‘Deep-Rooted Supply Chain’ Persists in China, With No 'Great Payback' to Move, Says Jabil CEO
Supply-chain services provider Jabil is experiencing “no big material impacts” from the Trump administration’s Section 301 tariffs, though it recently decided to funnel much of its new capital expenditures on factory expansion outside China, said CEO Mark Mondello on a fiscal Q4 call Tuesday. “There continues to be a deep-rooted supply chain in China,” despite the administration’s efforts to convince U.S. importers to shift production elsewhere, he said.
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Many Jabil customers, “when they look at the analyses, don’t see a great payback in terms of moving existing business” outside China, said Mondello. A “decent amount” of Jabil’s China revenue is “consumed in other geos other than the U.S.,” so the tariffs are “not applicable,” he said. Apple is Jabil’s largest contract-manufacturing client, said a recent S&P Global Ratings report (see 1909160010).
“General footprint expansion is essential” for Jabil, “with all the growth we’ve put into the company,” said Mondello. “From a CapEx perspective, we’re going to continue to expand our footprint, and a lot of that expansion is largely outside of China.” That’s a decision Jabil has “taken a hard look” at the last 75-100 days, he said. The company says it runs 100 factory "sites" in 30 countries.
Jabil thinks the “mobility” supply chain, which includes smartphones, “continues to be overcapacitized for current and future volumes,” said Chief Financial Officer Mike Dastoor. The overcapacity has been a “constraint” on margins, so Jabil is “proactively taking steps to optimize our footprint,” he said.
Reducing factory capacity will enable Jabil to use its “fixed assets” more efficiently, and “normalize our cost structure,” said Dastoor. The forecast through the fiscal year ending August 2021 is for “increased unit volume through market share wins,” he said.
Jabil expects to be able “to support higher levels of revenue across a more optimized footprint” through automation and “manufacturing process improvements,” said Dastoor. Jabil will incur an $85 million charge for the optimization, including $35 million in cash, he said.
The optimization “will largely be concentrated around our China footprint,” said Mondello. The “timing feels pretty good to take out some capacity” in the smartphone business, he said. The move isn't indicative of “the health of the business,” he said. “Where we’re positioned today is as good as it’s ever been. Market share’s in good shape.” The aim of reducing capacity through factory optimization is “getting more water through a smaller pipe,” he said.
Jabil's forecasting a 15 percent fiscal 2020 revenue decline to $2.9 billion in the segment it calls “edge devices & lifestyle.” There’s a “significant number of products in that bucket,” said Mondello. Some are “going through technology changes as things prepare for 5G,” he said. Others are “just plainly going end-of-life,” he said. With still others, management “just made some decisions not to pursue follow-on products” because they didn’t meet Jabil’s “margin structure or cash flow priorities,” he said.