In Good Company with Nicolai Tangen - Henrik Ehrnrooth CEO of Kone

Episode Date: April 20, 2022

In this episode Nicolai Tangen talks to Henrik Ehrnrooth, CEO of Kone. They discuss Kone’s origin and company culture, their innovative edge and how Kone is dealing with its high exposure to China. They also discuss governance issues, and share some elevator stories!The production team on this episode were Plan B’s Tor-Erik Humlen and Olav Haraldsen Roen. Background research were done by Sigurd Brekke and Bård Ove Molberg with additional input from our portfolio manager Martin Prozesky.Links:Watch the episode on YouTube: Norges Bank Investment Management - YouTubeWant to learn more about the fund? The fund | Norges Bank Investment Management (nbim.no)Follow Nicolai Tangen on LinkedIn: Nicolai Tangen | LinkedInFollow NBIM on LinkedIn: Norges Bank Investment Management: Administrator for bedriftsside | LinkedInFollow NBIM on Instagram: Explore Norges Bank Investment Management on Instagram Hosted on Acast. See acast.com/privacy for more information.

Well, Henrik, thank you so much for coming. You are flying in from Helsinki this morning to participate in the studio. So big thanks to you. Very happy to be invited. What does it mean to be a Finn? To be a Finn, you know, what we are proud of is what we call our sizzle. You know, that's the grit, perseverance. You know, that's something you need to have when you come from a small country.

You know, so we're a small and proud country. And that's something to be very happy of. And can we see part of this Sisu in your company in Kone? I think we can. Where do we see it? Well, if you think about it, you know, we are a 112-year-old company. You know, the elevator escalator business. And it was like one Asian customer said to me that,

Henrik, how did this happen? That, you you know you come from a country with hardly any elevators and no tall buildings and yet you sell more elevators than anyone else in the world that how did this happen and i think there's been some sizzle some grit perseverance some fighting spirit behind that so tell me how did it happen well i think you, if you look at many Nordic companies, it's the same thing. We don't have very big home markets. And when we get into something, you have to get into a niche, and you have to make sure you become very good at it. And have a very long term mindset. You know, we are a family owned company, you know, started off as a Finnish company. but then the family realized that that's not the future.

You cannot survive in international competition and start to very proactively, aggressively expand abroad. But I think the really key thing has been a very strong culture of innovation. Because when you come from a small country, unless you are really good at what you do, you're not going to survive. Actually, if you look at many Nordic companies, it's pretty much the same things that have been behind many of their success. We'll come back to the innovation. But first, why elevators?

It sounds like really dull, right? Yet, it is one of the finest businesses you can be in. So tell me, what's so good about this business? I think it's actually a really fun business. If you think about all the encounters and all the things that happen in an elevator every day, you know, we don't need to get in there. But I think everyone has their own stories. At the same time, you can actually say that particularly a service business is pretty boring, because it's so stable, predictable. But I think the boring is good. So I think it's a hugely fascinating business very

global business that operates you know very very broad geographic basis so there are just so many interesting things and if you think that we move a billion people every day you can just think about all the things that happen in this elevators and escalators that we service and install every day. But the main drivers, can you tell us about them? So urbanization, more people moving to cities. I mean, in a way, we are kind of piling them high, you know, the people these days. Well, we know that the world has constantly been urbanizing. You know, the urbanization happened in China starting about 2000, really peaked maybe 2015. I mean, it was the biggest migration of people this world has seen so far. And let's see if anything can challenge

that. But at the same time, in every other country, people are moving into cities for, you know, better life, better job opportunities, better healthcare, better education. So cities are something that draws talent, and therefore there continues to be good growth there. When I look at this business, the likelihood that people are going to start moving less is quite low. So I think the need for it will continue to be there, just because of the way we live and the way people prefer to live.

You've been very strong in China for a long time. What was the key to establishing that position? It was, again, a long-term vision and clarity of what we want to achieve. The leaders of Kone at that time really saw that, hey, this urbanization is going to be a really long-term megatrend. And that's what we always focused on. What are the big trends? And then investing heavily into it.

You know, putting the focus there, getting very strong local leadership, and being bold about how one goes into the country on a very broad basis. So today, we have 600 offices around the country in China. And that's been really part of the success that really decided we're not only going to stay in the big cities, we're going to go throughout the country. And that has been a huge success. And then innovation played a huge role here. You know, when Kone really started to grow in China,

there was a time when most companies still brought, I would call, yesterday's technology and products to China. But Kone at that time was very bold and said, no, actually, latest innovation, we're going to bring them first to China. And the Chinese customers, they really appreciated it. We brought the same energy efficiency, the same quality, the same quality,

the same design, actually then, of course, applied to Chinese needs. So very early, we were in China for China. But it's really this philosophy that we wanted to go China first with innovation really paid off big time. In business school, you know, one learns that sometimes you need two brands to compete with each other. And you have a two-brand strategy in China. Can you tell us about that? So that was one of the clear ways in the beginning that we have the KONE brand. But at the same time, there's always been a strong market for local Chinese brands. And we wanted to have a local Chinese brand that can compete against the local ones.

