Managing Manufacturing in a Higher Cost Environment

more than eight billion dollars. They've got more than one seventy thousand employees around the world. Needless to say, they've got a great idea of what's going on when it comes to some of the macro themes that we talk about here on Bloomberg Business Week all the time. Very pleased this afternoon to be joined by Paul Lunstrom, the chief financial officer of Flex. Paul joins us this afternoon via zoom from San Jose, California. Paul, how are you. I'm very I'm doing very well. How are you, Tim?

Thanks for having us. Yeah, doing really well as well, So thanks so much for joining us. Um As I mentioned, you guys touch at all you've got suppliers like qual, Calm, an XP, You've got clients like Apple, Cisco, Ford and more. I want to start big picture here. Just give us an idea of what you're seeing around the world right now, and as as our audience tries to make sense of what the macroeconomic environment looks like, how is this global economy?

I would say mixed. I would say mixed, and you gave a pretty good intro, so I won't waste a whole lot of time sort of reintroducing the company. But like you said, we're in We're in a lot of different areas, big tech, heavy industry, medical devices and equipment, automotive, consumer products, and so I think that's, uh, it's an interesting place to be because that's a pretty representative cross section of the world economy, being in so many product

then markets. But we're also operating in thirty countries around the globes and now we have that front seat to the wide range of products and markets. But we see the regional nuances as well, So it's uh, we see the local market dynamics, we see the geopolitics. It's a it's a pretty interesting place to be. Well, Paul, let's let's talk before we talk regional to for instance, let's talk industrial stuff. So where are you seeing strength in

terms of different industries versus weakness? What are some highlights right now? Yeah, just to kind of walk you through the portfolio, we just had an earnings call a month ago, and one of the things that we talked about was a little bit of softening in some of the shorter cycle consumer product markets. But for us, that is much more than offset by you know, we continue to see very robust demand in a number of other areas, things like networking and connectivity, whether it's you know, cloud or

five G that continues to be very very strong. Network security continues to be very very strong. Um a number of the industrial markets, including things like renewable energy. Uh, you know that probably seems obvious, but that that continues

to see robust growth. We're we're quite pleased with what we've seen there, even things like automotive, which is, you know, you would expect demand to soften if the economy softens it up here in the automotive space, but but frankly, there's so much backlog and that whole sector is going through mus going through so much restocking that you know, try and buy a new car today, you're gonna be on a waiting list for quite some times. Yeah, it's funny that you say that my dad ordered a new

car a year ago. He just got an email from Ford today saying that it's it's actually going to start being assembled later in September. So it took a year to get to that point later in September exactly. And I hear stories now tim of you're on a wait list to get on a wait list and then we'll tell you when we can deliver. So it's at the moment it's crazy. So what is it holding up those products? I mean, we talk about chips all the time, but but really dig into that for us, like where are

you seeing the supply chain the bottlenecks right now? Well, certainly it's chips. To just give you a sort of a short brief answer, semiconductors has been a big bottleneck, but so of things like oversea logistics, you know, ports stacking up with containership after container ship. Who hasn't seen aerial photographs of that? But you know, from my standpoint,

you look to the root cause. Going into the pandemic, the world economy was already doing pretty well, and so in a lot of cases producers were just barely keeping up with demand. Now you sprinkle in COVID, you see production, you know, shut down for four months on end, and a lot of different geographies well at the same time you have and this isn't just a US thing, this is you know, world governments just just pounded stimulus, spending

pounded it. And so what that did was, I think demand did not go down like many thought it would. In some cases, demand actually went up. But then when you take the you take the away the ability for producers to produce, the backlog just went through the roof and we've been trying to recover ever since. Paul, when we were last speaking before the break, you you mentioned some regional differences, and that's really where I want to dig into right now, is getting understand from you about

where we're seeing some economic softness. And I know, look, we can talk about what we've seen from Europe over the last few months on some softness there and concerns about recession there. But where some regions with strength and where some regions with weakness. Yeah, I would say I see less region to region and more product to product and so you know, from from my vantage point, the

shorter cycle consumer product markets. What is the short cycle consumer product I think of it as more commodities electronics, you know, cell phones and laptops and that sort of stuff, um and and that. Over the last quarter or two we we have seen that softened up a little bit. It probably will you know, continue that way as as you look forward. But I would say that's worldwide. You know,

that's not unique to one particular region. Where we continue to see robust demand is the more infrastructure related technology, you know, things like five G and and cloud continues to be very very robust. But are there areas of the world that are sticking out to you where you're seeing weakness? Uh, well, the zero COVID policy in China

is that's not going to help those local markets. I think people want to get back to work and get back to get back to normal and so you know, we see it more from a supply chain perspective than than from a specific end market perspective. But yeah, that would be an example where it would be nice to get back to a little bit of normalcy. Can you talk a little bit about how you've navigated China zero

COVID policy, Paul Uh. So for a company like Flex, so we're we're a large contract manufacturing company, and I think in this particular space, scale really does matter. You know, we have a very wide geographic reach, and so we also have a very large supplier network, and so as things have been you know, coming on an offline in China over the last couple of years, frankly, um, it's been a little easier for us to pivot, you know.

