The Problem with the Big 4 in the Elevator Industry & Why Independents Can’t Break into the Industry

The Problem with the Big 4 in the Elevator Industry. What does this mean for you? If you need an elevator, your choices will be limited to elevator installation and repair. But they’re not all created equal. This also means that prices will stay high because there’s no competition between brands. This episode talks about how these problems affect you and what we can do about them!

AuditMate is the first-ever SaaS company to help property managers get more from their elevator contracts. When you sign up with AuditMate, you’ll get the clarity you need to save money, time, and headaches.

For More Information Visit https://auditmate.com/.

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The Problem With The Big 4 In The Elevator Industry & Why Independents Can’t Break Into The Industry

You're also an expert in the elevator industry having come from that segment. Talk us through the big four and I'll share some stats here as well for the audience. I was floored at how these old family businesses have tremendous market caps. Otis, $38 billion, Schindler, $30 billion, Kone, $30 billion market cap. How much did Thyssenkrupp sell their elevator division for? I think it was $20 billion or something. These have massive numbers. Would you agree that these are the big four?

Those are the big four, hands down. They're all over 100 years old. Schindler is still majority-owned by the Schindler family, which is insane. It has never been disrupted and never had to change. We were talking about destination dispatch, that's not fair. It's not good for the customer that they can 100% control a market. There's no competition there, but because each of them does it, they don't sue each other because they want to have their own so the others can have their own. They operate together to keep that pack of the big four slinging elevator parts on the black market.

Why is PE getting involved? What's going on and why are there only four companies? Why aren't there hundreds of companies or even, why isn't it one company? Why is it the way it is? How have these companies sustained their position and why is private equity now getting involved?

I think that there have been four because there have always been four. Schindler had been established. They are hundreds of years old, so they've always been around. For the big four, it's the way it has always been and the clients say that too. The clients are like, “It's how it is. You just pay the bill.” I think PE is getting involved because the contracts are so sticky. You get into a contract, they are 5 to 10 years.

The only time you can get out of these contracts is it states, “90 days, no more than 120 days by certified mail with your first born child.” They are extremely hard to cancel and there are no minimum requirements to do anything. PE is looking at this like when you're purchasing reoccurring revenue, your chances of cancellation are slim. To purchase up the independent elevator market, the bar is low.

Private equity is not getting involved to come in, fix it, or make it better and more consumer-friendly. You're saying there's a money motive. They realize this is a cash cow because you can just print more money with it.

That's what I think.

Knowledge is power, particularly in real estate, where information is symmetry. The knowledge gap between one party and another results in someone taking advantage.

Is there a consolidation going on?

Yeah. They are purchasing up independence. I don't know that they'll change the names of the independence though. The majors do this too. They will purchase independent companies and then operate as that independent. If let’s say, Schindler loses a bid, their independent company can go win it. Even in Switzerland, the market is controlled by Schindler and the independent that Schindler owns.

It’s a monopoly.

In Switzerland, for sure. Yes.

If there is more consolidation and it looks like this is the parts and this is where things are going with this independence. Is that going to disrupt the big four or is that going to ensure the big four stay and the other companies follow suit and operate the way everyone else operates? Because you would think if there's independence, they will be crushing and challenging the giants. Why are these independents failing to challenge the giants?

Who controls the parts market? We've sat in on meetings in regard to how do we slow the independence down? You slow the independence down by slowing down the parts. If you have a Class A building, those building managers will be hesitant with going to an independent because of the speed at which you can bring elevators to live again. Controlling the parts market, you've controlled everything.

You can get an independent that's large that crushes the market and does well, but you're still going to have the big four. I think that the way to disrupt all of that is through transparency and awareness. The clients need to be educated about what they're doing. The clients need to understand that they hold the power, which is what they've been trying to be convinced otherwise of. I used the term gaslight and I still agree with that, for the last hundreds of years. Clients hold the power 100%, but it's about getting them in the right contracts, protecting them, and then when the elevator company doesn't do their job, the client shouldn't be paying for that. Right now, they do.

Unfortunately, it's like this throughout which is why prop-tech is one of those exciting spaces to be in. I also noticed this problem exists in other areas too. Elevators being one, and with elevators, I have to say it's one of the most critical pieces of a building. If the human being has a nose and a mouth for a building, your door is the nose, but the mouth is the elevator. If it's a big building and the elevator doesn't work, that is a major problem. No one wants to mess with that. Everyone wants to go with a big name brand, the big four, because that's what you're supposed to do. You're not going to get fired for choosing Schindler, Kone or Otis, but you certainly will get the blame if you try to cut costs and go with an independent and something goes wrong.