So then first we bought the minority stake back in 2005 in something called Giant Corner, and then successively we bought more, and now we own 100%. So we have two brands, but they operate in different segments and cater for different needs. So how much of your business now is in China, roughly?

It's about 35%. And given what's happening in China and the worries we're seeing in the property market, does that make you nervous? Clearly, the Chinese market has been a bit more uncertain now for the past year. At the same time, you know, China will continue to be the biggest market in the world. It is going to decline this year, but we still think it will be a huge market. It is going to decline this year, but we still think it will be a huge market. And China is also going through a transition like most other growing markets.

At first, it was about installing a lot of new elevators. And now we're starting to see the service business grow very fast. And we have a very strong position there as well. And we can see that the modernization of elevators that were installed about 15 years ago is now a very fast growing business. So, we are in a transition. New equipment will continue to be a huge market there, no question. But a big part of the growth will come from services, and that's what we're transitioning to now. What about the rest of the world? It's kind of a neat market because you are not so many players, right? So, you have Thyssen, Schindler, Roltes, and you pretty much. Well, that's what it looks like

I mean have you kind of carved up the world between you? not at all, if you look at the service business in Europe, European service market is still the biggest market for services in the world these top four players we represent about 55%

of the market so there's a huge amount of mid-sized and smaller players. Then you have a bunch of Japanese players. So there's still plenty of room for consolidation in this industry. And in services, and also for new elevators and escalators, China is still quite fragmented. You mentioned service business a couple of times, and in my mind, that really is the beauty of the whole thing, right?

The secret sauce, because you have to service these elevators, otherwise they come and close them down, right? So tell us about the service business. Why is it so good? It's a very stable business. It was clear you need to service elevators, and there's also good growth in it. So, you know, we've been growing it constantly over the years. And it's a low capital intensity business. So it's very people heavy. However, not a lot of capital in it. But I think the stability combined with the growth is, of course, a great business to be in.

And so you know what to do remote monitoring, I understand. So basically the elevator tells you guys when you need to come and sort it out. We have been really pioneering this in our industry, how you bring digital connectivity and therefore can do your service in much better ways. There's still a lot of regulation that you need to visit them physically. But when we connect them, we get a much better outcome for our customers. It's just remarkable how much better it gets. And that our customers are appreciating,

and that is driving a lot of our growth also in our top line, these new services that our customers are buying. Now, this service business is so good and profitable. Do you actually make money on selling the new lifts, or is it all coming from the service? services that our customers are buying. Now, this service business is so good and profitable. Do you actually make money on selling the new lifts, or is it all coming from the service? We do make money in all of our businesses. So, we have three different businesses. It's about selling new elevators and escalators.

It is about maintaining them, and it's about modernizing them. So, it is a true lifecycle business, and we are profitable in each of those parts. So innovation, I mean, isn't an elevator an elevator? That one can say, but like every business, there is a huge amount that you can improve. So let's say now you come into an elevator, right? So what does it take for you to say, wow, wow, what a ride, you know? I'm having a good time in this elevator. What is a touch and feel you as a CEO? How do you see this?

Of course, you first see what are the waiting times to get into the elevator. That means that is the building properly planned and designed. And then when you get into it, of course, good design is really important. Is it clear to you where you're going? So also that aspect. And then, of course, it's how smooth the ride is. And, you know, everyone can have their own feeling. And we've done a lot of research some years ago on what people expect on elevators.

And then you need to meet those expectations. So in the end, what do you want? We want people to come out of the elevator with a smile on their face. You know, as a little bit of an elevator nerd, what I do is that I stand in the back corner and lean into the corner because then you can feel the vibrations more and see how well it's been serviced and installed, the elevator. But, of course, that's not what everyone would do.

