rose by a good 2 percent last year. For 2021 he expects a further increase of 3 percent. Although Schindler is raising prices, this is not nearly enough to compensate for cost inflation. Margins that will continue to shrink must therefore be expected, especially in the first half of the year. In the final quarter of 2021, operating profit was 15 percent below the previous year.

One issue Schindler has no control over is the challenging market situation in China, the world’s largest market for new installations. The market is fundamentally solid, Napoli said. The company generates around 18 percent of its revenue in China. Although construction activity has increased in the past year, the stock of completed houses has decreased.

Nevertheless, there is apparently a bitter price war in China, especially for large commercial buildings. Compared to local providers, western companies such as Schindler or Otis from the USA and Kone from Finland have little to do in terms of price. The money must be made with the maintenance business. From March, Robert Seakins, who was previously responsible for quality management on the executive board, will head the Asia-Pacific region. He replaces Jujudhan Jena, who is leaving the company.

Too complicated production

Schindler has more influence on the costs during production. The company has been trying to switch to a modular approach and make fewer one-off products for several years. But the results so far are disappointing. This has been done quite well in Europe, but it is far from enough to eliminate costly complexity in manufacturing.

Modular production is currently used for a third of new orders. However, this is only the case for a fifth of the order backlog, which was CHF 12.2 billion (+10 percent) at the end of 2021. In concrete terms, this means that seven different types of cabins have to be built in the factories, while there were only four in 2017. Instead of reducing the complexity, it has actually increased.

The “Top Speed ​​23” fitness program is intended to remedy this. Costs of CHF 150 million (previously CHF 100) have now been budgeted for the program launched last April. For the time being, however, margins will suffer. The analysts had expected an improvement in the current year. Schindler securities tended to be correspondingly weak on Wednesday. the participation certificates lost about 5 percent. Schindler’s enterprise value has fallen by 30 percent since last fall.

The owner families apparently want to be actively involved in this multi-year fitness regimen: Both the patron Alfred N. Schindler, who has managed the company for decades and will be 73 next month, and Luc Bonnard (75) are standing for re-election at the Annual General Meeting on March 22. although both have exceeded the statutory age limit. However, Schindler Holding’s rules of procedure allow these limits to be extended. As in the previous year, the Annual General Meeting will only take place virtually, the shareholders must exercise their rights via the independent proxy.