I agree that the problem exists in other industries of a building too. Where the difference for me is in the knowledge. Everybody knows a guy that knows something about HVAC or you know a guy that can do a little electrical or a little plumbing or can like stop a leak, but you can't just call John to come to fix your elevator. First of all, you can't buy code. Even your building maintenance person shouldn't even turn off and on the power and things of that nature. You could be breaking code, which is a whole other section if we want to get into compliance and the mess that that is too. When it comes to elevators and escalators, you can't get by with even the best building person. You have to have a company come and maintain it.

On the flip side and this speaks to the point that real estate is rotten. The state of things now isn't pleasant. We've talked about an example here where in the elevator industry, you've got these large big four companies and you have to work with them. On the flip side of things, it doesn't look much better if you look at the HVAC industry.

In one of my buildings, we have a chiller system. It is what provides AC to the entire building. When that thing doesn't work, it doesn't work. It can mean hundreds of people can be without AC. In hot Texas weather, for example, 100 degrees, that's a dangerous situation. We found that we were bringing in lots of vendors who provide services to the chiller systems. We had 4 or 5 different people come and every single one of them had a different problem.

It was like, "No. This is the problem that is going to cost you this much." One group had the audacity to suggest we need a brand new chiller system. Our property management firm almost went ahead and authorized hundreds of thousands of dollars spent for a damn new chiller system. A chiller system is supposed to last 40 years. This was an eight-year-old chiller system. On the advice of one vendor who wants to sell us their new product and charge for the billing enabled, we almost did that.

We got all these bids and we were breaking rules. We were looking at the electrical wiring and the panels. It turned out one of our onsite staff had a family friend who she trusted who worked in the industry. He came out and said, “No. It's just a tiny piece of hardware that needs to be changed.” He also informed us that if we go direct to the manufacturer, they will come out and do it. We had to wait a little bit, but they came out. Lo and behold, for a $500 visit, they replaced a small part.

We may have gone ahead and replaced the entire system or we would have broken down mobiles and done the wiring. Even when you have lots of small vendors and independence, it's this information gap and people want to take advantage. I'm lost. I'm on the tech side but I'm also on the principal side. I think I have a unique view because I buy real estate, but I was investing in prop-tech startups and it's a struggle. Whether it's elevators or HVAC, whatever it is in a building, it sucks the way things are now. The general concept of auditing and maintenance is a problem in every area of real estate.

It's not enough to be diverse anymore. We must be radically inclusive. And to be radically inclusive, we must be painfully aware of our privilege.

It’s something that I said at Auditmate all the time as we speak elevator, but we work for you, and it's true. People need an ally. People need someone that they can trust that they go to and says, “Is this accurate? I don't mind spending the money, but is it real? Is it honest?” I'll often say something else like, “Folks in the elevator industry, you don't know how you're getting screwed. You just know that you are.” There's this general feeling, but you can't pinpoint exactly what it is because you don't have the knowledge.

That's exactly what we're trying to do at Auditmate. It is to be able to audit the reason, the labor, the material, and things of that nature that it's like, “We'll manage the technical side, you make the decisions. We'll make sure the maintenance is getting done. We'll audit the repairs. Anything that's needed in the next five years, we'll bring it to you. We're not going to make any decisions for you. We're not here to disempower you, but to shift the power dynamic from the elevator company back to you.” I completely agree that Auditmate will be very useful in other verticals as well.

What are you seeing when it comes to the level of expertise that clients have, especially when you're dealing with facility management groups or you've got giants out there, great companies like JLL, CBRE, Cushman, and all these folks that manage buildings. There are others too that specialize in facilities management. At some scale, do they develop expertise? Do they start to hire elevator experts or is that not something that you're seeing?

On a corporate level, many of the major property managers will have vertical transportation teams or procurement teams but it's like, “What's the expertise in?” Is it in procurement and contracts or is it actually in the engineering of elevators and how they operate? There are many different schools of thought in regard to what should be in an elevator contract as well. There's an old-school mentality that we should have door speeds and very technical specs in an elevator contract and I am not of that mind. That's not where we're at. I've had someone question me on it before and had been like, “There are no door speeds or floor-to-floor speeds in here.” I'm like, “When did you last check that?” They're like, “What do you mean?” I'm like, “Property managers are not going to check that.”

