Intelligent elevators: Japan elevator systems gets a lift

Japan, Inc., Sept, 2004 by John Dodd

RIDE to the top of Shibuya's Cerulian Tower on a clear day and you can see Mount Fuji beyond the amazing sprawl of Tokyo. The first thing that strikes most newcomers to Japan is the number of office buildings, popping up like mushrooms as far as the eye can see. There are reportedly more than 300,000 such buildings, and each one of them has an elevator.

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THERE ARE AN ESTIMATED 244,000 elevators in the Kanto region. Elevators in Japan are traditionally serviced by the manufacturer, but 10 years ago, an ambitious entrepreneur decided to challenge the status quo and take a small share for himself. 38-year old Katsushi Ishida has used technology, competitive pricing and good old-fashioned quality of sales to wrest almost 5 percent of the market away from the majors. Ishida is now picking up the pace and is targeting 10 percent in the next three years. We interviewed him to discover how he was able to wedge himself into this very closed industry.

How did you get started?

I founded JES, which stands for Japan Elevator Services, in 1994. Originally I was a maintenance engineer, working on the repairs and technology side of the business. During that training period, I acquired certification as an elevator inspector. After that I did sales and business development for my employer. Then I founded this company. I started out by myself, doing both maintenance and sales--I'd pop on a business suit after a job to get new clients, and grew the company organically.

Today we have 140 employees, 11 branches in Tokyo and three Kanto prefectures, and in Sapporo, Hokkaido. We also have about 6,000 contract customers and we are growing 30 percent a year. Our sales revenue last year was about [yen]1.5 billion and will be [yen]2 billion by the end of this fiscal year (ending September, 2004).

30 percent a year puts you among the fastest growing companies in Japan. What is your overall ranking in the industry?

We are No. 2 among the third-party elevator maintenance companies. My main competitor, and the company I once worked for, has 1 percent greater market share than we do, so I'm hoping to overtake them in the next year or so. After that, my target is to take on some of the manufacturers.

How big is the third-party maintenance industry?

There are 50 to 60 players in the market, and most of them have less than 1,000 contract customers--indeed, many are "mom and pop"-type operations. With companies like my own able to offer competitive pricing and technology-based services, these smaller companies are unable to grow much. Basically elevator customers like building owners and managers prefer the safety and security of a larger provider, but they don't always want to be tied to the original manufacturer because there is no price competition. With our size and experience, we are attractive to such customers.

Who is Number One?

A company called SEC.

What is your company's biggest selling point?

There are three, and they are basically simple. We're "third party," so we compete on price with the actual manufacturers. We're 30 to 40 percent cheaper--but using genuine specifications and parts, we're innovative and give customers reporting and monitoring services that no one else has. And we're big enough that we're reliable and have the resources.

How do you price 30 percent lower than a manufacturer while still using their parts?

Well, you need to remember the Japanese way of doing business. The manufacturers will often sell an elevator at little margin or even at a loss in order to win a contract. Then they hope to pick up the profits on the maintenance side of the business. Kind of like a 'razors-and-razor-blades' business model. This worked fine while the manufacturer could control who could buy their spare parts, but in the last 15 years, the laws on fair trade have changed dramatically. Now companies like mine can get access to the parts and service manuals. And of course, I don't have the research and development costs of a manufacturer, so this works well for us.

The requirement to sell you parts must stick in the craw of the manufacturers.

Yes, they don't like it, but they were forced by a Shikoku company about 15 years ago, in quite a famous antimonopoly lawsuit, to supply parts to third party maintenance companies. The Shikoku company's legal premise was that elevators are usually sold, not operated on leases, and therefore the owners had the right to engage any suitably qualified party to maintain their product. In view of this argument, the judge said it was inevitable that the manufacturers had to be supply spare parts as the product wore out. The case opened up the market. Of course, the problem now is that the manufacturers are often slow to deliver and can put us in a difficult situation. Just the year before last, the Fair Trade Commission investigated Mitsubishi for purposefully slow delivery--I must say that their service improved dramatically after that! In any case, we made it a rule to keep parts in inventory, so that we cannot be held hostage in the future.