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iRobot Gives China Two Finger Salute, Partners Revenue Falls 55%

iRobot the vacuum cleaner Company has split with their Chinese manufacturing partner who relied on the US Company for 55% of their revenue last year, the move is said to be because of the tensions between China and the USA.

Kin Yat Holdings said in a premarket exchange filing Tuesday that a “significant customer… which is a leading American technology company specializing in robotic floor care products” was ending its service contract.

Kin Yat said the termination stemmed from its client’s desire for more geographic diversification of production and rising production costs in China, where Kin Yat’s factories are concentrated.

According to Nikki Asia, Kin Yat shares then tumbled on the Hong Kong exchange, ending down 16.8% at 94 Hong Kong cents.

iRobot has been shifting production gradually out from China to Malaysia, amid rising tensions between Washington and Beijing.

“Our plan to substantially increase our production in Malaysia over the course of this year is progressing well, even with the tight Labor market,” Julie Zeiler, executive vice president and chief financial officer, told analysts during a first-quarter results call.

She said in previous earnings call in mid-February that “by the end of 2021, we estimate that Malaysia manufacturing will have sufficient capacity in place to support the vast majority of our 2022 North American volume requirements.”

By making this shift, the company said in its annual report also released in February, “we believe that we will substantially reduce and potentially eliminate our exposure to current U.S. tariffs, and mitigate the geopolitical risks associated with concentrating production solely in China.”

In her comments, Zeiler noted that Washington had reinstated a 25% tariff on Roombas imported from China at the start of the year, which she said has increased costs by $3.4 million during the first three months. The gross margin would have been 1.1 percentage points higher if there were no tariffs, she said.

iRobot’s reference to geopolitical risks suggests security may have factored into its production shift amid worries in the U.S. and allied nations about the possibility of China-made gadgets being used to covertly transmit sensitive data.

Based on figures from Kin Yat’s disclosure Tuesday, its reliance on iRobot peaked in the year ended March 2019, when its key U.S. customer accounted for 65% of total revenue, or 2.66 billion Hong Kong dollars ($342.47 million). That fell to HK$1.7 billion the following year.

Kin Yat, which began as a toymaker in 1981, started moving its production from Hong Kong into the adjacent mainland city of Shenzhen in 1985. According to its website, it began collaborating with iRobot on the development of the Roomba in 2007.

While Kin Yat has been shifting some of its manufacturing operations further inland in China due to rising factory wages — first to Shaoguan, which like Shenzhen is in Guangdong Province, then to the interior province of Guizhou — high-value production, including Roombas, has remained in Shenzhen.

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