A. O. Smith Corporation Business Information, Profile, and History

History of A. O. Smith Corporation

A. O. Smith Corporation is a diversified manufacturer of automotive structural components, electric motors, residential and commercial water heaters, fiberglass piping systems, livestock feed storage systems, and storage tanks. The company ranks among the United States' 500 largest publicly held industrial concerns, having grown from a turn-of-the-century bicycle parts factory to a modern manufacturer.

Although A. O. Smith was founded in 1904, the company traces its history back to the mid-19th century, when Charles Jeremiah (C. J.) Smith emigrated to the United States from England. The journeyman metal tradesman ventured all the way to Milwaukee, Wisconsin, and, after being self-employed for a decade, went to work for the Milwaukee Railroad Shop. As a highly skilled workman, he made a good living, but went back into business for himself in 1874, when he opened a machine shop and began manufacturing baby carriage parts. Two of Smith's four sons, Charles S. and George H., joined the family firm in the mid-1880s.

As bicycles became popular in the last decade of the century, C. J. Smith and Sons branched out. By 1895, it was the largest manufacturer of steel bicycle parts in the United States. The patriarch called in his eldest son, Arthur (A. O.), an architectural engineer specializing in large buildings, to help build a five-story factory for the growing family business. After two years of close work with his father, A. O. decided to join the company permanently as treasurer. By then, C. J. Smith and Sons had declared itself the largest manufacturer of component bicycle parts in the world.

Increasing overcapacity in that industry and the advent of the automobile brought another change to C. J. Smith and Sons. In 1899 the family sold its business to the Federal Bicycle Corporation of America, a then-legal monopoly known as the "Bicycle Trust." A. O. retained management of the Milwaukee (or "Smith Parts") Branch of the Trust. Arthur Smith indulged his personal interest in the composition and manufacture of automobile frames with two years of "tinkering" that culminated in the sale of his first automotive frame to the Peerless Motor Car Co. in 1902. Word of his frame, which was lighter, stronger, more flexible, and cheaper than conventional ones, spread quickly: by the following year, Smith had contracts with six major automobile manufacturers.

A. O. Smith quit Federal in 1903, bought the Smith Parts Co. from his former employer, and incorporated it as A. O. Smith Company in 1904. The company's sales totaled $375,733 and profits topped $100,000 that first year. Unfortunately, patriarch C. J. Smith also passed away in 1904.

In April 1906, Henry Ford contracted with A. O. Smith for frames. At the time, the company was only producing ten pressed steel frames a day. Ford needed 10,000 frames in four months, a ten-fold increase in the prevailing production rate. Realizing that adding workers and space would only consume valuable time in training and construction, Smith looked for ways to increase efficiency through technological improvements. He and his team of engineers retooled existing presses to produce two corresponding halves of an auto frame simultaneously and arranged the presses to form a continuous assembly line. The delivery of 10,000 A. O. Smith frames that August helped Ford introduce his popularly priced Model N late in 1906 and attracted ever more automobile manufacturers to the supplier. Because A. O. Smith soon found itself turning away business, it soon built a new, larger headquarters on 135 acres on the outskirts of Milwaukee to accommodate demand. By the end of the decade, A. O. Smith was manufacturing 110,000 frames per year, over 60 percent of the auto industry's requirements.

Three years later, when A. O. Smith died, his son Lloyd Raymond (Ray) was made president. Ray's was not just a dynastic leadership, however. Both A. O. and L. R. Smith were later inducted into the Automotive Hall of Fame and the Wisconsin Business Hall of Fame. The 23-year-old former company secretary had previously proposed manufacturing improvements that multiplied A. O. Smith's production rate seven times: by 1916, the company was manufacturing 800,000 frames per year--half the auto industry's needs. Called "decisive, restless and a profound thinker" by corporate historians, Ray Smith also propelled the family company into new ventures. Smith bought a license to manufacture "The Motor Wheel," a small gas engine that could be attached to a bicycle's rear wheel to make a "motorbike." The company sold 25,000 of the vehicles nationwide from 1914 to 1919, and even applied the technology to a small wooden "sports car" called the Smith Flyer.

