Malaysian Role Growing for IRobot as It Tries ‘Getting Out From Under’ Chinese Tariffs
IRobot Q3 U.S. sales declined 7 percent because growth “remained subdued as the direct and indirect impacts” of the 25 percent List 3 Section 301 tariffs “weighed heavily on consumers, retailers and suppliers,” said CEO Colin Angle on a Wednesday call. Tariffs forced iRobot to hike prices July 22 that resulted in “suboptimal sell-through” in August and September, he said. Sales recovered after the vendor "rolled back" pricing to “pre-tariff levels” in October, he said.
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The company regards the List 3 tariffs as “a short-term phenomenon that has temporarily stunted top-line growth and eroded profitability,” said Angle. “We plan to continue to limit our China exposure by moving production to Malaysia.” Ramping production there will help relieve some of the tariffs' “gross-margin pressure,” he said. The stock closed 9.2 percent lower Wednesday at $49.06.
IRobot will have one Malaysian production line “operating at scale” for entry-level products by the start of 2020, said Angle. It also will continue seeking “ways to move higher-complexity products outside of China, depending on what we’re seeing relative to the tariff situation,” he said. “Malaysia is playing a growing part of our strategy. We’re not holding our breath and waiting for tariffs to end or to be exempted.”
The vendor filed for a List 3 tariff exclusion July 1 on the "retail-packaged robotic vacuum cleaners" it imports from China under the 8508.11.00 tariff code. Its exclusion petition remains locked in a “Stage 2 -- Initial Substantive Review" hold at the Office of the U.S. Trade Representative. "Our position has strong merit," said Angle. "With over 30,000 applications now awaiting review, it could take several more quarters before we learn whether our request for an exemption will be granted." USTR didn't comment.
To legally designate a product as sourced from Malaysia, “enough” of it needs to be manufactured there to qualify it for a “substantial transformation” declaration that would pass muster at Customs and Border Protection, said Angle. “For lower-priced products, you get there basically by injection-molding the robot.” More “sophisticated” robots require “electronics being manufactured in Malaysia,” and that’s “a much longer road to hoe,” he said.
Malaysia is “coming up quickly” in its “sophistication” but “lags significantly behind China” in the capability to produce “these more advanced types of products,” said Angle. Bringing more sophistication to Malaysian sourcing will require “an investment” that iRobot is willing to make, because it won’t allow itself to stay exposed to Chinese tariffs “a day longer than it needs to,” he said.
IRobot’s 2020 financial plan assumes the 25 percent List 3 tariffs will stay in place for all of next year, said Angle. The company still estimates it will incur $35 million to $40 million in 2019 tariff costs, with the 2020 costs even higher because List 3 was imposed at 10 percent for some of 2019. Of the various “strategies for getting out from under those tariffs,” moving manufacturing “more fully to Malaysia” is one of them, he said. “We’re going to find a way to do it.”
IRobot is “advancing activities” that will enable its robotic vacuums to “work seamlessly” with other smart-home devices, said Angle. “Further progress in this area will increase our competitive differentiation.”
Consumers “are looking not for complexity, but for reliable, trusted simplicity in the role that technology plays” in the smart home, said Angle. “The idea that you can come home every day to a freshly vacuumed home,” and be sure the robot “cleans exactly what you want it to clean” is “very difficult to do well,” he said. That “plays nicely into iRobot’s core competency,” he said.
“Connecting more broadly into the smart home” will be a “very exciting time” for iRobot, said Angle. “Over the next two years, we’re going to see the smart home start to deliver on the promise for which it has disappointed to some degree over the last five years.”