Speaker 1: You're listening to Bloomberg Business Week with Carol Messer and
Speaker 1: Bloomberg Quick Takes Tim Stinovic on Bloomberg Radio. Well, as
Speaker 1: I mentioned, Flex is a company that really does it all.
Speaker 1: They're a global manufacturing company that builds products for companies
Speaker 1: like Facebook or excuse me, Apple, Cisco, Ford and more.
Speaker 1: They do work across industries. They work in housing, they
Speaker 1: work in health, the cloud, digital energy, and more. It's
Speaker 1: publicly held. They've got a market cap of a little
Speaker 1: more than eight billion dollars. They've got more than one
Speaker 1: seventy thousand employees around the world. Needless to say, they've
Speaker 1: got a great idea of what's going on when it
Speaker 1: comes to some of the macro themes that we talk
Speaker 1: about here on Bloomberg Business Week all the time. Very
Speaker 1: pleased this afternoon to be joined by Paul Lunstrom, the
Speaker 1: chief financial officer of Flex. Paul joins us this afternoon
Speaker 1: via zoom from San Jose, California. Paul, how are you.
Speaker 1: I'm very I'm doing very well. How are you, Tim?
Speaker 1: Thanks for having us. Yeah, doing really well as well,
Speaker 1: So thanks so much for joining us. Um As I mentioned,
Speaker 1: you guys touch at all you've got suppliers like qual, Calm,
Speaker 1: an XP, You've got clients like Apple, Cisco, Ford and more.
Speaker 1: I want to start big picture here. Just give us
Speaker 1: an idea of what you're seeing around the world right now,
Speaker 1: and as as our audience tries to make sense of
Speaker 1: what the macroeconomic environment looks like, how is this global economy?
Speaker 1: I would say mixed. I would say mixed, and you
Speaker 1: gave a pretty good intro, so I won't waste a
Speaker 1: whole lot of time sort of reintroducing the company. But
Speaker 1: like you said, we're in We're in a lot of
Speaker 1: different areas, big tech, heavy industry, medical devices and equipment, automotive,
Speaker 1: consumer products, and so I think that's, uh, it's an
Speaker 1: interesting place to be because that's a pretty representative cross
Speaker 1: section of the world economy, being in so many product
Speaker 1: then markets. But we're also operating in thirty countries around
Speaker 1: the globes and now we have that front seat to
Speaker 1: the wide range of products and markets. But we see
Speaker 1: the regional nuances as well, So it's uh, we see
Speaker 1: the local market dynamics, we see the geopolitics. It's a
Speaker 1: it's a pretty interesting place to be. Well, Paul, let's
Speaker 1: let's talk before we talk regional to for instance, let's
Speaker 1: talk industrial stuff. So where are you seeing strength in
Speaker 1: terms of different industries versus weakness? What are some highlights
Speaker 1: right now? Yeah, just to kind of walk you through
Speaker 1: the portfolio, we just had an earnings call a month ago,
Speaker 1: and one of the things that we talked about was
Speaker 1: a little bit of softening in some of the shorter
Speaker 1: cycle consumer product markets. But for us, that is much
Speaker 1: more than offset by you know, we continue to see
Speaker 1: very robust demand in a number of other areas, things
Speaker 1: like networking and connectivity, whether it's you know, cloud or
Speaker 1: five G that continues to be very very strong. Network
Speaker 1: security continues to be very very strong. Um a number
Speaker 1: of the industrial markets, including things like renewable energy. Uh,
Speaker 1: you know that probably seems obvious, but that that continues
Speaker 1: to see robust growth. We're we're quite pleased with what
Speaker 1: we've seen there, even things like automotive, which is, you know,
Speaker 1: you would expect demand to soften if the economy softens
Speaker 1: it up here in the automotive space, but but frankly,
Speaker 1: there's so much backlog and that whole sector is going
Speaker 1: through mus going through so much restocking that you know,
Speaker 1: try and buy a new car today, you're gonna be
Speaker 1: on a waiting list for quite some times. Yeah, it's
Speaker 1: funny that you say that my dad ordered a new
Speaker 1: car a year ago. He just got an email from
Speaker 1: Ford today saying that it's it's actually going to start
Speaker 1: being assembled later in September. So it took a year
Speaker 1: to get to that point later in September exactly. And
Speaker 1: I hear stories now tim of you're on a wait
Speaker 1: list to get on a wait list and then we'll
Speaker 1: tell you when we can deliver. So it's at the
Speaker 1: moment it's crazy. So what is it holding up those products?
