The future of industrial growth depends on water
By Robert Armacost, Director, Enterprise Solutions
Water is becoming a real bottleneck for industrial and AI-driven growth as data centers, semiconductor factories, and manufacturers compete for limited supplies in water-stressed regions.
Factories are going up faster than the water systems that keep them running. Nonfinancial S&P 500 companies are projected to spend $1.8 trillion on new plants and equipment in 2026, up from $650 billion in 20211. Yet the resource that determines whether those facilities can operate, water, receives a fraction of the attention given to power, chips and labor. The places attracting the most industrial growth are often the places with the least water to spare. For the executives and operators deciding where to build and expand, water has quietly moved from a background input to a constraint that can delay, reshape or halt growth plans entirely.
This challenge is emerging against the backdrop of a broader manufacturing transformation. AI infrastructure, semiconductor production, electrification and industrial reshoring are driving significant investment in new facilities and equipment across the United States. As organizations race to expand capacity, the conversation often centers on access to power, labor and supply chains. Increasingly, however, water is becoming just as important in determining where growth can occur and how quickly projects can move forward. The scale of this challenge is only growing: water demand across data centers, semiconductor manufacturing and the power generation that supports them could increase by 129% by 20502.
Why is water putting industrial growth at risk?
The communities and industries we work alongside are already managing water systems under real strain. Budgets are tight. Workforces are stretched. Infrastructure built decades ago is being asked to serve populations and industries it was never designed to support. The EPA has estimated a funding gap of $625 billion over the next two decades for drinking water infrastructure alone, with wastewater adding another $271 billion3. Neither figure accounts for the additional capacity that the current industrial expansion wave requires.
Now add the demand side. Semiconductor fabs, which rinse silicon wafers with ultrapure water, a form of water purified to remove nearly all impurities so chips can be manufactured without contamination, are clustering in water-stressed regions like the American Southwest. Forty percent of existing semiconductor fabs sit in watersheds projected to face high or extreme water stress by 20304. Data centers face a parallel problem: 45% of the world’s data centers operate in river basins at high risk of water-availability disruptions5 and a single hyperscale facility can consume hundreds of millions of liters annually, depending on facility size, climate and cooling design6.
Yet cooling is only part of the story. Every new data center and semiconductor facility also increases demand for electricity, and much of that power still depends on water-intensive generation. Research from Watering the New Economy2 found that the AI value chain uses water in three interconnected ways: semiconductor production, onsite data center cooling and offsite power generation. In many cases, the indirect water footprint associated with power generation exceeds the water used directly for cooling, making energy and water planning increasingly inseparable.
The pressure lands on the people who manage these systems every day. A utility director weighing a new industrial connection, a plant manager securing water for production, a facility leader planning expansion, each faces the same reality. Water availability is increasingly influencing whether projects can move forward.
What can industries do to reduce their water risk?
The response is already taking shape across sectors, not only by reducing water demand at facilities themselves, but also by rethinking how water is sourced, reused and conserved throughout the broader water-energy ecosystem. Water scarcity receives far less attention than power, labor and supply chain constraints, despite growing evidence that it will shape where industrial growth occurs. An industry analyst pointed to the broader pattern: when manufacturing scales in a region, scarce inputs such as chips, power and water become the bottlenecks that define who can grow1.
Meeting future demand will require more than finding additional water supplies. It will require building water security through smarter management, greater reuse and stronger system resilience.
Water reuse is one of the most direct responses. Rather than drawing fresh water for every cycle, facilities treat and recycle the water they already use, turning wastewater into a reliable supply that reduces dependence on municipal systems and local watersheds. Semiconductor water demand could grow more than 600% by 2050, driven by rising chip complexity and the ultrapure water each new generation requires6. Large-scale reuse will be essential to sustaining both chip production and local water security.
Real-time monitoring and analytics give operators a second lever. By continuously tracking water quality, flow and pressure across a network, teams can detect leaks, optimize usage and prevent failures before they disrupt operations. It is also important to recognize that data center water use is changing. New AI-focused facilities increasingly use direct liquid cooling combined with closed-loop designs that can dramatically reduce freshwater requirements. Some next-generation facilities consume little or no water for cooling during operation, depending on climate and system design. However, these approaches are not universal, and many existing facilities continue to rely on evaporative cooling systems that draw heavily on local water resources during periods of peak demand. For data centers, where daily water demand can spike six to ten times above average on hot days7, knowing exactly how much water is moving through the system, and where, is what keeps cooling running when it matters most.
Smart network management ties these capabilities together. Pressure management, leak detection and distribution optimization help utilities and industrial sites deliver water more efficiently, reduce loss and extend the life of aging infrastructure without massive capital programs. Together, these approaches let facilities cut freshwater draw, reduce exposure to supply disruptions and protect the communities that share the same resources6. They also help utilities accommodate expanding industrial and digital-economy demand without requiring equivalent increases in freshwater withdrawals, which is increasingly important as aging systems face growing demand from both communities and industry.
