WEBVTT - Managing Manufacturing in a Higher Cost Environment

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<v Speaker 1>You're listening to Bloomberg Business Week with Carol Messer and

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<v Speaker 1>Bloomberg Quick Takes Tim Stinovic on Bloomberg Radio. Well, as

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<v Speaker 1>I mentioned, Flex is a company that really does it all.

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<v Speaker 1>They're a global manufacturing company that builds products for companies

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<v Speaker 1>like Facebook or excuse me, Apple, Cisco, Ford and more.

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<v Speaker 1>They do work across industries. They work in housing, they

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<v Speaker 1>work in health, the cloud, digital energy, and more. It's

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<v Speaker 1>publicly held. They've got a market cap of a little

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<v Speaker 1>more than eight billion dollars. They've got more than one

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<v Speaker 1>seventy thousand employees around the world. Needless to say, they've

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<v Speaker 1>got a great idea of what's going on when it

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<v Speaker 1>comes to some of the macro themes that we talk

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<v Speaker 1>about here on Bloomberg Business Week all the time. Very

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<v Speaker 1>pleased this afternoon to be joined by Paul Lunstrom, the

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<v Speaker 1>chief financial officer of Flex. Paul joins us this afternoon

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<v Speaker 1>via zoom from San Jose, California. Paul, how are you.

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<v Speaker 1>I'm very I'm doing very well. How are you, Tim?

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<v Speaker 1>Thanks for having us. Yeah, doing really well as well,

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<v Speaker 1>So thanks so much for joining us. Um As I mentioned,

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<v Speaker 1>you guys touch at all you've got suppliers like qual, Calm,

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<v Speaker 1>an XP, You've got clients like Apple, Cisco, Ford and more.

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<v Speaker 1>I want to start big picture here. Just give us

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<v Speaker 1>an idea of what you're seeing around the world right now,

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<v Speaker 1>and as as our audience tries to make sense of

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<v Speaker 1>what the macroeconomic environment looks like, how is this global economy?

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<v Speaker 1>I would say mixed. I would say mixed, and you

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<v Speaker 1>gave a pretty good intro, so I won't waste a

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<v Speaker 1>whole lot of time sort of reintroducing the company. But

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<v Speaker 1>like you said, we're in We're in a lot of

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<v Speaker 1>different areas, big tech, heavy industry, medical devices and equipment, automotive,

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<v Speaker 1>consumer products, and so I think that's, uh, it's an

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<v Speaker 1>interesting place to be because that's a pretty representative cross

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<v Speaker 1>section of the world economy, being in so many product

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<v Speaker 1>then markets. But we're also operating in thirty countries around

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<v Speaker 1>the globes and now we have that front seat to

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<v Speaker 1>the wide range of products and markets. But we see

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<v Speaker 1>the regional nuances as well, So it's uh, we see

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<v Speaker 1>the local market dynamics, we see the geopolitics. It's a

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<v Speaker 1>it's a pretty interesting place to be. Well, Paul, let's

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<v Speaker 1>let's talk before we talk regional to for instance, let's

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<v Speaker 1>talk industrial stuff. So where are you seeing strength in

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<v Speaker 1>terms of different industries versus weakness? What are some highlights

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<v Speaker 1>right now? Yeah, just to kind of walk you through

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<v Speaker 1>the portfolio, we just had an earnings call a month ago,

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<v Speaker 1>and one of the things that we talked about was

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<v Speaker 1>a little bit of softening in some of the shorter

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<v Speaker 1>cycle consumer product markets. But for us, that is much

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<v Speaker 1>more than offset by you know, we continue to see

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<v Speaker 1>very robust demand in a number of other areas, things

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<v Speaker 1>like networking and connectivity, whether it's you know, cloud or

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<v Speaker 1>five G that continues to be very very strong. Network

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<v Speaker 1>security continues to be very very strong. Um a number

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<v Speaker 1>of the industrial markets, including things like renewable energy. Uh,

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<v Speaker 1>you know that probably seems obvious, but that that continues

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<v Speaker 1>to see robust growth. We're we're quite pleased with what

