A year ago, at the height of the pandemic, a severe shortage of vital personal protective equipment (PPE) hit America. Hospitals were asking staff to re-use masks and other protective equipment. Health care professionals, political leaders, and ordinary people with family members in hospitals and on ventilators were all in agreement: the U.S. must not be dependent on hard-to-get foreign imports for vital PPE equipment ever again.
How soon we forget. Early this year, with the world emerging from the pandemic, China suddenly cut the price of masks,putting the livelihood of new U.S. mask producers at risk. In the last few weeks 1,500 workers were laid off at a Florida mask-maker, over 400 workers have lost their jobs at a mask-making plant in Rhode Island, and another 200 at a company in Virginia Beach. The two-dozen mask-making companies that sprang up last year are all facing a life-and-death struggle.
According to Brent Dillie, co-founder of Premium PPE in Virginia Beach, the U.S. was up to a total of 8,000 employees at mask-making companies by the end of 2020. If price-cutting competition from China continues, all those jobs might be gone by the end of this year.
In the early 2000s, PPE equipment, like a substantial portion of pharmaceutical manufacturing, began to move offshore. At first, PPE manufacturing went to Mexico. But as China’s manufacturing industry grew, it took a growing share of the global market. China built the capability to manufacture the key components in PPE that gave it a lock on the market. For example, N95 masks rely on “melt-blown fabric” as the filtration mechanism inside the mask. At the start of the pandemic, most of the capacity to make that material was in China. The only way to build the capacity to manufacture N95 masks here was to find machines to make the melt-blown fabric and due to the pandemic, those machines were in short supply, with high prices and months of waiting times for delivery. Several companies did nevertheless find a way to build N95 production lines last year.
Most of the mask-makers in the American Mask Manufacturers Association make surgical masks, which require a minimum of 3-ply fabric to protect health care professionals. The products require federal approval to be sold to hospitals. Dillie and his three partners raised $5 million to launch their business last year, employing over 300 people. Now, Dillie is not sure he’ll be in business next year. “We were starting to gain a foothold, but this is traditionally a Chinese monopoly and all of a sudden they dropped the price by a factor of six to eight,” Dillie said.
According to the Boston Globe, Honeywell laid off 470 workers at an N95 facility in Smithfield, Rhode Island. Another multinational, the little-known Medline, has just agreed to sell itself to a group of three private equity firms: Blackstone, Carlyle, and Hellman & Friedman. Medline had revenue last year of $17.5 billion. The purchase price for the company was almost double that, at $34 billion. Private equity firms typically make their money by loading up on debt to buy a company, then selling off its assets and slashing prices to generate a cash return large enough to pay off the debt and pay the large fees the private equity firms charge the company they’ve bought. Last year, in the midst of the pandemic, Medline opened a production facility in Georgia with the capacity to produce 36 million masks a month.
So far, the purchasers of Medline have said little about how they will justify the high price they paid for Medline. But it would be surprising if the bean counters at the three private equity firms were not right now looking at how much the “new” Medline could save by shutting mask-making in Georgia and moving it to Asia. You can get a good insight into how private equity firms manage manufacturing businesses in this news coverage of Hufcor, a maker of moveable door systems in Janesville, Wisconsin. Private equity firm OpenGate bought the company in 2017 and is now engaged in shutting down the Janesville plant, laying off the 166 workers, and moving production to Mexico.
Re-Shoring PPE Production Back to the U.S.
For anyone who expects there will be another pandemic one day, and does not want to see patients and health care professionals losing their lives due to a shortage of PPE equipment, a government-led solution is the only answer. Chinese companies are most likely selling masks at far below their cost, benefiting from government subsidies in many forms. Indeed, the U.S. multinationals that source masks in China may also be benefiting from subsidies granted to their Chinese-owned manufacturing partners. According to industry players, when the pandemic began, the Chinese government blocked U.S. multinationals from exporting masks from China, and allowed only Chinese companies to sell internationally, so they could benefit from the skyrocketing prices (and also stuff U.S. and other non-Chinese buyers with low quality products.)
But an anti-dumping case against Chinese exporters would take years to work its way through the U.S. legal system, by which time every one of the 27 members of the AMMA would likely be out of business.
According to Dillie, a tariff would be unlikely to make much difference when China is willing to sell masks at a penny each. A federal government stockpile of masks might provide some security, but it is likely to be insufficient in the event of a large pandemic like COVID-19, and creating one federal buyer does not generate a sustainable, competitive U.S. production industry.
In an insightful article in the Harvard Business Review, Professor and manufacturing expert Willy Shih and two colleagues wrote about the difficulties of rebuilding what Shih calls the “industrial commons” in the PPE industry. The phrase refers to the supply chain, the production equipment, and the knowledgeable personnel required to manufacture most modern products. Over the last twelve months, companies like Premium-PPE and Medline have rebuilt the depleted U.S. industrial commons in PPE. It would be a tragedy to lose all that now.
Shih points out that the Canadian government recently awarded a 10-year $382 million contract to Canadian manufacturer Medicom to produce N95 masks for Canada. This guarantees that a portion of the market will be dedicated to Canadian producers. Canada should have the critical mass and the knowledge base to accelerate to much higher production in the event of a crisis. The Canadian government feels that a slightly higher price for masks is a price worth paying for the security of supply and the lives that will be saved in the next crisis.
Such a solution would work for the U.S. too. If we reserved a portion of the market, say somewhere between 25% and 50% for U.S. producers, we would keep most of the AMMA companies alive, protect ourselves against future crises and exploitation from China, and create thousands of good-paying manufacturing jobs. And, as in other industries, we might find that a vigorous, competitive U.S. presence could lead to important innovations that would over time deliver significant improvements in quality and production processes in the PPE industry.