L. R. Smith's reluctance to pay for the marketing support necessary to maintain such products' popularity, combined with the fact that the United States was thoroughly embroiled in the First World War, brought diversification to a halt in 1919. A. O. Smith manufactured hollow-steel artillery vehicle poles and bomb casings for the war effort. By war's end, the company was producing 6,500 bomb casings per day, thanks to a welding breakthrough that produced stronger bonds in less time.

Throughout the war years, a team of Smith's best engineers formulated a revolutionary plan to automate the company's frame production process. Although expensive--construction consumed $6 million by 1920--the "Mechanical Marvel" they created produced 7,200 frames on two 180-man shifts per day. The machines performed 552 separate functions, including forming, trimming, and riveting. It took A. O. Smith 15 years to recoup its investment in the Mechanical Marvel (which was designated a National Historic Mechanical Engineering Landmark in 1979), but the plant ran practically without stop until 1958.

The Mechanical Marvel only marked the beginning of an enterprising decade, during which the company's 500-person engineering department developed new applications for the welding process formulated during World War I. A welded coupling designed to link seamless steel casings for oil drilling rigs soon became a petroleum industry standard. High pressure tanks for gasoline refineries developed by A. O. Smith could withstand three times the pressure of customary tanks. Engineers also modified those tanks for use in the paper, chemical refining, and other industries by adding an anticorrosive, stainless steel liner to the tanks. During the 1920s, A. O. Smith also originated the large-diameter, high-pressure pipe that launched the natural gas transmission industry and made natural gas a viable alternative to coal and oil. The company captured every order for large diameter pipe in the country. As the authority in this industry, Smith had to send its own employees out to weld pipeline installations around the world.

A. O. Smith was thus well positioned when the stock market crash of October 1929 ushered in the Great Depression. It had a two-year backlog of pipe orders and a dominant position in its other markets. However, as auto sales fell from 4.4 million in 1929 to less than 2 million in 1931, the company was forced to cut employment by 10 percent at its main plant. In 1930, sales plummeted from $57 million to $9 million and the company suffered an operating loss of $5 million the following year. L. R. brought in an outsider, William C. Heath, to play "bad cop." Heath cut executive salaries by 50 percent and reduced the operating staff by one-fourth, but even these measures did not bring the company into the black. In May 1932, 3,000 employees--almost half the total company's payroll--were laid off. Corporate historians noted that "Demand for frames was so low, supervisors painted them by hand to save the expense of starting the automatic equipment."

A. O. Smith's "savior" came from a highly unlikely source--the December 1933 repeal of Prohibition. The end of that "noble experiment" brought America's brewing capital, Milwaukee, back to life, and A. O. Smith utilized its technical creativity to profit from the rebirth. The company quickly introduced a steel beer barrel with a special liner that protected the beer from metallic migration. The new keg's quick acceptance enabled A. O. Smith to recall 450 laid-off workers. The company also developed an innovative process to fuse glass to the interior of 35,000 gallon tanks that resulted in the superior cleanliness demanded by the brewing industry.

Ray Smith left day-to-day management of the company to Heath after suffering a heart attack in 1934. Heath lead the company to apply its glass-and-steel fusing process in A. O. Smith's first mass consumer product, the water heater. Before the product's introduction, most homeowners had to replace their all-steel water heaters often due to corrosion, or spend prohibitive amounts on stainless-steel ones. Although A. O. Smith developed its affordable, durable, glass-lined model in 1936 and was able to mass-produce it by 1939, world war interrupted the company's plans a second time.

Smith began to expand through acquisitions before World War II, purchasing Smith Meter Co., a Los Angeles firm that produced petroleum line measuring devices in 1937. The company diversified into electric motors with the 1940 acquisition of Los Angeles-based Sawyer Electrical Manufacturing Company and Whirl-A-Way Motors in Dayton, Ohio. By the end of the 1950s, electric motors, especially hermetically sealed ones, were A. O. Smith's best-selling product.

By the time the United States entered the Second World War in 1941, A. O. Smith had already submitted proposals for aerial bombs made of welded pipe, won the government contracts, and built a factory to produce them. The company's engineers developed better, cheaper propeller blades and manufactured landing gears for B-17 "Flying Fortress" and B-29 "Super Fortress" fighter bombers. The company was such a vital wartime supplier that Adolf Hitler targeted it in an unexecuted invasion of America.

