IRobot to Source a Third of Its US Unit Volume This Year From Malaysia, CEO Says
IRobot’s 2019 operating-profit margin would have been 3.1 points higher at 10.4 percent if not for the $37.9 million in List 3 Section 301 tariff costs imposed on the robotic vacuum cleaners (RVCs) it sourced from China, CEO Colin Angle said on a Q4 earnings call Feb. 6. IRobot expects to incur $47 million to $50 million more in 2020 tariff costs, Chief Financial Officer Alison Dean said.
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A top 2020 priority will be to “continue taking the steps necessary to negate the impact of tariffs without compromising our category leadership,” Angle said. One entry-level Roomba RVC model began production in Malaysia ahead of schedule late in 2019 (see 1911220032) and is now shipping in the U.S., he said. It plans to start producing a second Roomba in Malaysia in 2020's second half, he said.
Malaysia-sourced volume will be “up to a third” of iRobot units sold in the U.S. this year, Angle said. “We plan to accelerate and expand Malaysia production to cover most of our RVC portfolio by the end of 2021.” The List 3 tariff exemption that iRobot seeks “would help defray the costs of ramping Malaysia,” Angle said. Producing in Malaysia gives iRobot the “benefit” of eliminating tariff exposure, but it's more expensive building goods in Malaysia than it is in China, Dean said.
The Office of the U.S. Trade Representative has made “substantial progress working through the list” of 30,000 List 3 exclusion requests, Angle said. More than 10,000 applications were rejected, and “much fewer approved at this point,” he said. IRobot’s July 1 request is one of more than 17,000 that remain in a Stage 2 administrative hold (see 2002030009). USTR has granted 526 exclusion requests in seven tranches since August.
“We remain extremely engaged garnering support for the exemption,” Angle said. “We have found that our efforts moving to Malaysia are consistent with what the administration is hoping for, and so that is a big positive.” There’s also “real support” in Washington for the U.S. to “continue to lead in the consumer robot industry, and a recognition that the tariffs are working counter to that,” he said. “We remain optimistic” the exclusion will be granted, “just uncertain on timing,” he said.
IRobot is “absolutely committed to manufacturing in Malaysia” even if the tariffs on Chinese goods were to disappear, Angle said. The goal is for a more “geographically diverse manufacturing footprint,” he said. “As we scale our operations in Malaysia, we believe that the premium that we’re currently paying in Malaysia can be materially reduced.” A “long-term commitment” to Malaysia would be “an important part of risk mitigation, given the uncertainty of geopolitical situations,” he said.
“Our ability to go and generate revenue in a direct-to-consumer fashion is going to become an increasingly important part of the iRobot story,” Angle said. Direct-to-consumer sales skew heavily toward “more engaged customers” who are “more interested in premium-differentiated features,” he said. That bodes well for generating higher average selling prices for models that connect with other smart home devices, he said.