For a manufacturer like Milwaukee-based A.O. Smith Corp., there are plenty of sources of uncertainty as 2025 gets underway.
Just a few of the questions for the maker of water heaters and water treatment products to consider include: Will the Trump administration apply new tariffs to overseas products? If they do, what will the tariff be? Which products will it cover? Which countries will it cover? Will there be a push to increase building single-family homes? What will the timing of that effort be and how will it be implemented? Will regulatory changes, either at the state or federal level, shift demand for different types of products, impacting production plans and investments?
“It is really uncertain,” said Stephen Shafer, president and chief operating officer at A.O. Smith. “Our mindset is very much we’re not assuming any sort of big macroeconomic takeoff in 2025. We’ve got to be ready for it. We’ve got to be ready for some things that might happen that would put pressure under our markets. And we’re watching those things closely. We’re preparing ourselves to respond as markets shift.”
Shafer was among the speakers at the annual Economic Trends conference on Jan. 23. He spoke with BizTimes ahead of the event.
A.O. Smith has grown in recent years from around $3 billion in net sales in 2019 to $3.85 billion in 2023. The company has around 12,000 employees and 27 manufacturing facilities globally and serves roughly 80 countries.
Around three quarters of the company’s sales are in North America, primarily in water heating and primarily within residential applications. Within A.O. Smith’s “rest of world” segment, about 87% of the business is in China with another 6% in India.
Preparing for uncertainty means having the right products available regardless of which direction the market or regulations take the industry. Shafer acknowledged that investing to have that kind of flexibility means some investments may not pay off to the maximum degree.
“I think it’s really tricky, especially for companies that make things,” he said. “Industrial companies, manufacturing companies, you have to make decisions that require real capital investment because it’s not just a theoretical model on a spreadsheet.
“If you want to make a certain type of water heater by a certain time horizon, you’ve got to start digging the ground and building the plant and putting the equipment in place,” Shafer added. “Those decisions oftentimes have to be made years in advance.”
He noted that having a long-term outlook has helped A.O. Smith weather ups and downs, even if results in a given quarter may be under more pressure than others.
“For the most part, what we try to do is make sure we understand generally where the world is going,” Shafer said. “It can be difficult any given year or any given quarter to get that exactly right, but as long as you’ve got the arc, those investments will pay off.”
While most of A.O. Smith’s business is in North America, the company does have a significant presence in China as a consumer brand. With the Trump administration poised to apply tariffs or engage in negotiations on a range of issues, it is another area of potential uncertainty.
Shafer acknowledged the level of rhetoric between the two sides has been building for a number of years, but he also said A.O. Smith benefits from thinking long-term and having a long history in China.
“We’ve been in China for 25 years. We got there early. We really invested locally for the local market, again in the water heating and water treating space. We built a local leadership team that has on-the-ground insights, and we’ve got a terrific brand there,” Shafer said. “When you have a company that knows how to run a business in China, some of that rhetoric doesn’t impact you the same way.”
He also noted China is the world’s second-largest economy and its residents need clean and hot water, too.
Beyond the rhetoric, the challenge in China is the economy and the need to rebuild consumer confidence, Shafer said.
“That’s a new muscle for China,” he added. “They’ve always relied heavily on supply-side economic stimulus, and now they’ve got to figure out how to generate a demand-side component of their economy. I feel confident they will figure it out. It’s just a question of how long it’ll take and when.”
He also noted Chinese competitors are becoming stronger and more capable, adding another challenge in the region.
“We still think there’s a path forward for us to compete with our China business,” Shafer said. “We watch these things very carefully and have to respond even faster in China than anywhere else. That’s one thing I learned from running a business in China is the speed in which you have to adjust and that’s why you want to have your local team lead those efforts.”