Helping utilities and industrial operators address these challenges requires a more integrated approach to water management, combining efficiency, reuse, visibility and network resilience.
Where is this heading?
Water is becoming a siting criterion, not just an operating cost. Over the next decade, the facilities that succeed will be the ones that planned for water from the earliest stages, before ground was broken, before permits were filed, before the community was asked to share. The question is shifting from “do we have enough water?” to “can we secure and manage water well enough to grow here?”
For the people reading this, the directors, managers and engineers who live these decisions, the implication is concrete. Water planning belongs at the front of the expansion conversation, not the end of it. The teams that treat it that way will be the ones who build where others cannot.
Frequently asked questions
AI infrastructure depends on a network of water-intensive assets that extends beyond data centers themselves. Data centers may use water for cooling, semiconductor fabs require large volumes of ultrapure water for manufacturing advanced chips and power plants often rely on water for cooling and generation. While many newer data centers are becoming more water-efficient through direct liquid cooling, air cooling and closed-loop system designs, these approaches are not yet universal. At the same time, thousands of existing facilities still depend on local water supplies. As AI-related investment accelerates, organizations must consider both direct and indirect water demand when planning future growth.
Water scarcity can reduce plant productivity, force temporary closures, and limit where new facilities can be built. When local water supplies tighten, water managers may impose limits on industrial use, which can curtail production and cut into revenue. Manufacturers in water-stressed regions face higher costs for treatment, recycling and alternative supply arrangements.
Many data centers use large volumes of water for evaporative cooling, while newer facilities increasingly employ direct liquid or closed-loop cooling systems. Semiconductor fabs require ultrapure water to rinse silicon wafers during chip manufacturing. Both industries are expanding rapidly and often cluster in regions with limited freshwater, such as the American Southwest and parts of East Asia. Nearly 40% of existing semiconductor fabs and 40-45% of data centers operate in areas facing high water stress. In addition to their direct water needs, the electricity infrastructure required to support AI growth can create significant additional water demand through power generation, especially where thermoelectric generation remains part of the energy mix.
Industries can reduce water risk by implementing water reuse and recycling systems, deploying real-time monitoring to detect leaks and optimize usage and managing distribution networks more efficiently. Treating water as a strategic input during site selection and facility design, rather than an afterthought, helps secure supply before constraints become critical. Partnering with water technology providers can help facilities implement these capabilities at scale.
Why water security belongs in every growth conversation
Water has always enabled industry. What is changing is that it can no longer be assumed. The facilities, utilities and communities that recognize this earliest will be the ones that grow without interruption, and the ones that protect the shared resources their neighbors depend on.
At Xylem, we work alongside utilities and industrial operators navigating these challenges, helping improve visibility, efficiency and resilience across the water cycle. When a utility secures supply for a new industrial connection, when a fab reclaims water to protect production capacity, when a data center keeps cooling running through a heat wave — that is what solving water looks like in practice. Together, we are helping customers and communities build a more water-secure world, one decision at a time.
The question is no longer whether water will shape industrial growth. It already does. As manufacturing, data center and semiconductor investments continue to expand, organizations must account not only for the water used inside their facilities, but also for the water required to generate the power that supports them. New cooling technologies, water reuse strategies and infrastructure partnerships are showing that growth and water stewardship do not have to be competing priorities. The organizations that plan for water early, invest in resilience and strengthen the systems they depend on will be better positioned to grow while protecting the communities and ecosystems that share those resources. Water may be one of the oldest industrial inputs, but the organizations that treat it as a source of long-term resilience, not just a utility cost, will help turn water scarcity into water security and unlock the next generation of industrial growth.
1Barron’s, https://www.barrons.com/articles/manufacturing-stocks-picks-roundtable-7c264514
2Xylem & Global Water Intelligence, Watering the New Economy: Managing the Impacts of the AI Revolution, January 2026, https://www.xylem.com/en-us/info/watering-the-new-economy/
3Environment+Energy Leader, https://www.environmentenergyleader.com/stories/water-infrastructure-gap-is-reshaping-us-industrial-growth,121760
4World Economic Forum, https://www.weforum.org/stories/2024/12/how-climate-change-and-water-stress-is-risking-the-semiconductor-supply-chain
5TNFD, https://tnfd.global/knowledge-bank/nature-related-issues-in-the-technology-sector/
6World Economic Forum, https://www.weforum.org/stories/2026/01/ai-water-data-centres-opportunity-am26-wef-xylem/
7University of California, https://www.universityofcalifornia.edu/news/data-center-water-spikes-could-cost-billions