The investment of over $50 million in new plants and equipment before 1950 propelled A. O. Smith to unprecedented success in the booming postwar American economy. As new housing starts jumped to 4,000 per day and auto production soared to one million a month, the company was poised to prosper. Volume at the centrally located Kankakee waterheater plant built in 1947 doubled twice before 1950, with the help of retail giant Sears, Roebuck & Co., which sold A. O. Smith waterheaters under a private label. Monthly production grew from 15,000 to 48,000 within less than ten years after the war's end. In addition, A. O. Smith supplied all of Chevrolet's automotive frames during the 1950s, when that make was the most popular in America. The contract helped establish A. O. Smith as the largest independent supplier of chassis frames to the auto industry in the postwar era. Petroleum pipeline sales also recovered quickly and Smith formed a joint venture with steelmaker ARMCO to create a pipe factory in Texas close to customers.

Diversification continued under Heath in the postwar era, with the development of Harvestore glass-lined silos that were filled from the top, emptied from the bottom, and were dark-colored to prevent wintertime freezing of the feed stored inside. After a slow start, the silos were well accepted by U.S. farmers, and the company offered them overseas in Germany and the United Kingdom beginning in the 1960s. A. O. Smith started investigating the fiberglass industry in 1953 in cooperation with Dow, forming a Reinforced Plastics Division in 1957. The company soon developed fiberglass pipe and fittings for special niche applications in oil fields, and later made fiberglass Corvette Sting Ray bodies.

Diversification was accompanied by rationalization. When A. O. Smith's patent on the glass-lined water heater expired in 1955 and competition was opened, Smith eased out of the private-label segment, and scaled back efforts in the residential market to concentrate on the commercial segment with its leading Burkay brand. The company also phased out pressure containers like beer and petroleum tanks in the late 1950s. A. O. Smith's own success thwarted some of its business interests. The completion of the U.S. Transcontinental Pipeline System significantly reduced the demand for pipe, eventually forcing the company to sell its steel pipe business in Texas to its partner, ARMCO. Despite these withdrawals from certain markets, sales at A. O. Smith increased from $190 million in 1946 to $280 million by 1960.

A. O. Smith's automotive division endured several upheavals throughout the 1960s, 1970s, and 1980s that threatened its existence. The proliferation of car models in the 1960s challenged Smith's adaptive ability and compelled it to retool from riveted frames to more adaptable welded frames. At the same time, 45 percent of U.S. auto production converted to unitized frame construction, effectively eliminating the need for a conventional frame. General Motors' decision to stick with the tried-and-true isolated frame construction kept the automotive division afloat for the time being.

L. B. "Ted" Smith was elected chairman and chief executive officer and Urban Kuechle became president in 1967. The team sought out new businesses to replace the ones that had been eliminated. In 1969 alone, A. O. Smith acquired Layne & Bowler Pump company in Los Angeles, Bull Motors of the United Kingdom, and a majority interest in Armor Elevator, the sixth-largest elevator manufacturer in the United States. The company also pushed its international growth, forming a Mexican affiliate to manufacture auto frames, Canadian and Netherlands water heater subsidiaries, and a consumer products division in Japan. Successive earnings records in 1968 and 1969 seemed to affirm the acquisition spree, as sales rose to $355 million in 1969 and soared to $600 million in 1973.

Unfortunately, the ensuing decade ushered in a myriad of problems that impaired A. O. Smith. The government wage and price freeze mandated in 1971 squeezed profit margins, and the Arab oil embargo that started in 1973 forever harmed sales of full-size, gas-consuming cars, which constituted the majority of Smith's remaining frame market. Labor unrest also plagued many Smith divisions. A ten-month strike at Armor Elevator, which had just completed two years of acquisitions, crippled that subsidiary in 1972. The following year saw strikes at plants in Pennsylvania and Kentucky and the first labor halt at the Milwaukee factory in its 100-year history.

L. B. Smith and President Jack Parker divested Armor Elevator, Bull Motors, and Meter Systems in 1975. After the strikes were settled and the government lifted the wage and price freeze, inflation set in. Still, A. O. Smith began to recover in the last half of the decade, winning a new contract with General Motors and expanding the Harvestore and Electrical Products divisions. Sales increased $100 million from 1976 to 1977 and profits were also on the rise.

