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So this is the salt-fog machine, right? There's humidity, salt, temperature, rusting. The elevator has to operate under all of those conditions. In the middle of Bristol, Connecticut in a 28 story building. Otis, the largest elevator company in the world, tests its elevators. This is a dust chamber, which we have sandstorms and those kinds of things coming in. And we want to make sure that system operates under those conditions as well. Otis elevators installed in buildings all across the world. Some of the most famous include the Space Needle, the Eiffel Tower, the Burj Khalifa, and of course, the Empire State Building. This right here is the machine that was first installed in the
Empire State Building in 1931. The tallest building in the world is open for the first time the Empire State Building. Operating in over 200 countries and moving 2.5 billion people around the world every day, its business model aims for stability amidst a market of volatile AI stocks, but has hit some recent speed bumps After over five years of growing profitability. The intersection of our thesis, which is urbanization, digitalization, aging people who need mobility and infrastructure modernization is not only going to be attractive in the near term the next few years versus all the data center expansion that's
happening in the near term. But this has decade long runs in it. CNBC took a look into the business of Otis to understand how the company brought in over $14 billion in 2025, and why it's confident it can keep growing. In the years ahead, Otis says housing development presents a major opportunity for its business. Cbre estimates that there is a shortage of 3.4 million single family homes in the U.S. that, coupled with high mortgage interest rates and elevated housing pricing, is supporting demand for more multifamily building. These are often in the form of apartments or condos with elevators. Are you seeing increasing development?
We're starting to see the early days of multi-family housing revived here in North America. We're seeing housing explode in terms of demand in places like India, in other high growth demographics. And then we're seeing, again, with the aging population this third thesis of mobility. So we're seeing hospitals growing globally. We're seeing senior living growing globally. As long as there's more than two stories that's perfect for our product. As urbanization continues to happen worldwide, it leads to further infrastructure build out and more modernization. Think about airports and train stations, but also stadiums and convention centers, not to mention all the data centers being built right now. Those all need elevators.
Some of the commonality we're seeing across the globe is in infrastructure. So if you look at either new infrastructure in high growth markets again, think airports, rail, metros, things like that, or modernization of infrastructure, which we're seeing significant amount in North America that is happening synchronously globally. Infrastructure is a high growth market and we've got great market share there. Well, you know, there's elevators in buildings and, you know, they're going to be going up and down in 50 years or 20 or 70. And so there is that stability, which again, is relatively disfavored at this moment, but very predictable, you know,
revenues decades into the future. So devices like these were previously used to run tests on all of these machines. That's right. So this is called a service tool. It was a combination of this and many manuals like this where the mechanic had to carry this into the machine room, refer to this, make adjustments on this. That's why we created the command app which is using our modern smartphones. Building new elevators isn't super profitable, but servicing them is. That means maintenance and repairs, but also modernization, which involves fully or partially replacing its parts. Its service business generates more than 90% of its profits. Otis currently
services about 2.5 million elevators per year, up from over 2 million units in 2020, when it first spun off as its own publicly traded company. The stock price is up since then, but it's faced some challenges more recently. The stock is down over the past year while the industrial sector overall is up. A certain number of elevators are servicing. That retention slipped a little bit. And then around about a year ago, they started calling out cost actions that were going to do to fix it, which is simply hiring more people, focusing more on maintenance, less revenue producing, but more customer pleasing maintenance and things like that. It's been an issue that has coincided with a lot of noise around tariffs, etc. And so
there's just been a little bit more uncertainty around what is normally a very stable earnings stream. Why do you believe the company deserves a premium valuation? We're not a traditional industrial. We do tend to get compared to industrials who are mainly manufacturing and going to market through distribution. We're also not considered right now in the power space, which we're seeing tremendous grid and activity. We're not considered a data center industrial right now. And those are getting significant multiples because they have incredible backlogs for years to come.