Speaker 1: I mean, we talk about chips all the time, but
Speaker 1: but really dig into that for us, like where are
Speaker 1: you seeing the supply chain the bottlenecks right now? Well,
Speaker 1: certainly it's chips. To just give you a sort of
Speaker 1: a short brief answer, semiconductors has been a big bottleneck,
Speaker 1: but so of things like oversea logistics, you know, ports
Speaker 1: stacking up with containership after container ship. Who hasn't seen
Speaker 1: aerial photographs of that? But you know, from my standpoint,
Speaker 1: you look to the root cause. Going into the pandemic,
Speaker 1: the world economy was already doing pretty well, and so
Speaker 1: in a lot of cases producers were just barely keeping
Speaker 1: up with demand. Now you sprinkle in COVID, you see production,
Speaker 1: you know, shut down for four months on end, and
Speaker 1: a lot of different geographies well at the same time
Speaker 1: you have and this isn't just a US thing, this
Speaker 1: is you know, world governments just just pounded stimulus, spending
Speaker 1: pounded it. And so what that did was, I think
Speaker 1: demand did not go down like many thought it would.
Speaker 1: In some cases, demand actually went up. But then when
Speaker 1: you take the you take the away the ability for
Speaker 1: producers to produce, the backlog just went through the roof
Speaker 1: and we've been trying to recover ever since. Paul, when
Speaker 1: we were last speaking before the break, you you mentioned
Speaker 1: some regional differences, and that's really where I want to
Speaker 1: dig into right now, is getting understand from you about
Speaker 1: where we're seeing some economic softness. And I know, look,
Speaker 1: we can talk about what we've seen from Europe over
Speaker 1: the last few months on some softness there and concerns
Speaker 1: about recession there. But where some regions with strength and
Speaker 1: where some regions with weakness. Yeah, I would say I
Speaker 1: see less region to region and more product to product
Speaker 1: and so you know, from from my vantage point, the
Speaker 1: shorter cycle consumer product markets. What is the short cycle
Speaker 1: consumer product I think of it as more commodities electronics,
Speaker 1: you know, cell phones and laptops and that sort of stuff,
Speaker 1: um and and that. Over the last quarter or two
Speaker 1: we we have seen that softened up a little bit.
Speaker 1: It probably will you know, continue that way as as
Speaker 1: you look forward. But I would say that's worldwide. You know,
Speaker 1: that's not unique to one particular region. Where we continue
Speaker 1: to see robust demand is the more infrastructure related technology,
Speaker 1: you know, things like five G and and cloud continues
Speaker 1: to be very very robust. But are there areas of
Speaker 1: the world that are sticking out to you where you're
Speaker 1: seeing weakness? Uh, well, the zero COVID policy in China
Speaker 1: is that's not going to help those local markets. I
Speaker 1: think people want to get back to work and get
Speaker 1: back to get back to normal and so you know,
Speaker 1: we see it more from a supply chain perspective than
Speaker 1: than from a specific end market perspective. But yeah, that
Speaker 1: would be an example where it would be nice to
Speaker 1: get back to a little bit of normalcy. Can you
Speaker 1: talk a little bit about how you've navigated China zero
Speaker 1: COVID policy, Paul Uh. So for a company like Flex,
Speaker 1: so we're we're a large contract manufacturing company, and I
Speaker 1: think in this particular space, scale really does matter. You know,
Speaker 1: we have a very wide geographic reach, and so we
Speaker 1: also have a very large supplier network, and so as
Speaker 1: things have been you know, coming on an offline in
Speaker 1: China over the last couple of years, frankly, um, it's
Speaker 1: been a little easier for us to pivot, you know.
Speaker 1: I think we can produce like for like, you know,
Speaker 1: from one region to the next without a whole lot
Speaker 1: of notice, and because we have a large supply chain network,
Speaker 1: it helps. So I think scale has been a big
Speaker 1: help for for a company like ours. I'm wondering about
Speaker 1: globalization and where we are in Before we went into
Speaker 1: the pandemic, we saw a move, uh at least from
Speaker 1: the United States of trying to isolate China to a
Speaker 1: certain extent under the Trump administration's tariffs and policies. And
Speaker 1: during the pandemic we saw just how fragile so many
Speaker 1: of the global supply chains were. So now we're hearing
Speaker 1: from companies where they're on shoring or or re shoring
Speaker 1: or near shoring. You know, use the shoring word that
Speaker 1: you want to use, but they're moving production to other
Speaker 1: parts of the world. What are the themes that you're seeing. Well, Yet,
Speaker 1: first of all, you just nailed it. I mean going
Speaker 1: back to the to the globalization and labor arbitrage that
Speaker 1: you know, and not just us China, I mean go
Speaker 1: back ten years ago. Um, you know, it's it's been
Speaker 1: about labor arbitrage for for decades now, and Western companies
Speaker 1: have made the decision and to produce in the Far
Speaker 1: East for for a long long time because of all
Speaker 1: the issues that we've seen over the last few years.
Speaker 1: And you're right, you know it started with with trade politics.