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<v Speaker 1>we've seen there, even things like automotive, which is, you know,

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<v Speaker 1>you would expect demand to soften if the economy softens

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<v Speaker 1>it up here in the automotive space, but but frankly,

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<v Speaker 1>there's so much backlog and that whole sector is going

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<v Speaker 1>through mus going through so much restocking that you know,

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<v Speaker 1>try and buy a new car today, you're gonna be

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<v Speaker 1>on a waiting list for quite some times. Yeah, it's

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<v Speaker 1>funny that you say that my dad ordered a new

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<v Speaker 1>car a year ago. He just got an email from

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<v Speaker 1>Ford today saying that it's it's actually going to start

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<v Speaker 1>being assembled later in September. So it took a year

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<v Speaker 1>to get to that point later in September exactly. And

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<v Speaker 1>I hear stories now tim of you're on a wait

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<v Speaker 1>list to get on a wait list and then we'll

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<v Speaker 1>tell you when we can deliver. So it's at the

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<v Speaker 1>moment it's crazy. So what is it holding up those products?

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<v Speaker 1>I mean, we talk about chips all the time, but

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<v Speaker 1>but really dig into that for us, like where are

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<v Speaker 1>you seeing the supply chain the bottlenecks right now? Well,

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<v Speaker 1>certainly it's chips. To just give you a sort of

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<v Speaker 1>a short brief answer, semiconductors has been a big bottleneck,

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<v Speaker 1>but so of things like oversea logistics, you know, ports

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<v Speaker 1>stacking up with containership after container ship. Who hasn't seen

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<v Speaker 1>aerial photographs of that? But you know, from my standpoint,

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<v Speaker 1>you look to the root cause. Going into the pandemic,

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<v Speaker 1>the world economy was already doing pretty well, and so

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<v Speaker 1>in a lot of cases producers were just barely keeping

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<v Speaker 1>up with demand. Now you sprinkle in COVID, you see production,

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<v Speaker 1>you know, shut down for four months on end, and

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<v Speaker 1>a lot of different geographies well at the same time

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<v Speaker 1>you have and this isn't just a US thing, this

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<v Speaker 1>is you know, world governments just just pounded stimulus, spending

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<v Speaker 1>pounded it. And so what that did was, I think

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<v Speaker 1>demand did not go down like many thought it would.

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<v Speaker 1>In some cases, demand actually went up. But then when

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<v Speaker 1>you take the you take the away the ability for

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<v Speaker 1>producers to produce, the backlog just went through the roof

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<v Speaker 1>and we've been trying to recover ever since. Paul, when

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<v Speaker 1>we were last speaking before the break, you you mentioned

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<v Speaker 1>some regional differences, and that's really where I want to

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<v Speaker 1>dig into right now, is getting understand from you about

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<v Speaker 1>where we're seeing some economic softness. And I know, look,

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<v Speaker 1>we can talk about what we've seen from Europe over

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<v Speaker 1>the last few months on some softness there and concerns

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<v Speaker 1>about recession there. But where some regions with strength and

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<v Speaker 1>where some regions with weakness. Yeah, I would say I

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<v Speaker 1>see less region to region and more product to product

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<v Speaker 1>and so you know, from from my vantage point, the

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<v Speaker 1>shorter cycle consumer product markets. What is the short cycle

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<v Speaker 1>consumer product I think of it as more commodities electronics,

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<v Speaker 1>you know, cell phones and laptops and that sort of stuff,

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<v Speaker 1>um and and that. Over the last quarter or two

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<v Speaker 1>we we have seen that softened up a little bit.