I thought that was because you were an introvert Finn and tried to get away from the other people. That's one of the profiles, you know, of users. What's the best elevator ride you ever had? Of course, I have to say the one where you play to all of your senses and it's just a phenomenal ride. You can hardly feel you're moving even though it's a very fast elevator. It's in our test shaft,

goes down underground. But if I think about one that is open for users every day, I would say it's the Bloomberg building in London. Here, the architect, Lord Foster, wanted to be like a feeling of floating in the air. And you come up in the elevator and you can see St. Paul's coming up behind you or in front of you. That is just a fantastically

designed overall experience. Well, I'll check it out. Lastly, on innovation, where is the innovation taking place now? And perhaps you can talk a bit about energy efficiency and so on. There are a lot of very exciting things happening in innovation, as everyone knows today, and everything from new materials to digital services. And of course, what is innovation? It's about finding something that adds value to your customers or the end users of your equipment. So where are we focusing? Of course, as you said, energy efficiency is a huge thing nowadays. But at the same time, it's the user experience that has to do with design. How do

you play to all of people's senses? Because we live in an experience world, making the journey very simple. You don't need to touch anything. You just walk in and it knows where you're going. It can be about directing or guiding people. Then another innovation that is very key to us right now is that how do we help our customers on construction sites be much more efficient? We know that construction sites, there's a huge problem with productivity. We have a lot of innovations there,

how we can make builders build buildings faster when we put in the elevator earlier, and that way save time, save money, and help making apartments more affordable. If we change gear a bit and just try to get to know you a bit better, who is Henrik Amroth? You know, a Finn who has lived much of his life in Finland, but a good part also abroad with a very international family. Your father was a well-known industrialist in Finland and a really grand man, and I have been lucky enough to meet him. When you grow up with a very successful father or mother, you can either be very inspiring or you can think, gee, no way I'm going to be that successful.

And then you turn out to be miserable. So tell me about your relationship to your father. As you said, you have met him. He is a very human person, you know, has done an amazing career, but also always someone who has shown great respect for everyone around him, including, of course, his family. Of course, I always looked as a child that he wasn't home a lot. But luckily, I have a mother who, you know, had a huge influence on all of us children in our youth. And that kind of sparked an interest for this. But I will say that, you know, when I was younger, my mother always thought that I was going to be a farmer.

So that's how clear the path was from the beginning. But in the end, you know, I got on this path and found my way and have enjoyed it tremendously. Do you ask him for advice? I do. I'm in a lucky position that when you are a leader very often you have problems that you just need to be able to talk to someone about but it's difficult to talk to your direct team and he is one of these people I can talk to and and explain my problem and he asks me three or four questions and immediately the things are much more clear in my mind. What do you think is the key to a successful father-son relationship?

Of course, it's all about respect. And there shouldn't be any expectations. I don't think there was any expectation of what I should do. There was encouragement. But never, you have to do this, you should do that. And I think we are four siblings, and we were always allowed to, encouraged to find our own path and do what interested us.

A few weeks back, we had David Salomon of Goldman Sachs on the program, and you spent a lot of time at Goldman's as well. Can we see that in any way now in the way you run Kony? I think there was a lot that one could learn from Goldman Sachs. Those were 11 fantastic years of my career when I think I learned a lot. I think what I learned early on is the importance of teamwork, the importance of culture, how that really breeds success, and the importance of being totally uncompromising when it comes to hiring and developing people.

So I think those basic things that I would say are behind every successful company was something that is such a strong part of the ethos of Goldman Sachs. So that was, of course, very ingrained. And the other thing you learn when you are in an environment like this is that you learn how to learn fast very well. Now, you came up through the financial route. You were the CFO, the chief financial officer of Kone, before you took over as a CEO.

Don't you think it's a bit strange that not more people come through the HR route? I mean, this is a people company, no? I'm saying, because in Norway, I think only three out of the top 50 companies have CEOs who came up through the HR route. It is a very good reflection because if you want to be successful, as we all know,

we all say that people is our biggest asset. That's what every company says and it is very true and of course the people in HR are critical in how we develop how we drive that talent I would say that we have people at Kone who have gone from the HR side to take business responsibilities P&L responsibilities, not to that level yet. When I think about the most successful HR leaders that I've worked with, those are clearly people who I wouldn't hesitate for a second giving them a very large commercial responsibility.

You mentioned corporate culture and the importance of that. What are you trying to achieve at Kone? And what is your corporate culture like? Kone, our corporate culture is strong, is in our own feeling. And it's not only actually a feeling. We've researched it a lot. We've studied it many years in a row. And what do Kone's employees say about our culture?

They talk a lot about innovation. They talk a lot about clarity of direction. And then what is really important, they say that Kone's values are compatible with their own values. So I think we have a good starting point in all these studies. We do come up very highly compared to benchmarks in how we develop culture. But what does it mean in practice? It's clear that people like to work there, people enjoy working. And culture is, of course, something you need to constantly work on, constantly develop and evolve.

