Otis Ltd / Key Elevators Ltd
OFT closed case: Completed acquisition by Otis Limited of Key Elevators Limited.
Affected market: Lifts/elevators
The OFT's decision on reference under section 22 of the Enterprise Act 2002 given on 5 April 2004.
Otis Ltd (Otis) is active in the manufacture, installation, upgrading, repair and maintenance of passenger and goods lifts and escalators. It is ultimately owned by United Technologies Corporation of the US and is a leading international supplier of lift and escalator equipment and services. In the year to 30 November 2002 Otis had a turnover of £248 million.
Key Elevators Limited (Key) supplies new lifts and repairs, refurbishes and maintains lifts, primarily in the local authority housing and local government sectors. It does not have its own manufacturing facility, sourcing lifts and parts for refurbishment from a number of third parties. Key operates from a single site in Rainham, Essex. In the year ended 31 May 2003 Key had a turnover of £3.8m and generated pre-tax profit of £0.22m.
This is a completed merger – Key was acquired on 6 February 2004 for a consideration of [see [note 1]]. The statutory deadline expires on 5 June 2004 and the 40 day administrative deadline is 6 April 2004. The acquisition by Otis of Oakland Elevators Ltd was cleared by the OFT on 28 November 2003. As with that previous merger, the main rationale for this acquisition is in the maintenance sector and it will enable Otis to bid competitively for the provision of maintainance and service contracts to a wider range of customers.
As a result of this transaction Otis and Key have ceased to be distinct. The parties overlap in the supply of new lifts; the refurbishment of installed lifts; and maintenance services. The share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met in respect of the supply of new lifts. A relevant merger situation has been created.
On the demand side, new buildings have some leeway in design to incorporate different types of lifts (such as scenic versus non-scenic lifts) but the overall maintenance, refurbishment and installation of passenger and goods lifts are unlikely to be substitutable.
On the supply side, a company active in installation of new lifts will, by default, be able to refurbish and maintain lifts although the reverse need not be true. In practice there appears to be a greater number of companies active in maintenance than installation.
Consequently, a cautious view is taken: treating the installation of new lifts separately from the sectors of maintenance and also refurbishment. Given that no competition concerns arise on this narrow definition, it is not necessary to review any wider frame of reference.
Whilst very few lifts are manufactured in the UK, suppliers generally assemble the parts on-site prior to installation. In addition, for service and repair of lifts it is necessary to be located locally to the customer in order to attend promptly to a breakdown. Many of the larger lift companies maintain a range of locations throughout the UK and some customers have national contracts for the provision of lift servicing. For this reason it appears that the UK is the appropriate frame of reference for the consideration of this case, although the constraint exerted by Key will have been more localised in nature as it operated from a single site in Essex and all of its major customers were located in the London area.
As noted in the previous Otis / Oakland decision, shares of supply are difficult to estimate in this industry due to lack of public data. The most comprehensive figures, provided by the parties, are available from two sources:
- The trade association, the Lift and Escalator Industry Association (LEIA) gathers information from its members. However membership is not universal but the LEIA represents the majority of the industry and the largest suppliers. Consequently any figures calculated from its estimates of sales are likely to overestimate the parties' share of supply.
- A consultancy also provides estimates of the companies active in the lift industry. This is derived from publicly available turnover information and consequently if the activities of a company are wider than elevators then this would appear likely to over estimate the total industry turnover. Nor is information split between installation of new lifts, maintenance or refurbishment.
Based on the sources outlined above, Otis presents the following post-merger share of supply figures:
a) supply of new lifts 20-30 per cent see [note 2]
(increment see [note 3])
b) maintenance 15-25 per cent see [note 2] (increment see [note 3])
c) refurbishment 25-35 per cent see [note 2] (increment see [note 3]).
Otis is already the largest supplier of new lifts and refurbishment services, but, as shown above, the increments arising from this acquisition are very small. Three other major suppliers of lifts and servicing remain post-merger: Thyssenkrupp, Kone and Schindler and each will act as a constraint on the merged enterprise in the three sectors. There are also a number of smaller competitors operating in all three segments.
Differences in focus of the two firms indicate that competition between the parties pre-merger for some contracts would not have been strong. Otis focuses on installations in new, commercial buildings and the provision of high-specification maintenance and servicing work. Key on the other hand had a heavier focus on the provision of refurbishment and service, typically for local authorities, with a focus on a lower-cost service provision. Third parties have indicated that this pattern is typical of the differences between the contracts preferred by small and large firms in the industry: major lift firms prefer contracts for installations in new buildings and are price competitive in the provision of standardised solutions. In contrast the smaller firms are more competitive in the provision of bespoke solutions, which are required in the provision of much refurbishment work as a standardised lift cannot always be fitted into an existing shaft and running rails. It is noted that Otis has a high overall share of supply of refurbishment work, although with reference to the discussion above, Otis appears to focus on contracts where it can more easily fit its existing products which will limit the area of direct overlap. In any event, the increment in this segment is minimal.
One local authority raised concerns that Key was one of the few companies willing to bid for its refurbishment work, an area where Otis is not keen to compete and withdrew its last tender put forward for a contract. However, to the extent that Otis was not previously competing for business in this area, this transaction is not expected to result in a substantial loss of competition for these local authority refurbishment contracts.
Competition between the parties appears to be most strong in the provision of service contracts, though they are typically operating at different ends of this segment in terms of service quality and price. Otis submits that this is a mature and competitive marketplace with frequent re-tendering of contracts and significant churn: in the Otis/ Oakland case it provided data showing a churn of (see [note 1]) in its service portfolio in 2002. LEIA indicated that there are around 250-300 firms able to provide these services, and industry publications indicate that a wide range of these firms are located in the London area. In addition, five customers accounted for two-thirds of Key's total turnover, indicating that its spread of customers was not wide.
Barriers to entry and expansion
Information provided by the parties indicates that, as in the previous Otis/ Oakland case, barriers to entry to the provision of lifts and associated services are low. In particular they cite examples of recent entrants into the provision of servicing and maintenance, for which there are very few requirements to meet in order to be able to begin offering services. Spare parts are available to firms wishing to service all makes of lift and one local authority customer indicated that there are no significant barriers to a new supplier joining its approved supplier list.
Many recent entrants have begun by sub-contracting their services to major lift firms, later - once they have sufficient experience and capital – moving into offering their services direct to the customer. Key itself entered the market in this way, beginning as a sub-contractor in 1982 and subsequently developing its own direct customer sales and servicing operation.
No conclusions have been reached in this investigation regarding buyer power.
The OFT does not believe that this merger raises any vertical concerns.
THIRD PARTY VIEWS
A number of Key customers and competitors and industry representatives were contacted to supplement the extensive third party investigation undertaken in the Otis/ Oakland case. Their views have been taken into account in the preparation of this decision.
Although the merger enhances Otis' position as the largest supplier of lift installation and refurbishment and its role in the provision of servicing work, it results in only a small increment to Otis' existing share of supply in the installation of new lifts and the provision of servicing and refurbishment of lifts. A number of large and smaller competitors remain in the industry and barriers to entry, particularly to the provision of servicing, appear to be low. In addition, Otis and Key tended to focus on different contracts when operating independently.
Consequently, the OFT does not believe that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
- Figure excised at the parties' request.
- Exact figure replaced by a range at the parties' request.
- The increment is no greater than one percent.