The Elevator And Escalator Industry In Sri Lanka Economics Essay

I am employed at ETA MELCO ENGINEERING (PTE) LTD for the past one year and I’m currently working as the Human Resource Executive. My company is a fully owned subsidiary of ETE MELCO Elevator Co. L.L.C. and has its head office in Dubai, U.A.E. which belongs to the ETA STAR GROUP OF COMPANIES. We represent Mitsubishi Elevators and Escalators in Sri Lanka and our activities cover the marketing, supply, installation and maintenance of all types of Mitsubishi Elevators, Escalators, Moving Walks and Vertical transportation equipment. Mitsubishi Escalators and Elevators has earned a reputation as one of the most advanced Elevator and Escalator manufactures in the world, offering ‘firsts’ in technology.

Let analyze in detail the Elevator and Escalator Industry in Sri Lanka and the market my company belongs in relation to the economic context.

About the Group Company

ETA STAR Group was established in the early 1973 and is involved with expertise ranging from Civil Construction to Electro Mechanical, Facilities Management and Elevator Engineering. Today the ETA STAR group involves in activities that cover 16 broad industry verticals. Namely: Construction and Engineering, Trading, Shipping, Manufacturing and Assembly, Facilities Management, Auto Mobile, Real Estate, Retail, Services, Travel and Leisure, Health Care, Aviation, Learning and Education, Insurance, Hospitality, Oil and Natural Gas. The group has a network of 140 entities and offices in 22 countries. As a group we provide employment to over 72000 people. All group companies are guided through the group company’s vision, “Quality is our single-minded pursuit in the application of new technologies. In our wide ranging diversity, we innovate continuously as we strive to provide complete satisfaction to our customers and shareholders”. We have emerged as one of the largest corporate houses during the last 37 years of operations achieving excellence.

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A look at the Industry

The Elevator and Escalator industry in Sri Lanka is highly depended on the construction industry. The construction industry in Sri Lanka comprises of ‘building, highway, bridge, water supply and drainage, irrigation and land drainage, dredging and reclamation and other constructions’. According to the annual survey carried out by construction industries, “the total value of estimated work done by all types of construction activities in Sri Lanka was Rs. 56,496 million in 2007”. The building construction sector was the highest contributor to the total value of work done contributing 64.1%. This contribution to the building construction sector was made by the private and public sector. The second largest contributor to the total value of work done in the construction industry was the highway construction amounting to 25.2% of the total value of work done. The highest value of work done was reported from Colombo district amounting to 37.2% of the total output. Hambanthota and Kaluthara Districts contributed 11.3% and 6.2% accordingly. Jafna District reported the lowest value of work done amounting to 0.3% of the total output.

A detail breakup constriction industry for the year 2007 is as follows:

Source: Annual Survey of Construction Industries 2008

To evaluate on the industry of Elevator and Escalator let’s analyze the detail break up of the building construction industry.

Source: Annual Survey of Construction Industries 2008

Elevators and Escalators are mainly used in Sri Lanka for high and medium rise buildings that has being developed for residential apartments, hotels, shopping complexes and hospital buildings. The demand for elevator is based on the infra structure development in the above mentioned areas.

Based on the interview I had with the Sales Manager he told me that the demand for elevators and escalators have being 238, 243, 219 and 171 for the years 2006, 2007, 2008 and 2009 respectively. This clearly helps us to understand the sudden drop in the demand for elevators was due to the economic crisis that affected the constriction industry in our country in the mid 2008 and 2009. The estimated annual demand for elevators for the year 2010 is predicted to be 260 units.

However the rapid development in the northern and southern province in the country after the 30 years of civil was is contributing favorably to the elevator and escalator market in Sri Lanka as many infra structure development programmes are presently taking place. Many of these projects are government owned. Population growth on the other hand too contributes immensely to the building construction industries. Due to scare resources such as land developers are compelled to put up high rise apartment buildings and complexes. Today even in the rural sector there are plans to up such building. Tourist industry too positively contributes to the elevator and escalator market as we need to develop many hotels and hotel apartments to keep up to the demand. Sri Lanka tourist board is presently focusing on areas such as Trincomalee and Puthalam in order to promote Dolphin, Wale watching and Surfing. Also areas such as Hambanthota, Jaffna, Baticalo are given preference. The Health care sector too in Sri Lanka gives high priority to the elevators and this is seeing as a sector that has been having a continual growth over the last decade.