We need to put things in contracts that real people can monitor and manage. Where does that trickle-down? You have these corporate teams maybe and some of the majors, but how does that get to the ground like Jack and Jill that are running actual buildings because usually, those property managers and even facilities managers, their goals are to manage the whole building, not just the elevators. It's a full-time job if you're managing just the elevators, and the technical expertise is very low.

It reminds me of a situation when I was a kid with my dad. He's a mechanic for cars, and just to see how differently they would treat him. First, you come in and you're buying a secondhand car for example. They'll tell you, "This is great." My dad points out, "No, this is actually wrong." Suddenly, they realize where you're from and you get the honest truth. You get a fair price for the car. On the opposite side, my mom would take her car to the mechanic and they'll lie to her. They'll tell you, “This is broken. That's broken.” She's like, “I want to bring my husband along.” My dad comes and is like, “We don't need a new part. You just need to do this. This is two hours’ worth of work. You don't need to take my car away for three weeks and get this part done.”

This is the way the world has been where knowledge is power. It is particularly true in real estate where information asymmetry, which is a gap of knowledge between one party and another, results in someone taking advantage. I gave an example with the car industry. We've talked about at length here with the elevator industry, but real estate overall is like that, even for buyers and sellers.

We've used Auditmate as a police example. Everyone is the best driver in the world when a cop is behind you and we've seen that with Auditmate too. Even the client signing up with us will increase the level of maintenance before we've even done anything just because it levels the playing field. I completely agree.

It's like human psychology even in business. What gets measured gets managed, and what gets managed does well. If you're not measuring it, suddenly, you're going to find that the metrics aren't doing well. Once you start measuring and you have a mechanism in place and transparency, suddenly, things seem to work well. People will take advantage. Even in the pandemic, people are working from home. I'm horrified. I'm hearing stories of people taking multiple jobs just to take as much salary as they can, and they get fired and get the next job.

They're working 3, 5 or 10 jobs. Someone posted online that they're working ten different software engineering jobs and they coast along. They're making $1 million a year and they're doing the bare minimum. Until someone points out that this productivity isn't good. They'll get fired and take the next job. This is the world we live in now and this is what will change with prop-tech coming in. It will create more measurability and when things are measured, then things get managed and better performing.

You're a big proponent of diversity. We met because I posted on my LinkedIn. I was saying, “Where are the female prop-tech founders in real estate?” You've come from traditional real estate and prop-tech. Any advice you have for our audience, whether they're from the traditional model and they want to increase diversity or if they're a female founder or a female leader, such as yourself. What advice do you have for them?

I am of the belief that it's not enough to be diverse anymore. I think we must be radically inclusive. In order to be radically inclusive, we must be painfully aware of our privilege and all of that isn’t fun. It's messy. It's anxiety-ridden. I hear a lot here in San Francisco, “Safe spaces,” I believe we need more brave spaces because it's hard to be a person of privilege and be like, “I don't know what I don't know. I know I'm going to screw this up, but I want to try. How do I learn without requiring the people of color, the women, and the LGBT community around me to educate me, but I don't even know where to start.” How to foster brave and safe spaces that are radically inclusive without being tokenizing is hard.

Break that down for me there. Repeat that last sentence about tokenizing. It was wonderful.

How do we be radically inclusive without being tokenizing? To even say like, “I want everyone to have a seat at the table,” implies that I own the table. I guess, with Auditmate, it’s a little different, but generally speaking, there's an inherent privilege in that statement. “Take a seat at the table.” It's, “How do we foster a table that is everybody’s and that everybody feels a part of.”

It’s inviting people that want to be there and want to change and want to be a part of whatever movement it is. Without being tokenizing is like, “I need a black person. I need a woman. I need this,” which is, on one hand, true but if we're doing it just to check a box and not to foster diverse and inclusive spaces, it can be not putting your money where your mouth is. It's like affirmative action. That's not really inclusive because the intention behind it is different.

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About Zain Jaffer:

Zain Jaffer is an accomplished executive, investor, and entrepreneur. He started his first company at the age of 14 and later moved to the US as an immigrant to found Vungle, after securing $25M from tech giants including Google & AOL in 2011. Vungle recently sold for $780m.

His achievements have garnered international recognition and acclaim; he is the recipient of prestigious awards such as “Forbes 30 Under 30”, “Inc. Magazine’s 35 Under 35,” and the “SF Business Times Tech & Innovation Award.” He is regularly featured in major business & tech publications such as The Wall Street Journal, VentureBeat, and TechCrunch.