VS Industry, Dyson, and Bissell: A Supplier Shift Worth Watching

Previously, I wrote an article about the cooperation agreement reached between VS and Bissell. At that time, I had many doubts because VS is Dyson's main supplier of vacuum cleaners, and Dyson has exclusive agreements with its primary suppliers. Therefore, there must have been some issues between VS and Dyson for them to potentially collaborate with Bissell.

Later, I gained some additional information from friends, which confirmed that there were indeed some conflicts between VS and Bissell.

Today, I came across an article published by a director of the VS company. Here is the full translation for your reference:

[Translation of the VS company director's article follows]

For homegrown electronics manufacturing services (EMS) provider VS Industry Bhd, newly secured job orders from US-based Bissell International Trading Co BV could not have come at a better time.

Recall that the stock, which has been on a downward trend since January last year, got hammered to a three-year low of 64 sen in December. The management had then issued a profit warning, telling investors that earnings for the second half of its financial year ending July 31, 2019 (2HFY2019), were going to weaken as the group anticipated that order flow from a key customer might decline.

Compounding this was speculation that the group may have lost some job orders from the European multinational corporation (MNC), best known for its home care products. Some even went as far as to say that VS Industry may have lost the global brand as a client.

Its share price declined 69% last year before staging a rebound, rising 42% year-to-date to close at RM1.04 last Thursday.

On March 1, VS Industry announced that it had signed a three-year master supply agreement with Bissell — a leading home appliance company in the US — to manufacture its home care products on a box-build assembly basis. Although no contract volume or amount was specified, managing director Datuk Gan Sem Yam expects Bissell to become the group’s second largest customer, contributing about 15% to 20% to its turnover in the coming years.

"Bissell is our first new key customer in recent years," he tells The Edge in an interview. "The new contract is expected to drive our future earnings performance, but we may not see a significant contribution yet in FY2020."

Currently, the group's top three clients are the European client Keurig Green Mountain Inc. (a US-based hot beverage system company) and Zodiac Pool Systems Inc. (a global manufacturer of pool and spa equipment).

Based in Michigan, Bissell is a family-owned home care solutions company founded in 1876. Known for supplying households and businesses globally with vacuum cleaners, carpet-cleaning machines, cleaning formulas, and pet-grooming products.

Bissell currently has three contract manufacturers — two in China and one in Mexico. VS Industry will be its first in Southeast Asia.

According to Gan, US-China trade tensions have opened up opportunities for VS Industry as Bissell, for example, had to move out some of its production lines from Shanghai.

"I met CEO Mark Bissell (the fourth generation of the founding family) at its US headquarters and his key management members in Hong Kong to discuss how VS Industry could absorb its orders in Shanghai. Subsequently, they came to Johor to visit our plant. Within less than six months, we managed to secure the contract," he says.

Gan firmly believes that the US-China trade dispute will bring many business opportunities to Malaysian manufacturers and hence, the prospects for VS Industry in the next three years should remain bright.

"What I can say is that Bissell will not be our only new client this year. We are confident of securing at least another two contracts by the end of this year," he says.

Johor-based VS Industry is the fourth largest EMS provider in ASEAN and among the top 50 in the world, with in-house printed circuit board (PCB) and battery-pack assembly capabilities.

In the EMS industry, securing a new contract every three years is considered excellent. However, VS Industry will be signing three new contracts this year alone—a remarkable achievement, says Gan, who joined VS Industry in 1982.

Besides Bissell International Trading Co BV, many other MNCs are looking to relocate their production lines from China, he adds. Nevertheless, VS Industry will remain selective due to its limited production capacity.

For VS Industry Bhd, a significant milestone has been reached with the formal confirmation of work orders from American company Bissell International Trading Co BV.

VS Industry's stock, which had been in decline since January last year, hit a three-year low at 64 sen in December, marking its lowest point. The management subsequently issued a profit warning to investors, informing them that profits for the fiscal year ending July 31, 2019 (the second half of the 2019 financial year), would weaken due to anticipated declines in order flow from key customers.

The situation is further complicated by the possibility that VS Industry may have lost orders from some European MNCs known for their home care products. Some even speculate that VS Industry might have lost a global brand client.

Its share price fell 69% last year before rebounding, gaining 42% to reach RM1.04 on the previous Thursday.

On March 1, VS Industry announced a three-year supply agreement with American household appliances giant Bissell for the production of packaged home care products. While specific contract quantities and amounts were not disclosed, Datuk Gan Sem Yam, the managing director, expects Bissell to become the group's second-largest customer, contributing approximately 15% to 20% of its turnover in the coming years.

