How manufacturers coped with a $100 million mandate.

The first major change to hit the water heater industry for almost 30 years has been in place for six months. All new conventional gas-fired water heaters are required to use new technology complying with the American National Standards Institute (ANSI) standard, ANSI Z21.10.1-2001.

Gas water heaters captured the attention of the U.S. Consumer Products Safety Commission in the early 1990s regarding the fire hazard posed by the potential ignition of flammable vapors, such as the spill or misuse of gasoline, near the heaters. The technology to meet the standard, which requires the design of water heaters “shall not ignite flammable vapors outside the water heater created by the spilling of… gasoline onto the floor,” was developed by the joint effort of industry members.

Phase One of the standard began July 1, 2003, for conventional 30-, 40-, and 50-gallon residential heaters. The deadline for the next phase, covering power-vented 30-, 40-, and 50-gallon water heaters, was recently changed to go into effect in January 2005. All remaining models should be available in FVIR versions by July 1, 2005.

The Water Heater Joint Research and Development Consortium, a group to which all water heater manufacturers have contributed, officially started in 1994 to create the technology that eventually would be seen in the ANSI standard. Some manufacturers estimated that overall, the industry has spent $100 million to achieve the new Flammable Vapor Ignition Resistant (FVIR) technology. “That may be conservative,” says one manufacturer. “In addition to research, new tooling and certification, there were hidden costs.”

Michael Gordon, vice president of engineering of Bradford White, estimates his company spent “millions and millions and millions” on just the equipment and the process. The entire project, including research and development, cost more than $10 million, he says.

Peripheral resources pulled into the project make it difficult to put a firm number on the cost, says Ron Massa, president of A.O. Smith. “It was a significant effort, requiring substantial resources dedicated by the manufacturers.”

The Consortium: Contributions And Benefits

At Rheem, the resource pools dedicated to the FVIR project ranged from top management to the people working on the production line, says Jim Bienias, senior product manager/residential of Rheem Water Heaters. The company's core team included people from marketing, research and development, technology, finance, quality assurance, purchasing and operations.

One of Rheem's primary contributions to the consortium was the best practices approach that it has adopted. Bill Harrington, Rheem's vice president of research and development, worked with his peers from other manufacturers. They looked at the product collectively early on to make sure that when it was rolled out, the reliability factor was there.

“Each manufacturer contributed its perspective of the marketplace and technology,” says Massa. “A.O. Smith brought an additional perspective. Our participation in the consortium helped us to focus in on technology and do more thorough testing.”

Each manufacturer gained by dedicating its own resources to the consortium.

Gordon says the consortium allowed Bradford White to share the burden of some of the fundamental research, and it helped accelerate the development of the project. Bradford White hosted developing and testing throughout the process, and had hundreds of units of its final design in the field almost a year prior to production.

What Rheem gained from its experience with the consortium was reliability and shared technical expertise.

American Water Heater Co. was with the consortium at its beginning but has since dropped out.

“We went through quite an extensive reliability testing program,” says Tim Shellenberger, vice president of engineering of American Water Heater Co., which did two field tests before it went into production. “Before the mandate came up, we had over 150,000 in place and working prior to the effective date.”

Phase Two of the standard goes into effect in January 2005 for power vent water heaters. Massa says that although the two phases present different types of challenges, the same type of benefit applicable to the initial phase will be applied to the second phase. “Where the industry combines efforts, such as in this consortium, it is much more beneficial to the customer than independent action by a manufacturer.”

Sidebar: Wholesalers' Perspective

Wholesalers saw a seamless conversion to water heater compliance with the FVIR mandate, which raised the price for water heaters by about $50 to $60.

“The new water heaters sell at a significantly higher price but the margins have not changed dramatically,” says Hayes Williams, business development manager of Slakey Bros. in Sacramento, Calif. “Because of the higher price for the FVIR water heaters, it's like we are selling half again as many. The margin has not improved but we are getting the same margin on a larger sale.”

Jeff Clyne, regional vice president of Hughes Supply (Orlando, Fla.), also says his company's margin hasn't increased but profit dollars have because of an increase in the volume of dollars.

Year-to-date sales for Slakey Bros. have risen dramatically compared to the rest of its market, says Williams. Water heater year-to-year sales at Ferguson Supply (Newport News, Va.) are up about 25%, according to Charlie Williams, sourcing manager for finished products and equipment.

Some wholesalers, such as Hughes Supply and Ferguson, were able to set up training sessions with manufacturers or their reps. Clyne says he worked with Rheem and its manufacturers rep organizations to host workshops for both Hughes Supply employees and customers.

Williams says Slakey Bros. has been training its employees on its own. “It used to be like driving a nail home - once the water heater was installed, that was it,” he says. “With the new FVIR water heaters, some maintenance is required.” That may become an issue in the future, he notes.

Because of the pipeline of old water heaters, which are still eligible for installation if they were sold before July 1, 2003, it is tough to gauge how FVIR water heaters will do. Water heaters aren't usually considered a big moneymaker for wholesalers.

"We have very few of the old (non-FVIR) water heaters left," says Ferguson's Williams, adding that the conversion to FVIR was less of an event than expected. "Manufacturers did a nice job of communicating the issues beforehand," he says. "It was not that big a deal."

The new mandate means people who have had the same water heater in their houses for 30 years may be in the market for a newer, safer one.