Overview of the Organization

Taking into account the initial success achieved in the U.A.E. market in the early 1980s the ETA MELCO Elevator Co. L.L.C. set up branch office in Sri Lanka in the name ETA MELCO ENGINEERING (PTE) LTD and 20 other countries. The Sri Lankan construction industry proved to be during very well in the early 1980s and this influenced the management to set up operations in Sri Lanka to provide vertical transportation facilities as there was a huge demand for products such as elevators, escalators and moving walks and other related products for high rising buildings, hotels, hospitals, commercial buildings, residential apartments etc. These products are supplied by Mitsubishi Corporation.

Popularly known as the ‘Elevator People of Sri Lanka’ we have grown to be the biggest elevator specialist in the region enjoying a very high market share. We as a company are singularly focus on growth by keeping up with modern technological changes and advances. We have a fully fledge research and development team in Japan that keeps us updated with trends that suites the industry tomorrow.

The phrase that brands our products, “Quality in Motion” is not just a catchy slogan but a statement of fact. We are driven by the continual evolution of technological improvement. The professionals of our company and through out the worlds practice “Quality in Motion” everyday. We not only pay emphasis to operational efficiency but also safety and comfort. We are embodied by our mantra “Number one for Quality” to ensure we exceed out customer requirements.

The policies of Mitsubishi Electric has made all these possible while fostering the values necessary to harmonize our products and activities with the environment and local communities.

These will vary based on customer’s requirement for capacity, speed, purpose, number of persons, number of stops (floors) etc. Refer appendix for more details on our product range.

Market Share

The industry leader in the Sri Lankan Elevator market is ETA MELCO ENGINEERING (PTE) LTD the agent for Mitsubishi Elevators in the country. We import Mitsubishi Elevators and Escalators under the HS code 84281010 – Lifts and skip hoists. According to the import statistics details obtained from Data One Company our sales team analyzed the market share for the year 2009 based on the number of units ETA MELCO (Mitsubishi) secured as against its competitors. The data is as follows:

With reference to the analysis carried out it could be said with much certainly that this industry belongs to the Oligopoly (Imperfect) Market Structure as it has a relatively small number of large firms. They sell differentiated products and comprise of significant entry barriers. Thus we have a few key industry players like Otis, Sanyo, Sigma, Dipra, Schindler, Johnson, Kone and Local Fabrications who deal with Elevators and Escalators in Sri Lanka.

Hence we export only three types of products – Elevators, Escalators and Moving Walks. We are the only local company that exports these products from Mitsubishi we have better access to architects, clients, contractors, government authorities and other developers due to the good name we maintain in safety, comfort, efficiency and superior quality. Nevertheless this industry is highly competitive as all the few players on average have to meet a demand of 175 – 200 elevators for a year. This leads to sever competition. We have to keep a breast of the ever changing technological advances and we need to convince our customer base on the modern products and modifications needed to existing products from time to time to avoid our products being modernized or serviced by out competitor companies.

Taking in to account the over all market in to consideration ETA MELCO has grown from strength to strength enjoying the highest market share in this segment when compared to its competitors. The company has to now focus on promoting vertical transportation products such as Elevators, Escalators and Moving walkers by moving in to the northern and southern geographical areas of the country to remain as the market leader as many developments are taking place.

The product alone is a luxury item and today the demand for Home elevators our becoming popular. The company also has it focus in coming up with more customized products to cater to the market. In Sri Lanka alone we have Home Elevators.

Market Structures

My findings indicate that this organization belongs to the Oligopoly (Imperfect) market structure since it highlights the following characteristics;

Major industry players’ amounts to 9 competitors while there are few other mushroom companies that deals with maintenance of elevators and escalators. The firm is relatively large compared to the overall market and has a substantial degree of market control. In short there are small numbers of large firms.

Firms in oligopolistic industries produce either identical or differentiated products. Identical product oligopolies also knows as perfect oligopolies produce tend to process raw materials or intermediate goods that are used as inputs in other industries. Notable examples are petroleum, steel and aluminum. On the other hand elevator and escalator falls into differentiated product oligopolies also knows as imperfect oligopolies focuses on consumer goods (mostly luxury) to satisfy the wide variety of consumer needs and wants.

