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iRobot Takes a Big Step Toward Negating the Impact of Chinese Tariffs

It's no mystery that tariffs and the ongoing U.S.-China trade war have done iRobot (NASDAQ: IRBT) no favors. The home robotics leader has made as much clear in each of its past several quarterly reports, culminating in a steep drop after last month's update that sent iRobot shares to a fresh four-year low.

On Wednesday morning, however, iRobot (NASDAQ: IRBT) announced a key step toward blunting the impact of tariffs on its bottom line, saying it has commenced production in a new Malaysian factory earlier than previously expected.

For perspective, during last month's earnings call, CEO Colin Angle told analysts the company was on track for Malaysian "volume production to begin in 2020."

Angle elaborated in a press release this morning:

"Establishing manufacturing operations in Malaysia is a fundamental component in our initiative to diversify iRobot's manufacturing and supply chain capabilities, while also mitigating our exposure to current and prospective tariffs on products that are imported from China. We are thrilled that the new production line in Malaysia is officially up and running earlier than anticipated. Taking this project from start to finish in less than a year was a massive undertaking that required detailed planning, scenario modeling and crisp execution by our operations team and our partner, Jabil.

Image source: Getty Images.

iRobot isn't in the clear yet

This doesn't mean the impact of tariffs will be completely absent for iRobot in the coming quarters. As it stands, it is starting by producing "limited quantities" of a single Roomba 600 series model at the new factory, and plans to accelerate production for that model starting in the first quarter of 2020.

"Additional models may be added to the line over the coming quarters and into 2021," the company added today.

But this shouldn't be a huge surprise considering it's in line with Angle's comments during last month's call -- namely that iRobot would begin with a single entry-level Roomba at the factory, then follow with additional stock keeping units on an as-needed basis. This progression is a consequence, Angle says, of the incremental challenge involved with shifting production and developing the infrastructure in Malaysia to support manufacturing of more sophisticated electronics and batteries required for higher-end Roomba models.

The bigger picture

That also raises the question: If the U.S. and China resolve their trade dispute and roll back tariffs altogether, is all this effort for naught? Not necessarily.

"As we move forward, we believe that our investment to establish manufacturing operations in Malaysia will serve us well as the global demand for home cleaning robots across multiple categories continues to grow," Angle said.

Even as it fosters growth from its core Roomba line, iRobot is simultaneously working to spur adoption of its less-mature Braava floor-mopping robots. And looking further ahead, the company plans to introduce its new Terra lawn mower on a limited basis online in the U.S. next year, followed by a larger-scale commercial launch in early 2021.

In the meantime, this appears to be an encouraging first step toward realizing iRobot's longer-term supply chain ambitions. As those ambitions continue to play out, I think iRobot will prove to be a top stock for any investors who buy shares before it rebounds from its multiyear lows today.

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Steve Symington owns shares of iRobot. The Motley Fool owns shares of and recommends iRobot. The Motley Fool has a disclosure policy.


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