The market has been obviously very one dimensional around AI, right? And so that thematic has led some industrials to perform more. Is it fair to compare the industrials. It is. I mean it depends on your purpose. But for a portfolio manager trying to decide where to allocate capital it falls within the industrial cone. So one of the ways you test ride quality is through using a smartphone inside of the elevator. We put it on the ground. So it's basically measuring the A vibration, it can tell you that there's a problem with the machine.
It could be a problem with the rails. Some of the most common elevator issues that arise are malfunctioning doors, power failures, and mechanical issues. As Otis modernizes its elevators across the world with new sensors and equipment, it ultimately allows engineers back at its facilities to proactively respond to repairs and problems before they even arise. Otis has been fairly consistent with growing the profitability of its service segment over the past couple of years, but the first half of 2026 saw margins fall sharply. There's definitely a wave of money that's been, you know, following along or chasing or whatever the AI plays. It's also true that Otis, as a service led business, had a, you know, a setback in service. And they're fixing
it. It'll get fixed. But that was kind of a stumble at the right time for flow funds to go the other direction. How do you get that back to where the investment community expects them to be? We decided to take a step back and make some more investments to make sure our service quality was where we wanted it, to make sure we could increase our retention rates. That then drove our whole service business. So as we go through this year, you'll see those service margins improve again and you'll see that expansion of profit dollars happening in service.
China has also been a point of scrutiny for investors. It was once a major growth engine for Otis. Skyscraper construction really took off in the 2000, and it became one of the fastest growing markets for new elevators. There was a concerted move by the government to move many people out of rural areas into urban areas. To do that, there was a step function rise in the need for buildings. Here it's about eight stories. Most residential buildings in China start at about 20 stories. But that construction hit a wall in 2015.
Supply was outstripping demand and growth slowed. It spiked again during the pandemic as the government increased spending to offset economic declines. But since then, the government has pulled back and cracked down with stricter regulation at its peak. China accounted for almost 50% of Otis new elevators being built. It's now less than 20%. It's still the largest equipment market, but it's half the size, roughly, of what it was in 2021. So our response has been to transform our company, to have less factories there, to focus a little less on half the volume, as you can imagine, to get that price cost equilibrium where we want it, but instead view China more as a mature market like Europe, like the US, where all of a sudden the service business is becomes
the larger contributor. The growth in China in general has led people to think, oh, well, and this is true again across industrials. If you're not winning there, then you're not winning in what has become a very large revenue pool. But honestly, that's very hard to do in China sometimes. And so it's had an outsized impact on the Oda story. You still have a growing base of units across Europe and the US and the rest of Asia Pacific and so forth. Otis has recently invested in its European markets to improve retention, meaning the number of maintenance contracts it successfully renews each year.
What are the investments you're making in order to keep these customers? The investments we've been making are to bring on more mechanics so that we have the people available as we hit this modernization surge coming in Europe. We need skilled people there to be able to do that repair. Otis has grown its sales by about 13% since 2020, when it spun off from United Technologies, along with the Hvac company carrier. At the time, United Technologies Aerospace businesses merged with Raytheon to become Raytheon Technologies. If you go back 40 or 50 years, there was value in having a conglomerate with us spinning. We have investors now who make a conscious decision to be part of really owning a global service company.
There's a chance Otis could soon lose its title of biggest elevator company in the world. Finland's Kone agreed to buy Germany's Tkk elevator in a nearly $35 billion deal announced in April of 2026. But that agreement faces regulatory hurdles before the announcement even happened. The second largest elevator company, Schindler, said it would challenge the deal for antitrust reasons. One analyst points out that the merger could actually have potential benefits for Otis, as there would be just three instead of four, major players bidding for elevator contracts. If that deal goes through, how are you looking at the competitive landscape?
Listen, we compete and today with both Kona and Tkk all over the globe. And you know, we're going to leave this one really up to the regulators and to the customers to make decisions.