I think we can produce like for like, you know, from one region to the next without a whole lot of notice, and because we have a large supply chain network, it helps. So I think scale has been a big help for for a company like ours. I'm wondering about globalization and where we are in Before we went into the pandemic, we saw a move, uh at least from the United States of trying to isolate China to a

certain extent under the Trump administration's tariffs and policies. And during the pandemic we saw just how fragile so many of the global supply chains were. So now we're hearing from companies where they're on shoring or or re shoring or near shoring. You know, use the shoring word that you want to use, but they're moving production to other parts of the world. What are the themes that you're seeing. Well, Yet,

first of all, you just nailed it. I mean going back to the to the globalization and labor arbitrage that you know, and not just us China, I mean go back ten years ago. Um, you know, it's it's been about labor arbitrage for for decades now, and Western companies have made the decision and to produce in the Far East for for a long long time because of all the issues that we've seen over the last few years. And you're right, you know it started with with trade politics.

Then I would say it's been you know, across multiple administrations now where that that tone and rhetoric really hasn't hasn't improved. Uh, then you have COVID, Then you have chip Shorges, then you have logistics to spend shock after shock after shock. And so what we're seeing now is this trend where customers are coming to us and saying, we don't want to produce everything we want to be. We don't want to be captive to Asia anymore. We

want to produce in Asia for Asia. But if you can, we'd like you to produce in Europe for Europe, in North America for North America, because we're worried about our supply chain resilience. How tough is it to get employees

around the world right now? I mean, I just returned from a ton of driving here in the Northeast and in the Midwest, and everywhere I went, whether it was West Virginia, Kentucky, Ohio, Western New York, help wanted signs everywhere we hear about the labor shortage here in the US. What about for your industry around the world. Yeah, So,

I mean, here's a funny little anecdote. I was, I was driving around I don't know, maybe three weeks ago, and I passed a storefront and it was a, uh, it was a search firm, and on the door it said help want it. They can't find help. So to your point, look, unemployment is low, and it's it's not just the US, you know, we're we're seeing it all over the place. You know, where there's there's labor shortages in Malaysia, there's labor shortages in China, there's labor shortages

all over the place. And so that definitely puts put some pressure on the system and then we'll probably have some upward pressure on wages here for for a little bit. That's exactly where I wanted to go, sort of this idea of inflation and to what extent you see inflation sticking around. We heard from FED Chair J Powell on Friday, and we know that the FED is taking very seriously the idea of tackling inflation right now, what is your own as CFO reflex, what is your own outlook on inflation?

What are you planning for? Uh, well, we're planning for higher for sure, and you know we do every thing we can to insulate the business from that. And you know are are probably quickest, most readily usable lever is price and passing those inflations, passing the cost inflation on our side through to the to the end customer. That's not great for for overall inflation. And like, I'm not going to make a call on where we're gonna be.

I do like that the FED is is being more aggressive and trying to get this in check, but it could be around for a little while. Here's an interesting one though, because you mentioned the regional nuances and on shoring offshoring, whatever shoring, you know, where do you want to choose? Um, there's an offset, you know, so as you move stuff from the Far East to eastern Europe, or to Mexico or to Brazil or wherever you want to go, it's possible that you'll pay a little bit

more for labor. Although I would say labor arbitrage in China versus labor arbor arbitrage today has changed dramatically. Wages for Asia production have gone up significantly over the last ten twenty thirty years. But if I think about re shoring, there's cost offsets that make it advantageous. And I'll give

you example, just shipping costs. If you look at the the logistics cost as a percentage of of a product's total cost for company like Flex, it can range anywhere from a couple of percentage points to double digits ten twelve. And think about it. You know, you look at the costs of an overseas container a year ago, two years ago, you know it's it's gone up about ten x an

order of magnitude higher. And so if you can regionalize and produce closer to the end customer, you can cut some of those logistics costs out, so that's deflative that that would be a that would be a nice tie that everyone could use. The other thing I'll say about this, this regionalization trend, which I think it's sort of interesting, is think about just the time on the water as stuff moves from Asia, how much America, and how much that time has has grown as ports around the world,

you know, are congested. Paul, we we unfortunately have to leave it there, but really appreciate you taking the time and joining us on Bloomberg Business Week. Paul Lunstrom is chief financial officer of Flex. You'll see him on YouTube, joining us via zoom from San Jose, California.