Barriers to entry prevail as the firm attain and retain market control. Patents, brand names, recognition, resource ownership, start-up cost, decreasing average cost are the most common barriers and the make it extremely difficult or impossible for potential firms to enter the industry.

Oligopolistic firms are diverse and they posses several behavioral tendencies. The following behavioral characteristics were highlighted in my findings:

Interdependency among firms as it takes in to account relative size and market control. This means that the actions of one firm will depend and make an influence on the actions of another firm. The firm keeps a close eye on the activities of the other firms in the industry. As a result the decisions made by one firm invariably affect others and are invariably affected by others. Thus a firm’s success will not only depend on its own action but also those of the competitor.

A Rigid price strategy is followed by the firm that helps to keep the price relatively constant as the firm prefers to compete in other ways that does not involve changing the price. This is mainly because if price decreases the competitor will try to match the same and will not take in to consideration the increases in prices as the firms do not gain much from price changes.

As the firm does not gain much from price competition they tend to follow non-price methods of competition which includes entry barriers, product differentiation and advertising, continuous improvement in quality, after sale services, effective distribution, guarantees as the firm’s objective is to get more buyers and simultaneously increase the market share while holding the line on price.

Taking all firms in the industry I wish to emphasize that the firms operate in cooperation through collusion in an oligopoly market. The factories of the companies that manufacture elevator and escalators secretly agree on prices, production and other aspects in the market and behave like they are operating as one firm – a monopoly. A formal method of collusion is cartel which is found among international produces.

Operating in an Oligopoly (imperfect) market brings in two important advantages to the firm. It could be elaborated as follows:

The firm tends to be a prime source for innovations that promotes advances in technology and economic growth. This leads to higher living standards. These firms have the motive and opportunity for innovation. Interdependent competition results in motive and access to abundant resuorses bring about opportunity.

The firm is in a position to enjoy “economies of scale” as it leads to a reduction in the cost of production and prices. The firm can “mass produce” at a low average cost. Elevators and escalators will be more significantly expensive if they were produced by a large number of small firms that small number of large firms.

Graphical Illustration of the Market Equilibrium

A kinked demand curve is used to illustrate the short run production activity of an oligopolistic firm. To explain the price rigidity in an oligopolistic firm the kinked demand curve is used. The kink of the demand curve exists at the current quantity (Qpm) and current price (Ppm).

This is because competitor firms will not match the increases in price as it will loose its customer base and market share. It is evident that a small increase in price will lead to a relatively large decrease in quantity demanded. Similarly any price decreases will be matched by competitor firms and the firms is unlikely to gain customers or market share. If a firm is to gain a small increase in quantity demanded a large decrease in price needs to take place. (This is not feasible to many firms)

Conclusion

With reference to my study on my organization ETA MELCO ENGINEERING (PTE) LTD I could state that we fall into Imperfect Oligopoly Market Structure. Hence I will use the following findings to justify my answer;

There are small numbers of large firms (09 major industry players) in the elevator and escalator industry.

The company sells a range of differentiated products to suit customer, client, architect, developers’ requirements and specifications taking in to account type of building, type of elevator/escalator, number of stops (floors), travel speed, capacity, and usage thus falling in to imperfect oligopoly without any doubt.

Significant barriers to entry prevail due to brand name, recognition, start up cost, decreasing average cost, patent and resource ownership.

Interdependency among firms exists.

A rigid price structure is followed to keep price relatively constant. As any decrease in price will lead towards the same action from competitor thus affecting the companies’ customer base and market share. Also any price increases will lead to a reduction in quantity demanded thus affecting the customer base and market share.

Due to the above reason the company follows non-price methods of competitions by promoting its brand image and reputation, quality products, customized products, guarantees, cost effective after sales services and product differentiation.

The firm balances competition among others through cooperation. We can identify collusion as a method used in the elevator/escalator industry. Price cartels are experienced in the factories that produce elevator/ escalators.

The company is heavily involved in innovations that promote advances in technology and economic growth.

The main factory of the company enjoys economies of scale through mass production thus leading to low average cost.

Finally giving all reasons, arguments and justification above like to conclude that ETA MELCO ENGINEERIN (PTE) LTD is operating in an Imperfect Oligopolistic Market Structure.