By the fall, the speaker manufacturer wants to source all of its products for the United States from Southeast Asia.
Sonos Inc. is collaborating with suppliers to expand manufacturing capacity in Malaysia in order to lower its tariff costs, but the company’s efforts have been hampered by coronavirus restrictions and a semiconductor shortage.
Sonos, based in Santa Barbara, Calif., sells voice-activated, internet-connected speakers and other audio electronics. By the fall, Chief Financial Officer Brittany Bagley said, the company plans to source all of its US-bound products from Malaysia. The United States is the company’s primary market, accounting for more than half of revenue.
“It’s taken longer than we anticipated, but we’re still on track with our Malaysia strategy,” said Ms. Bagley, who joined the company as chief financial officer in 2019.
In an effort to diversify its supply chain, Sonos began relocating orders from Chinese suppliers to Malaysia that year. Its tariff costs have since decreased, but the company wants to reduce them further as long as tariffs between the US and China remain in place. Sonos declined to provide a percentage of its products manufactured in China that are currently sold in the United States.
The company stated that it would continue to source products from China for sale in Europe, the Middle East, Africa, and the Asia-Pacific region, which accounted for approximately 42% of revenue in the quarter ended April 3. No plants are owned or operated by Sonos.
Its plans to expand orders from Malaysia have run into roadblocks. Manufacturing plants in the country were forced to temporarily close due to pandemic-related restrictions, and Sonos encountered hiring difficulties. The company declined to disclose the number of suppliers or the cost of increasing orders from manufacturing partners in Malaysia.
Adding to the difficulty is the company’s strong demand for its products and a global shortage of semiconductors, which makes inventory management difficult for the company and many others. Semiconductors are used in software for speech recognition in wireless speakers and other electronic devices. Sones declined to comment on its semiconductor sourcing practices.
The company reported earlier this month that revenue increased 90.2 percent year over year to $332.9 million in the quarter ended April 3. Net income of $17.2 million increased from a net loss of $52.3 million the previous year.
Most recent quarter
Reduced tariff costs, which are included in the cost of revenue, aided Sonos in offsetting increased costs associated with shipping, logistics, and semiconductors. Sonos reported that its cost of revenue increased 63.8 percent to $167.2 million in the most recent quarter.
Additionally, the company recorded $1.7 million in tariff refunds from the United States for tariffs paid in prior periods as a result of the government’s temporary exemption last year. It anticipates receiving $27.5 million in refunds related to the exemption at some point in the future.
“What we pay in tariffs has decreased significantly,” Ms. Bagley said, referring to the move to Malaysia and a reduction in the tariff rate on Chinese imports last year. The tariff rate was reduced from 15% to 7.5 percent in February 2020 as part of a trade agreement between the United States and China. Ms. Bagley declined to disclose the amount of tariffs paid by Sonos.
The Biden administration has taken a tough stance toward China, reiterating the Trump administration’s trade tariffs and other hard-line policies. Ms. Bagley stated that she is closely monitoring any changes to the administration’s trade policies in order to determine how to handle potential increases in tariffs.
The company’s supplier network should be expanded to ensure adequate inventory, according to Brent Thill, a senior analyst covering technology companies at financial services firm Jefferies Group LLC.
“The only way they can combat this is to strengthen their supply chain control,” he explained.