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<v Speaker 1>It probably will you know, continue that way as as

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<v Speaker 1>you look forward. But I would say that's worldwide. You know,

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<v Speaker 1>that's not unique to one particular region. Where we continue

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<v Speaker 1>to see robust demand is the more infrastructure related technology,

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<v Speaker 1>you know, things like five G and and cloud continues

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<v Speaker 1>to be very very robust. But are there areas of

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<v Speaker 1>the world that are sticking out to you where you're

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<v Speaker 1>seeing weakness? Uh, well, the zero COVID policy in China

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<v Speaker 1>is that's not going to help those local markets. I

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<v Speaker 1>think people want to get back to work and get

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<v Speaker 1>back to get back to normal and so you know,

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<v Speaker 1>we see it more from a supply chain perspective than

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<v Speaker 1>than from a specific end market perspective. But yeah, that

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<v Speaker 1>would be an example where it would be nice to

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<v Speaker 1>get back to a little bit of normalcy. Can you

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<v Speaker 1>talk a little bit about how you've navigated China zero

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<v Speaker 1>COVID policy, Paul Uh. So for a company like Flex,

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<v Speaker 1>so we're we're a large contract manufacturing company, and I

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<v Speaker 1>think in this particular space, scale really does matter. You know,

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<v Speaker 1>we have a very wide geographic reach, and so we

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<v Speaker 1>also have a very large supplier network, and so as

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<v Speaker 1>things have been you know, coming on an offline in

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<v Speaker 1>China over the last couple of years, frankly, um, it's

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<v Speaker 1>been a little easier for us to pivot, you know.

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<v Speaker 1>I think we can produce like for like, you know,

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<v Speaker 1>from one region to the next without a whole lot

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<v Speaker 1>of notice, and because we have a large supply chain network,

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<v Speaker 1>it helps. So I think scale has been a big

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<v Speaker 1>help for for a company like ours. I'm wondering about

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<v Speaker 1>globalization and where we are in Before we went into

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<v Speaker 1>the pandemic, we saw a move, uh at least from

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<v Speaker 1>the United States of trying to isolate China to a

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<v Speaker 1>certain extent under the Trump administration's tariffs and policies. And

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<v Speaker 1>during the pandemic we saw just how fragile so many

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<v Speaker 1>of the global supply chains were. So now we're hearing

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<v Speaker 1>from companies where they're on shoring or or re shoring

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<v Speaker 1>or near shoring. You know, use the shoring word that

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<v Speaker 1>you want to use, but they're moving production to other

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<v Speaker 1>parts of the world. What are the themes that you're seeing. Well, Yet,

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<v Speaker 1>first of all, you just nailed it. I mean going

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<v Speaker 1>back to the to the globalization and labor arbitrage that

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<v Speaker 1>you know, and not just us China, I mean go

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<v Speaker 1>back ten years ago. Um, you know, it's it's been

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<v Speaker 1>about labor arbitrage for for decades now, and Western companies

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<v Speaker 1>have made the decision and to produce in the Far

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<v Speaker 1>East for for a long long time because of all

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<v Speaker 1>the issues that we've seen over the last few years.

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<v Speaker 1>And you're right, you know it started with with trade politics.

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<v Speaker 1>Then I would say it's been you know, across multiple

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<v Speaker 1>administrations now where that that tone and rhetoric really hasn't

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<v Speaker 1>hasn't improved. Uh, then you have COVID, Then you have

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<v Speaker 1>chip Shorges, then you have logistics to spend shock after

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<v Speaker 1>shock after shock. And so what we're seeing now is

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<v Speaker 1>this trend where customers are coming to us and saying,

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<v Speaker 1>we don't want to produce everything we want to be.

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<v Speaker 1>We don't want to be captive to Asia anymore. We

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<v Speaker 1>want to produce in Asia for Asia. But if you can,

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<v Speaker 1>we'd like you to produce in Europe for Europe, in

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<v Speaker 1>North America for North America, because we're worried about our

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<v Speaker 1>supply chain resilience. How tough is it to get employees

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<v Speaker 1>around the world right now? I mean, I just returned

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<v Speaker 1>from a ton of driving here in the Northeast and

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<v Speaker 1>in the Midwest, and everywhere I went, whether it was

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<v Speaker 1>West Virginia, Kentucky, Ohio, Western New York, help wanted signs

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<v Speaker 1>everywhere we hear about the labor shortage here in the US.