Speaker 1: Then I would say it's been you know, across multiple
Speaker 1: administrations now where that that tone and rhetoric really hasn't
Speaker 1: hasn't improved. Uh, then you have COVID, Then you have
Speaker 1: chip Shorges, then you have logistics to spend shock after
Speaker 1: shock after shock. And so what we're seeing now is
Speaker 1: this trend where customers are coming to us and saying,
Speaker 1: we don't want to produce everything we want to be.
Speaker 1: We don't want to be captive to Asia anymore. We
Speaker 1: want to produce in Asia for Asia. But if you can,
Speaker 1: we'd like you to produce in Europe for Europe, in
Speaker 1: North America for North America, because we're worried about our
Speaker 1: supply chain resilience. How tough is it to get employees
Speaker 1: around the world right now? I mean, I just returned
Speaker 1: from a ton of driving here in the Northeast and
Speaker 1: in the Midwest, and everywhere I went, whether it was
Speaker 1: West Virginia, Kentucky, Ohio, Western New York, help wanted signs
Speaker 1: everywhere we hear about the labor shortage here in the US.
Speaker 1: What about for your industry around the world. Yeah, So,
Speaker 1: I mean, here's a funny little anecdote. I was, I
Speaker 1: was driving around I don't know, maybe three weeks ago,
Speaker 1: and I passed a storefront and it was a, uh,
Speaker 1: it was a search firm, and on the door it
Speaker 1: said help want it. They can't find help. So to
Speaker 1: your point, look, unemployment is low, and it's it's not
Speaker 1: just the US, you know, we're we're seeing it all
Speaker 1: over the place. You know, where there's there's labor shortages
Speaker 1: in Malaysia, there's labor shortages in China, there's labor shortages
Speaker 1: all over the place. And so that definitely puts put
Speaker 1: some pressure on the system and then we'll probably have
Speaker 1: some upward pressure on wages here for for a little bit.
Speaker 1: That's exactly where I wanted to go, sort of this
Speaker 1: idea of inflation and to what extent you see inflation
Speaker 1: sticking around. We heard from FED Chair J Powell on Friday,
Speaker 1: and we know that the FED is taking very seriously
Speaker 1: the idea of tackling inflation right now, what is your
Speaker 1: own as CFO reflex, what is your own outlook on inflation?
Speaker 1: What are you planning for? Uh, well, we're planning for
Speaker 1: higher for sure, and you know we do every thing
Speaker 1: we can to insulate the business from that. And you
Speaker 1: know are are probably quickest, most readily usable lever is
Speaker 1: price and passing those inflations, passing the cost inflation on
Speaker 1: our side through to the to the end customer. That's
Speaker 1: not great for for overall inflation. And like, I'm not
Speaker 1: going to make a call on where we're gonna be.
Speaker 1: I do like that the FED is is being more
Speaker 1: aggressive and trying to get this in check, but it
Speaker 1: could be around for a little while. Here's an interesting
Speaker 1: one though, because you mentioned the regional nuances and on
Speaker 1: shoring offshoring, whatever shoring, you know, where do you want
Speaker 1: to choose? Um, there's an offset, you know, so as
Speaker 1: you move stuff from the Far East to eastern Europe,
Speaker 1: or to Mexico or to Brazil or wherever you want
Speaker 1: to go, it's possible that you'll pay a little bit
Speaker 1: more for labor. Although I would say labor arbitrage in
Speaker 1: China versus labor arbor arbitrage today has changed dramatically. Wages
Speaker 1: for Asia production have gone up significantly over the last
Speaker 1: ten twenty thirty years. But if I think about re shoring,
Speaker 1: there's cost offsets that make it advantageous. And I'll give
Speaker 1: you example, just shipping costs. If you look at the
Speaker 1: the logistics cost as a percentage of of a product's
Speaker 1: total cost for company like Flex, it can range anywhere
Speaker 1: from a couple of percentage points to double digits ten twelve.
Speaker 1: And think about it. You know, you look at the
Speaker 1: costs of an overseas container a year ago, two years ago,
Speaker 1: you know it's it's gone up about ten x an
Speaker 1: order of magnitude higher. And so if you can regionalize
Speaker 1: and produce closer to the end customer, you can cut
Speaker 1: some of those logistics costs out, so that's deflative that
Speaker 1: that would be a that would be a nice tie
Speaker 1: that everyone could use. The other thing I'll say about this,
Speaker 1: this regionalization trend, which I think it's sort of interesting,
Speaker 1: is think about just the time on the water as
Speaker 1: stuff moves from Asia, how much America, and how much
Speaker 1: that time has has grown as ports around the world,
Speaker 1: you know, are congested. Paul, we we unfortunately have to
Speaker 1: leave it there, but really appreciate you taking the time
Speaker 1: and joining us on Bloomberg Business Week. Paul Lunstrom is
Speaker 1: chief financial officer of Flex. You'll see him on YouTube,
Speaker 1: joining us via zoom from San Jose, California.