However, General Motors' 1980 announcement that it would convert all of its production to front-wheel drive, unitized body autos threatened the survival of the $270 million automotive segment of A. O. Smith's $836 million business. Luckily, the massive automaker took over eight years to phase out full-framed vehicles (A. O. Smith delivered its last Cadillac frame in 1990), and A. O. Smith used that time to transform its automotive division. Automotive, which had made truck frames since 1905, shifted its primary focus to the expanding market for trucks, vans, and sport utility vehicles, winning contracts with Ford, Chrysler, and General Motors in 1980 alone. By 1985, light truck frames were the corporation's single largest product line. Smith also won a contract to produce components for the critically acclaimed and top-selling Ford Taurus in the early 1980s.

The company would meet other challenges under the leadership of Tom Dolan, who became president in 1982 and advanced to chairman and chief executive officer upon the retirement of L. B. Smith. Pressures from auto manufacturers, who were themselves influenced by intense foreign competition, spurred A. O. Smith to simultaneously reduce costs and increase quality. It was no simple task for the automotive division, which was then characterized by hostility between labor and management and 20 percent defect rates. Management embarked on a three-stage strategy to increase employee involvement through quality circles, labor-management task forces, and cooperative work teams. Although the plan initially met resistance from union leaders, six years of gradual change effected impressive results: the productivity growth rate doubled in 1988 and defects were reduced to 3 percent. The work teams also enabled A. O. Smith to save money by drastically reducing the ratio of foremen to workers from 1-to-10 in 1987 to 1-to-34 in 1988.

During this period of cultural revolution, A. O. Smith was hit hard by recessions in 1980 and 1982. Hundreds of workers were laid off as auto sales fell to their lowest levels in twenty years. The company slashed capital spending and expenses, cut officer salaries by 10 percent, and let one-fourth of the corporate staff go. Even more layoffs were necessary later in the decade, as the company reduced net employment from a high of 12,300 in 1986 to 9,400 in 1990.

The farming crisis that occurred at this same time reduced the Harvestore subsidiary's sales from $140 million in 1979 to $21 million by 1984. The division shuttered two plants and consolidated all operations at the main DeKalb, Illinois, plant. A. O. Smith eventually shifted the subsidiary's focus to municipal water storage tanks and sold Harvestore's U.K. subsidiary. Although its revenues remained small, Harvestore did eventually return to profitability.

A. O. Smith's problems compounded in the early 1980s, as competition in the water heater industry exposed internal problems. Inefficient plants cost the Water Products Division $10 million in 1981 alone. The subsidiary closed one factory and opened a more efficient one, and other cost-cutting measures helped it achieve profitability in 1983 after four successive years of losses. Continuing efforts helped the division become one of A. O. Smith's most consistently profitable divisions, setting profit records in 1986, 1988, and 1990.

A. O. Smith's electric motors division was one of the corporation's few consistently bright spots in the 1980s. Despite fairly intense competition, the subsidiary was able to establish operations in Mexico and Texas and even acquire a primary competitor's small motor business. The unit set a profit record of $45 million in 1985. Smith's fiberglass business had also recovered from the shocks of the previous decade to set four successive years of record profits beginning in 1987.

Despite an inconsistent earnings record in the 1980s--the company only achieved two successive profitable years during the decade--A. O. Smith did manage to pay cash dividends on its common stock every year since 1940. Having endured a grueling six years at the company's helm and achieving several of his goals, Tom Dolan retired from the chief executive office in 1988. Robert J. O'Toole assumed that office, adding the chair in 1991. He directed the company's implementation of "just-in-time" delivery of automotive products through the construction of five regional assembly plants in close proximity to customers. Although the firm recorded a net loss in 1992, its return to profitability the following year coincided with a general economic recovery in the United States. O'Toole hoped that the combination of internal efficiency and a beneficial economic environment would result in continued profitability.

Principal Subsidiaries: Smith Fiberglass Products Inc.; A. O. Smith Enterprises Ltd. (Canada); A. O. Smith Electric Motors (Ireland) Ltd.; A. O. Smith Water Products Company B.V. (Netherlands); A. O. Smith Harvestore Products, Inc.; AgriStor Credit Corporation.