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<v Speaker 1>What about for your industry around the world. Yeah, So,

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<v Speaker 1>I mean, here's a funny little anecdote. I was, I

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<v Speaker 1>was driving around I don't know, maybe three weeks ago,

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<v Speaker 1>and I passed a storefront and it was a, uh,

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<v Speaker 1>it was a search firm, and on the door it

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<v Speaker 1>said help want it. They can't find help. So to

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<v Speaker 1>your point, look, unemployment is low, and it's it's not

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<v Speaker 1>just the US, you know, we're we're seeing it all

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<v Speaker 1>over the place. You know, where there's there's labor shortages

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<v Speaker 1>in Malaysia, there's labor shortages in China, there's labor shortages

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<v Speaker 1>all over the place. And so that definitely puts put

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<v Speaker 1>some pressure on the system and then we'll probably have

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<v Speaker 1>some upward pressure on wages here for for a little bit.

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<v Speaker 1>That's exactly where I wanted to go, sort of this

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<v Speaker 1>idea of inflation and to what extent you see inflation

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<v Speaker 1>sticking around. We heard from FED Chair J Powell on Friday,

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<v Speaker 1>and we know that the FED is taking very seriously

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<v Speaker 1>the idea of tackling inflation right now, what is your

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<v Speaker 1>own as CFO reflex, what is your own outlook on inflation?

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<v Speaker 1>What are you planning for? Uh, well, we're planning for

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<v Speaker 1>higher for sure, and you know we do every thing

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<v Speaker 1>we can to insulate the business from that. And you

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<v Speaker 1>know are are probably quickest, most readily usable lever is

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<v Speaker 1>price and passing those inflations, passing the cost inflation on

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<v Speaker 1>our side through to the to the end customer. That's

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<v Speaker 1>not great for for overall inflation. And like, I'm not

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<v Speaker 1>going to make a call on where we're gonna be.

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<v Speaker 1>I do like that the FED is is being more

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<v Speaker 1>aggressive and trying to get this in check, but it

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<v Speaker 1>could be around for a little while. Here's an interesting

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<v Speaker 1>one though, because you mentioned the regional nuances and on

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<v Speaker 1>shoring offshoring, whatever shoring, you know, where do you want

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<v Speaker 1>to choose? Um, there's an offset, you know, so as

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<v Speaker 1>you move stuff from the Far East to eastern Europe,

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<v Speaker 1>or to Mexico or to Brazil or wherever you want

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<v Speaker 1>to go, it's possible that you'll pay a little bit

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<v Speaker 1>more for labor. Although I would say labor arbitrage in

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<v Speaker 1>China versus labor arbor arbitrage today has changed dramatically. Wages

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<v Speaker 1>for Asia production have gone up significantly over the last

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<v Speaker 1>ten twenty thirty years. But if I think about re shoring,

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<v Speaker 1>there's cost offsets that make it advantageous. And I'll give

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<v Speaker 1>you example, just shipping costs. If you look at the

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<v Speaker 1>the logistics cost as a percentage of of a product's

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<v Speaker 1>total cost for company like Flex, it can range anywhere

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<v Speaker 1>from a couple of percentage points to double digits ten twelve.

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<v Speaker 1>And think about it. You know, you look at the

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<v Speaker 1>costs of an overseas container a year ago, two years ago,

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<v Speaker 1>you know it's it's gone up about ten x an

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<v Speaker 1>order of magnitude higher. And so if you can regionalize

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<v Speaker 1>and produce closer to the end customer, you can cut

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<v Speaker 1>some of those logistics costs out, so that's deflative that

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<v Speaker 1>that would be a that would be a nice tie

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<v Speaker 1>that everyone could use. The other thing I'll say about this,

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<v Speaker 1>this regionalization trend, which I think it's sort of interesting,

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<v Speaker 1>is think about just the time on the water as

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<v Speaker 1>stuff moves from Asia, how much America, and how much

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<v Speaker 1>that time has has grown as ports around the world,

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<v Speaker 1>you know, are congested. Paul, we we unfortunately have to

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<v Speaker 1>leave it there, but really appreciate you taking the time

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<v Speaker 1>and joining us on Bloomberg Business Week. Paul Lunstrom is

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<v Speaker 1>chief financial officer of Flex. You'll see him on YouTube,

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<v Speaker 1>joining us via zoom from San Jose, California.