Malaysian Role Growing as iRobot Tries ‘Getting Out From Under’ Chinese Tariffs

IRobot’s U.S. sales declined 7 percent in Q3 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,” CEO Colin Angle said on an Oct. 23 call. IRobot price hikes in late July resulted in “suboptimal sellthrough” in August and September, prompting the vendor to roll back pricing to “pre-tariff levels” earlier in October, he said.

The company regards the List 3 tariffs as “a short-term phenomenon that has temporarily stunted top-line growth and eroded profitability,” Angle said. “We plan to continue to limit our China exposure by moving production to Malaysia.” The ramp there will help relieve some of the “gross-margin pressure” that tariffs exert to iRobot’s bottom line, he said.

IRobot will have one Malaysian production line “operating at scale” for entry-level products by the start of 2020, Angle said. 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. “Certainly 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.” IRobot filed for a List 3 tariff exclusion in early July, but its application remains in a “stage 2” initial review at the Office of the U.S. Trade Representative.

To legally designate a product as sourced from Malaysia, “enough” of it needs to be manufactured there to qualify it for “substantial transformation” declaration that would clear CBP oversight, Angle said. “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 [row] 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,” Angle said. Bringing more sophistication to Malaysian sourcing will require “an investment,” but iRobot 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, Angle said. The company still estimates 2019 tariff costs at $35 million to $40 million, with the 2020 costs even higher because List 3 took effect at 10 percent for much 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.”