There's no question about that. What are you trying in particular to sort out just now? If we think about today's environment and how do you motivate, how do you get the best out of everyone in today's environment, clearly it is a lot about how do you empower people, how do you make sure that everyone can contribute their best so you can talk about inclusion. Very important.

At the same time, at Kone, we have a very decentralized way of running our business. So we give a lot of local accountability empowerment, which is great when you want to respond quickly to customer needs. So you become very fast on that side. But when you have huge changes, you know, tectonic plates moving like we can feel right now, then how do you get the same direction for everyone in that environment? So how do we create speed on big changes is something that we're working on. And of course, it's all the time about direction and better leadership.

What's the biggest mistake you've made, Conny? It must be, you know, when you try to run the business. When you try to go in and direct people how to do things, you can get results for some period of time, but you're not creating anything that is long-lasting and you're not creating through the motivation and initiative of people. So that's something you learn very quickly. And that is something...

So too much micromanagement. Too much micromanagement and directive leadership. And it's something that's very easy to fall into when times are tough. So when times are tough, you need to focus even more on setting the context, setting your direction, motivating people, and really helping them, you know, go places where they wouldn't go otherwise. Now, talking about tough times, I mean, given the what's going on in the world now, we are seeing, you know, very high price inflation. So prices are increasing in a lot of your input costs. How are you coping with that? It's clear that

this environment that we operate right now is a totally new environment. I mean, most of people who work for Kone have never seen inflation like this. You know, we come from a 15-year period, or we can call it extreme price stability. So clearly, it takes new capabilities of how do we live in an inflationary world? What are the expectations? And that was a little bit about what I said, how do you create that urgency of change and operating in a different way on a broad scale in a very decentralized environment,

how we operate the company. The shareholder structure in Kone is very interesting. You have the Halin family owning roughly 20%, but controlling much more of the votes. And just how do you, tell me, how is it to have large dominant shareholders like that? I think we are in a very lucky position at Kone to have a clear owner who clearly has a

track record and a history within the family of really wanting to develop the company proactively all the time. So I would say the way we run Kone is very much like any public company. But at the same time, we have the clarity and long-term view of our owner to provide help and support to leadership. I would say in turbulent times, it is really an asset because you always have someone who you can talk to, you can spar with, you can exchange ideas. And I think that's been very valuable.

Now, on the one hand, having a big shareholder like that, you know, does give you that stability and long-term thinking. But on the other hand, having shares with, you know, unequal voting rights, it's not something we are particularly keen on in the oil fund. How would you defend that? That's, of course, totally a matter for our owners. But when I see from the inside, I don't see that that would have hurt us. On the contrary, it's someone who has very much the long-term health of the company in their mind

every day. And, you know, it's been owning a family for almost 100 years. And of course, they think about, hey, how do we make sure that we remain a healthy and strong company for another 100 or 200 years? So I've only seen as a leader of that company the benefits of it. And I think this, of course, in the end, very much a question for the owners.

Yeah. You also have a lot of cash. I mean, cash is good, but should you really have 2 billion euros on the balance sheet? Well, we just paid out over a billion of that to our shareholders. Yeah, thank you very much. On behalf of the Norwegian population.

You're welcome. Also, as a shareholder, I'm very happy about that. So, that's enabled us to have a very generous and proactive dividend policy. But as I mentioned, it may seem that we are very consolidated in industry, but in fact, we are not. There are a lot of mid-sized and even large players in this industry. And we think consolidation would make a ton of sense for innovation and scale. And therefore, if something is available, we are very interested in acquiring good businesses. So we have felt that having a strong balance sheet gives us that flexibility.

And also in turbulent times, it allows you to just stay 100% focused on executing on your strategy and not worrying about your balance sheet. And I think that we've seen in the past now 15 years, I think that's a real asset. Are you waiting for one of these defining moments to come up soon? I must say that you can say it's a bit of a strange industry that a lot of people want to buy in this industry, but there hasn't been many people who have wanted to sell. So I'm not holding my breath. But clearly, if something attractive is out there, we are going to be very interested, of course, in the right terms and all of that. How can you be best possible prepared for these defining moments?

It's constantly to understand what these businesses are. And I think in the end, the most important thing is to make sure your own business is healthy. Because then it enables you to do things. As leaders, we all the time have to do a lot of choices and pare down it to a small number of choices where we really focus. If your base business is not in good shape, then you cannot choose to do big defining acquisitions or similar transactions. Well, good luck with everything that comes up. It's been a pleasure having you on the program, Henrik.

Thank you so much for making the trip to Norway. Thank you.