CEO Conversations Installment XVI: Jay Shane, Founder and Chairman, Shane Global Holding (8482 TT)
It has been 6 months since our first interview with Shane Global chairman, Jay Shane. Jay is now back in Hangzhou China, ensuring that the factory is able to manage the surge in orders that resulted as US home furnishing demand came back quick and strong in 2H20. So far, he and his team have been managing well – Shane Global’s revenue grew 13% YoY in 2H20, and Jay expects the robust sales momentum to carry over through the end of 1H21.
We’d like to point out that these revenue achievements are particularly impressive because the company is still combating the ongoing 25% tariff hike levied by the US since 2019, the impact of the weak US$, raw material price hikes and the shipping container shortage, while also facing the difficulties of managing its workforce in this pandemic era.
As we call via Zoom, Jay is just finishing up managing Just-In-Time factory work. “The pandemic seems to have slowed down the pace of the world, however, to Shane Global, it has been a year in which we’ve been operating at a full sprint" Jay says with an easy smile.
Growing Business with Existing Clients While Gaining New Ones
Besides managing everyday operations, Jay and his team have also been busy working on new design proposals and sample deliveries for potential clients in Europe, Japan, China, Russia and the Middle East. Jay is confident that all this hard work will bear fruit, saying, “Some of these new clients from the UK, Japan and China have already placed their first purchase orders and Shane Global will start shipping to them as soon as 1Q21.”
Jay explains, “Overall, I believe our growth will be coming from three areas.
First, let me tell you about our organic growth. We expect to continue growing business with our existing clients in the US. Orders from RH and Williams Sonoma should continue to grow, and we will benefit from that. In the near term, given that orders have been quite strong, we believe the overall growth momentum is likely to continue through the end of 1H21. We will strive to achieve double digit revenue growth in 2021, as our major client’s 2021 revenue target is around 10-15% as mentioned in their earnings call. 2022 growth should be even more pronounced than 2021 as our Cambodia facility ramps up.
Second, we are getting increased wallet share from our existing clients as we increase our services, such as our new design service. It is very exciting to see this part of our business gaining traction with clients, because our proprietary designs can only be manufactured by us, Shane Global. And we are now building the new Cambodia facility to capture the “source-outside-of-China demand.
Third, we are adding new clients. We have refocused our sales efforts in China to target branded clients, rather than building our own brand. Using our unique and proven business model with our US clients, we provide the same high-quality products and services – customization and door-to-door service – to Chinese domestic brands, and the results have been encouraging. These Chinese brand clients really appreciate our services, including direct shipment to consumers. Our China domestic business has been gaining traction, as it grew more than 300% in 2020, and we expect continued high growth in the coming years, albeit from a small base. We have also made big strides in obtaining new customers from the UK and Japan, which should also start contributing to our sales in 2021.”
An Example of Shane Global’s Options for Customized Furniture
(Source: RH.com)
Building a Cambodia Compound to Capture the “Source-Outside-of-China Demand”
In November 2020, Shane Global announced that its subsidiary Shane (Cambodia) Furniture Co., will be investing US$50mn to build a vertically-integrated manufacturing facility in Cambodia. When asked about this investment, Jay explains excitedly “Given that we have seen strong orders and long order visibility since the start of 2H20, our current capacity is nearing its max level. We believe it is necessary to increase our production capacity. The new Cambodia site can also help us capture the source-outside-of-China demand. It doesn’t look like the US/China tariff hike is going away anytime soon, and we are seeing more and more demand from our clients to source- outside-of-China. So, it is imperative that we capture that part of the demand, because if we don’t take it, others eventually will.”
Jay adds, “Our plan is to produce the mirror image of our China facility and to have it ready by the second half of 2021. The factory site is 200,000 square meters in size, roughly the same as our Hangzhou, China compound. We will expand line by line, and eventually the capacity of our Cambodia facility will match that of our Hangzhou plant. Furthermore, our vertical integration will also match that of Hangzhou. We are arranging for our sponge and leather tannery suppliers and other key supply chain partners to join us in Cambodia. Our goal is to provide the same 6-7 week custom order and delivery service from our Cambodia site that we provide from our China facility.”
Shane Global Plans to Duplicate its Unique Custom MFG & Export Model in Cambodia
Jay Looks to Reap the Benefits of Blazing His Own Trail in Cambodia
We highlight that Jay’s Cambodia investment comes at a time when many of Shane Global’s peers are investing in new factories or expanding existing ones in Vietnam, where labor shortages, labor strikes and rising land prices are already an issue. So, we ask Jay why he has chosen to go against the grain and build his new compound in Cambodia.
Jay says, “After a long due diligence and assessment process, we believe that Bavet, Cambodia, which is only 6km away from Cambodia’s Manhattan Special Economic Zone, is the best place to invest in our second manufacturing compound. Cambodia is a country with a young and growing population. According to United Nations statistics, Cambodia’s population CAGR was 1.7% between 2010 to 2020, while Vietnam’s was 1%. As a result, 63% of the population is between the ages 15 and 60, and it is roughly equally split between male and female. We also believe that worker efficiency will be high. Worker efficiency should be around 70% that of Chinese workers after 6 months of training, and 90% after a year, according to our market research. This is in addition to land prices that are about 85% cheaper than comparable sites in Vietnam, with the added benefit of cheaper labor costs. The monthly pay for factory labor is US$230 in Cambodia, versus US$600 in Vietnam and US$800 in China. And the location is just 2 hours away from the nearest port! We feel that the overall labor quality and cost structure are far superior to that of Vietnam. The only thing lacking is the supply chain cluster, but that’s something we are building ourselves anyway, as mentioned before.”
Looking Forward to Continued Demand Growth in 2021 and in the Long Term
When we ask Jay to provide an outlook for near and long-term growth, he says, “While we see a strong 1H21, it is hard to say whether the current US home improvement boom will continue post-vaccination. However, given the client relationships that Shane Global has built up over the course of 45 years of doing business in the US, many of our clients have either verbally committed to place orders or have expressed strong interest in booking some of our production lines in Cambodia, as they can avoid the 25% tariff and diversify away from China and Vietnam. Therefore, even if demand normalizes post-covid, our growth should be sustained by new orders placed with the Cambodia factory.”
Lastly, Jay adds, “We have a unique business model that is very profitable and scalable. We are very proud of our achievements to date in the US, and we still have a lot of room to grow both within the US market and in the rest of the world. We will continue to expand our revenue, with an eye to sustaining robust profit margins and to increasing the return we provide to our shareholders. We remain committed to returning our earnings back to shareholders, as our cash dividend payout has averaged over 80% in the past 5 years.“
If you would like to arrange a meeting with Jay Shane, please contact yvonnehuang@qtumic.com