A.O. Smith cutting more jobs in China amid weak consumer demand

Company not concerned with potential GE Appliances competition

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Milwaukee-based A.O. Smith Corp. now plans to cut its workforce in China by 20%, an increase of 5 percentage points as the company continues to see weak consumer demand for its products.

The maker of water heaters and water treatment and air purification products also cuts its earnings guidance by 13% heading into the fourth quarter.

Earlier this year, A.O. Smith said it would cut employment by 10% in China compared to December 2018 levels. Those cuts were increased to 15% following the second quarter and now stands at 20%.

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“We’ll look at whether that would be increased as we go forward,” said Chuck Lauber, chief financial officer of A.O. Smith, noting the cuts have taken place throughout the company’s operations. “What we’ve been very careful to do is maintain our R&D and engineering capabilities.”

A.O. Smith also announced it would close a net of 700 retail locations in China while also scaling back selling, general and administrative expenses. Ultimately, the efforts are expected to save the company $38 million to $40 million annually, about $28 million of which would be realized this year.

“In the near term, the China economy remains weak and we’ve taken further action to right-size the business while continuing to invest in innovation,” said Kevin Wheeler, president and chief executive officer of A.O. Smith. “Over time, we are well-positioned to maximize favorable demographics in both China and India to enhance shareholder value.”

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China has been a major growth engine for A.O. Smith, going from around 10% of sales in 2008 to more than one-third in 2018. The company also topped $1 billion in China revenue for the first time in 2017.

The company is now anticipating revenues from China will be down 19% in local currency for the year after declining 20% in the third quarter.

A.O. Smith has been dealing with elevated inventory levels in its distribution channels in China. Those levels remain high, limiting demand for new product, but did not increase during the quarter, Lauber said. The biggest difference has been weaker consumer demand.

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“We’ve been asked more than once, ‘Are we at the bottom?” Wheeler said. “We kind of said, ‘Hey, we hope so,’ but we really don’t know. The data is a little bit unclear.”

“It’s one of these markets that we have to take month by month, quarter by quarter,” he added, expressing optimism that a trade deal between the U.S. and China could change the dynamics. “Maybe there’s a phase one of the China agreement that may help going into 2020, but we don’t know. What we do know is that we’re trying to give our best view based on the data we have today.”

Executives at A.O. Smith did express confidence in the company’s capabilities when asked by analysts about the prospect of GE Appliances entering the North American water heater market.

GE Appliances, a Haier company, announced plans in September to invest $60 million to create a manufacturing center of excellence for electric water heater production at its Camden, South Carolina plant. The plant previously produced refrigerators.

“We’re 10-times that,” Wheeler said, noting the company has invested $600 million over decades to build its water heater business. “It takes a lot of investment, engineering, relationships, (and) sales organization to be a major player in this market. We feel we’re in great shape.”

Wheeler said A.O. Smith has not seen any GE products in the marketplace.

“We don’t know, quite frankly, much more than what they published,” he said.

Wheeler emphasized A.O. Smith’s broad product offerings and technology offerings, although he acknowledged it appeared the company would now have more competition in a portion of the market.

“If and when that materializes… we’ll deal with it,” he said.

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