A. O. Smith executives — ‘Innovation is in our DNA’

By Mary Jo Martin
Editorial director

By all accounts, 2010 was quite a year for A. O. Smith Water Products Company.

During the course of the year, the company launched an incredible number of products in both the residential and commercial categories, as well as models utilizing emerging technologies. In May, after a flood surged through the plant — and many employees’ homes — leaving a wake of devastation behind, the entire organization pulled together to ensure virtually uninterrupted service to customers. And just a month later, A. O. Smith announced that they had formed a joint venture with renowned tankless manufacturer Takagi, a move designed to further strengthen and expand their water heating offerings.

Recently, editorial director Mary Jo Martin visited the company’s headquarters in Ashland City, Tenn., for a candid conversation with four key executives at A. O. Smith about the past, present and future of this venerable company. She also took a walking tour of the 1.5-million-square-foot facility to see just how they had rebounded since the flood, and watch the care its workers put into building each product.

The following is her interview with CEO and president Ajita Rajendra, VP-marketing & strategic planning Mike Parker, senior VP-wholesale sales Jim Margoni, and VP- emerging technology and market development Dave Warren.

MJM: For those who may not be aware, let’s start out with some background first to set the stage. What do you believe has been at the core of the reputation and success A. O. Smith has achieved?

Rajendra: A. O. Smith has always had a reputation for innovation. It started when the Smith brothers opened a machine shop in Milwaukee in the late 1800s. They made structures out of steel tubes, and soon discovered they could create greater strength by welding the tubes together. They started with things like baby carriages and bicycles, and eventually began making auto frames. Automaker Henry Ford approached them about doing business together, but he needed them to increase production more than 100 fold in just three months. Thanks to their ingenuity, they were able to accomplish that, and became Ford’s primary supplier of auto frames.

Next, the company developed the process of coating steel with glass — which led A. O. Smith to enter the water heater industry. We also developed a process for lining steel that enabled cost-effective transportation of natural gas and oil, which led to getting low-cost oil, gas and water to every home.
Innovation is in the DNA of this company. It is in our culture to invest in innovation and be the best with whatever we touch so we can make a significant impact on this industry.

MJM: Why has it been so important to you to keep a number of plants here in the U.S. at a time when many companies have moved the majority of their operations overseas?

Rajendra: We want to create and keep as many jobs in this country as possible. Even after the flood, we thought it was very important to bring back jobs here. Economically speaking, water heaters are big and bulky so transportation can be costly. In that respect, it is cost-effective to produce them domestically, and of course Ashland City is very centrally located for shipping product anywhere in the U.S.

Margoni: It’s also a source of pride to our workers. As you walked around the plant today, I’m sure you saw several American flags. They were actually hung by our workers because it was important to them.

[Editor’s note: In addition to the flagship Ashland City plant, A. O. Smith has domestic operations in McBee, S.C.; Johnson City and Franklin, Tenn.; Renton, Wash.; Charlotte, N.C.; Norcross, Ga.; Florence, Ky.; and Irvine, Calif. They employ more than 5,000 in the U.S. and approximately 10,000 worldwide.]

MJM: How would you describe the direction that A. O. Smith is taking its business today?

Parker: We are building our line based on what we believe are the demands of the future. We see the market evolving into high efficiency and new technologies, and we want to be a leader. The Cyclone was a groundbreaking high-efficiency unit in the commercial category, and we felt it was time to use that technology in the residential market. We’ve also added solar, heat pump and tankless options.

Another thing we should mention are the controls we’ve developed in-house. They provide more options and information to users and contractors. Just about every new product we’ve come out with is equipped with these proprietary controls.

Warren: We are developing products that are designed to capture the renewables market. Much of this begins with our corporate tech center in Milwaukee. It’s an incubator of ideas for new innovation. A. O. Smith continues to invest in and nurture new ideas, which acts as catalyst throughout our organization.

MJM: Are you pleased with the reaction you are getting from customers?

Margoni: Contractors are expressing greater interest in high-efficiency products than in years past. There seems to be a high level of excitement about our new product introductions, and the direction we are going. They see it as an opportunity to help their customers, enhance their business and grow their margins.

Parker: There is a longer learning curve for gas tankless models than traditional units, and it has taken a while for contractors to get comfortable with that technology. But our new heat pump water heaters are pretty straight forward, so we believe that will lead to much quicker acceptance.

Getting contractors on board is one of the primary reasons we are rolling out our Mobile Showroom this year. This will be an excellent way to get product in front of customers, and allow them to gain familiarity with these new water heating technologies. We will be coordinating with our wholesalers to schedule training sessions in conjunction with the Mobile Showroom stops. These will help contractors get a better feel for selecting the right product for every application, and teach them the proper installation techniques.

Warren: Training is one of our core strengths, and we have traditionally spent a lot of time training our reps so they can go in the field and properly educate our customers. Now thanks to our joint venture with Takagi, we have factory trainers in the field, which really strengthens our position. And our entry into the solar market also requires a focus on training to ensure that contractors are very comfortable with selling and installing these new systems. We have that support in place to educate contractors, and we expect more and more to jump in as solar grows.

MJM: Why is it so important to you to be so hands-on in your leadership and in building customer relationships?

