Fitbit’s China Exit – Harbinger of a Volley or a Lone Outlier?

Oct 10, 2019
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Fitbit (NYSE:FIT), the company that produces wearable devices for fitness enthusiasts, has announced that it will move almost all of its manufacturing activity out of China by the start of next year though it did not specify the new production location.

“In 2018, in response to the ongoing threat of tariffs, we began exploring potential alternatives to China. As a result of these explorations, we have made changes to our supply chain and manufacturing operations and have additional changes underway. Based on these changes, we expect that effectively all trackers and smartwatches starting in January 2020 will not be of Chinese origin,” the company’s CFO Ron Kisling said in a statement.

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Is this the start of a mass exodus from China?

Fitbit is certainly one of the first major western tech companies to publicly announce a relocation of manufacturing activities away from China, long considered an essential production and supply chain fulcrum by the Silicon Valley due to the country’s skilled low-wage workers, robust technology infrastructure, and a thriving consumer market. However, the imposition of tit-for-tat tariffs as part of the escalating U.S. – China trade war (read our previous coverage here) has undoubtedly changed the overall calculus. Moreover, the situation has only gone from bad to worse as the U.S. appears all set to impose tariffs on the import of consumer goods from China come December. This category of goods was not previously targeted by the Trump administration and so the tech sector remained largely immune to the growing animosity between the two largest economies in the world. However, now that the application of import taxes on these goods appears imminent, the U.S.-based tech companies have only two options: either pass on the increased costs to American consumers or relocate manufacturing away from China.

This does not, however, mean that the U.S. offshore manufacturing is returning to the home ground. Companies opting for an exodus from China are much more likely to move production to other countries in Southeast Asia – including Thailand, Vietnam, and Malaysia – in order to take advantage of the lower cost base of these countries and their proximity to legacy supply chains in China. Ironically, such an eventuality will nullify the entire rationale of the Trump administration in using tariffs to push manufacturing out of China in order to pull it back into the U.S. Moreover, a mass relocation of manufacturing to other parts of Asia, let alone back to the U.S., will undoubtedly come attached with significant financial and temporal costs. Furthermore, none of China’s Asian alternatives possess an equivalent industrial capacity. After all, it took 50 years to achieve China’s seamless integration with western supply chains and the dismantling of this integral web will require a much broader timeline than the one currently being envisaged by the White House.

Fitbit’s ailing financial metrics – a crucial contributing factor

For some time now, the manufacturer of wearables has been struggling against competitors such as Apple (NASDAQ:AAPL) which, in turn, has led to a decline in sales and a contraction of margins. In the second quarter of 2019, the company earned $314 million in revenue but reported an overall net loss of $69 million. Though revenue from its tracker device increased by 51 percent year-over-year and represented 59 percent of the overall revenue, the smartwatch revenue decreased by 27 percent on an annual basis partly due to weaker than expected sales of Fitbit Versa Lite. In order to boost its financial health, Fitbit recently reduced the retail price of some of its products in order to attract new customers. Additionally, the company has started to offer premium digital services such as personalized sleep improvement recommendations. The imposition of tariffs at this crucial stage would have nullified much of Fitbit’s resurgence strategy and, therefore, it is understandable that the company would look to avoid these taxes by relocating its manufacturing activities to a different venue.

At this stage, both the U.S. and China appear to be digging in waiting for the other party to blink first in order to reap maximum benefits at the expense of the other. A swift resolution to this conflict, therefore, appears unlikely. As this mutual one-upmanship continues, expect a growing number of companies currently relying on manufacturing sourced from China to weigh the following options: either abandon ship at a significant financial cost or bear the brunt of tariffs and become uncompetitive.

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