Bissell is a family-owned company founded in 1876, known for providing home care solutions such as vacuum cleaners, carpet washers, cleaning formulas, and pet grooming products. Bissell currently has three contract manufacturers—two in China and one in Mexico—with VS Industry becoming its first in Southeast Asia.

According to Gan, the trade tensions between the US and China have presented opportunities for VS Industry, such as Bissell moving some of its production out of Shanghai. "We met with CEO Mark Bissell at his headquarters in Michigan and his main management team in Hong Kong to discuss how VS Industry could absorb orders from Shanghai. They then visited our factory in Johor. In less than six months, we managed to secure the contract," he said.

Gan is confident that the US-China trade dispute will bring many business opportunities for Malaysian manufacturers. Therefore, the outlook for VS Industry over the next three years should remain bright. "What I can say is that Bissell won't be our only new client this year. We are confident of securing at least two more contracts by the end of the year," he added.

Other Industry Giants?

Will it be other industry giants like Shark or TTI?

Headquartered in Johor, VS Industry is the fourth-largest EMS supplier in ASEAN and one of the top 50 globally. The company boasts internal PCB and battery assembly capabilities and manufactures products such as vacuum cleaners, coffee machines, robotic pool cleaners, air purifiers, and automatic paper distributors for clients.

"In the EMS industry, if you can secure a new contract every three years, that's considered excellent performance. But we will be securing three new contracts this year. That's extraordinary," Gan said, who joined VS Industry in 1982.

He noted that besides Bissell, many other multinational corporations are looking to relocate their production lines back from China.

However, VS Industry remains selective due to its limited capacity.

Allaying Investor Concerns

Gan dismisses talk of losing a European MNC as "simply ridiculous."

"According to these people, we suddenly lost all our clients. Honestly, we were not at all worried; although we were quite shocked when we heard the rumors. We know our business model is sustainable and that we still have the client," he stressed.

He acknowledged that in late November, a European client had revealed plans to shift a production line to a Taiwanese firm operating in the Philippines and another to a local competitor of VS Industry.

However, the European client subsequently awarded VS Industry its first-ever and only new production line to manufacture its latest groundbreaking product, which is currently sold out in the market.

Gan emphasized that it's normal practice for clients to take away an old product from one manufacturer and replace it with a new one.

"All this happened when we were releasing our financial results mid-December. Naturally, investors were concerned about the gap between the commencement of new jobs and completion of earlier ones. But to us, it is all about timing. If old things don't go, new things will never come," he said.

He pointed out that VS Industry was awarded "vertically integrated" status by its European customer in 2016.

"Logically, whenever the European client launches a new product, it will come to us first."

Addressing Investor Concerns

Gan believes that the rumors suggesting VS has lost its European multinational corporation (MNC) client are "absolutely absurd."

"According to these people, we suddenly lost them. Frankly speaking, we are not at all worried; although we were shocked when we first heard the rumors. We know our business model is sustainable and we still have clients," he emphasized.

He acknowledges that in late November last year, the European client announced plans to transfer one production line to a Taiwanese company operating in the Philippines, while another was directed towards VS Industry's local competitor.

However, the European client subsequently provided VS Industry with a new production line – the world’s first and so far only one – for its latest breakthrough product, which is currently sold out globally. (Denny: It should be Dyson's new AirWrap series.)

Gan stresses that it is customary in the industry for clients to take old products from manufacturers and replace them with new ones.

"All of this happened when we released our financial performance in mid-December. Of course, investors are concerned about the gap between the start of new work and the completion of early work. But for us, it all depends on timing. If the old things do not go away, the new will never come," he said.

He points out that VS Industry was granted a "vertical integration" status by its European client in 2016.

"Logically speaking, every time the European client launches a new product, they always come to us first."

Gan admits that in the past, VS Industry had heavily relied on the European client. But today, the group has diversified its customer base. At the same time, the European client is making some changes to its business strategy.

"Certain people misunderstood. It is perfectly normal for MNCs to shift their production lines when they think the time is right," Gan explains.

"But we view it positively. Think about it... orders for old models will always decline whereas orders for new models will always increase. From our perspective, we don’t want old products to occupy too much capacity in our plant. We would rather be an EMS provider that can make new products so that we can grow together with our client."

Despite this, he warns that VS Industry may see a slight decline in earnings for FY2019 due to the six-month order gap from the European client between February and July this year.

"But we expect a double-digit recovery in both top line and bottom line come FY2020," he states.

However, he warned that the VS industry may see a slight decline in earnings for the 2023 fiscal year due to a six-month order gap from European customers between February and July this year.

"But we expect double-digit recoveries in both revenue and profits for the 2024 fiscal year," he stated.