Rajendra: We try to think of things from the customers’ viewpoint; they always come first. I will excuse myself from any meeting I am in to take a call from a customer — the only exception is if I’m with another customer. Being responsive is ingrained in everyone throughout our organization. That doesn’t mean we are always able to say yes, but it does mean we will listen and respond. One of our cardinal rules is “Don’t make a promise to a customer that you can’t keep — and if you do make a promise, make sure you keep it.”

MJM: Of course, one of the biggest announcements that you made in 2010 was your new joint venture with Takagi. What was it about Takagi that made it a good fit for you? And could you clarify why you used the wording joint venture rather than acquisition?

Rajendra: We did acquire Takagi’s U.S. business, but Takagi Japan remains independent. We have taken over the management of their U.S. sales and distribution organization, headquartered in Irvine, Calif. We are jointly developing product for the North American market, and after just seven months, I think both parties would say it is a partnership that is working very well. When the sales volume in the U.S. builds up, it is our goal to build a joint manufacturing operation in this country.

Takagi has been a pioneer and leader as the first manufacturer to bring tankless technology and later condensing models to the U.S. They are also a company that has very similar values and core competencies as A. O. Smith, which was very important to us. The chemistry between our organizations is very strong, which has been very helpful in working well together and respecting each other.

MJM: How did your discussions with them begin and then evolve?

Rajendra: It was a long process that took more than a year and a half. We held a lot of discussions to carve a mutually beneficial path that we both were comfortable with and saw value and value creation in. This was a big step for them as well as us. They are entrusting us with their brand name in the U.S. market.

MJM: What does this mean to A. O. Smith as an organization, and to your customers?

Warren: There are certain applications where tankless units are beneficial, and we believe this joint venture really broadens and completes our portfolio. We want to be able to offer every possible solution a customer might need, so they can select the one that is right for their application. Our customers can be sure we will always provide them with the latest technology for every solution.

MJM: What has been the response from your customers?

Rajendra: In two words — very positive.

Margoni: This joint venture really gives our customers an opportunity to be a one-brand water heating solution provider. They are very excited that we are so committed to the tankless business moving forward.

MJM: Now, I’d like to ask you some follow-up questions to the interview that Ajita was kind enough to give me last summer (see The Wholesaler, July 2010, page 130). Would you mind sharing an update on the recovery A. O. Smith has made since the devastating flooding hit the Nashville area and left the plant under 9 feet of water last May?

Rajendra: Our recovery has gone extremely well. All of our major processes are operating at even better than pre-flood levels. And our smaller processes are coming along better than we expected. We will be at pre-flood production levels by end of first quarter.

MJM: How did this disaster affect your employees?

Rajendra: In those first days, we didn’t know the extent of the damage and how long it would take us to come back. We initially told our employees we’d guarantee their paychecks for the following week. Then we amended that to say we would guarantee their paychecks for a month. We felt this was very important because the flood wasn’t just a plant disaster, it was a family emergency. We wanted to take away the uncertainty they were feeling about their future and paying their bills. Holding true to these values cost us millions of dollars, but to be honest with you, the conversation I had with my boss to get approval for this literally lasted about 30 seconds. He fully supported my desire to take care of our people.

You have to keep in mind, this flood didn’t just affect A. O. Smith. Many of our people suffered damage to either their own homes or the homes of close family members or friends. We wanted them to be able to deal with their own personal situations — then we would move on as a company.

About 25 of our employees lost their homes. We started a fund through a local charity with a $100,000 contribution with instructions that all disbursements from that fund were to be directed strictly to our employees. That fund collected a total of nearly $200,000 that went to these families to help them rebuild. Many of our customers and competitors contributed to the fund, and we sincerely thank them.

MJM: Structurally, have your facilities all been cleaned up and renovated?

Rajendra: Our objective was to get everything running as quickly as possible — but with no sacrifice to quality — to ensure that we would be able to take care of our customers. I’m proud to say we did not lose any customers during this process. That is a testimonial to our people on the floor, and to Jim [Margoni] and his sales team. They spent weeks in a little conference room, where they sat around a large table and worked the phones to keep our distributor and reps apprised of the situation.

We got a lot of compliments from people about how we handled things. We were very up front and honest, which helped us build credibility early in the process.

We had over 2,000 machines that were submerged in dirty water for days. In most cases the electronics couldn’t be repaired. But our team was really focused on getting those production lines up and running, and we accomplished that. We had 800+ people working on cleanup; most of whom were specially trained for this type of event.

MJM: Is there anything you would like to say to your employees and customers who stuck by you through such a difficult time?

Rajendra: Our employees are awesome. So are our customers. They were very open and willing to work with us so we could all come through this together. All of our distributors really stepped up and worked with their branches to coordinate ordering, delivery, etc. Communication and planning was key. And there was a high level of trust — our customers trusted that we wouldn’t leave them hanging.

MJM: Looking back, what did that experience teach you?

Margoni: We have awesome people. It has really pulled our company — and all of our divisions and brands — together. It has made us an even stronger company.

Rajendra: We empowered our people to make decisions in the best interest of our customers and they did an outstanding job. I was really impressed watching how our team worked together.

Parker: If there was any question in people’s minds about whether our philosophy was right, once we came through this, they realized it was. I think that across our business, people now are much more of one mind and one focus than ever before.

Warren: Communication is key. Everyone is very busy, and we are all being pulled in different directions. But open communication and doing what you say you are going to do helped us get through this.

For more information, log on to www.hotwater.com.