Is China's mask gold rush coming to an end?

What happened when everyone opened a mask factory

Table of Contents

  1. The domestic mask market is competitive
  2. Converting non-mask factories to produce masks
  3. Sound investment or greedy speculation?
  4. Export market as a last resort
  5. Post-pandemic outlook

This article, originally published in Chinese, lays out the fate of factory owners that converted existing factories to produce masks. Usage of "domestic" refers to China. Original prices are given in ¥ Chinese yuan, as well as converted to $ US dollar for reference

The domestic mask market is competitive

After being busy for more than forty days, Li Hao's mask factory finally produced the first batch of masks.

But Li Hao can't breathe a sigh of relief yet. It will take some time until all machines are fully set up and can operate at full speed. He works until late at night, 7 days a week.

More importantly, at the end of March, as the Chinese government actively promoted the resumption and expansion of production, previously scarce prevention materials are now widely available again.

Empty shelves in pharmacies and supermarkets were filled again with masks, now cheaper than before as more and more people jumped into the mask manufacturing business.

On popular Chinese social media website a user by the name of 张师傅 ("Master Zhang") published a post explaining where to find face masks and to verify their authenticity. The post went viral with over a million views, over 10,000 likes and thousands of comments. But recently there are more and comments of hoarders having troubles selling left-over stock: I'm hoarding many masks, anyone still want one?

A surgical mask that used to be sold by factories at 9 a piece is not easy to sell. Since the price of disposable surgical masks has fallen back to 1.6 a piece, a mask dealer said that he is sitting on an inventory of 100,000 masks and can only hope to sell them on the international market; another user by the name of 黄牛 (Huángniú, "Yellow Cattle") said he ordered a batch of masks during the pandemic but only recently received them and now can't sell them profitably on the domestic market as prices already recovered.

Changes in the mask market are the result of a substantial increase in domestic production capacity. According to information from the National Development and Reform Commission, as of February 29, China is now producing 100 million surgical masks a day, with some experts estimating the total production capacity may have reached 200 million masks per day.

The demand for masks during the pandemic was so high that many non-mask manufacturers have switched to making masks.

However, many of the manufacturing costs, including the purchase of production machinery, raw materials, and application for qualification have come down, and many companies have just started manufacturing.

It's unclear if these businesses will turn out profitable as the domestic demand is plummeting.

Converting non-mask factories to produce masks

If we don't switch to producing masks, we will have to close the factory this year, said Liu Yifei, founder of a custom clothing brand said. She feels fortunate that her clothing factory received a request from the authorities, hoping to convert the factory to start producing medical supplies such as masks and protective clothing.

The department gave us a green channel authorization, and organized us to make a sterile production workshop. Liu Yifei said that she welcomed the authorities demanding her to change production as the company couldn't sustain the original fashion business.

At the same time, in February, Li Hao, originally a luggage manufacturer also decided to switch production. Originally we wanted to assist the local government, later one we just tried to keep the factories running to avoid staff layoffs

Li Hao's luggage business usually sees a spike during Chinese New Year, but this year the pandemic impacted the business a lot - sales in physical stores are practically non-existent and online sales are reduced by 60% compared to 2019.

Having experienced the SARS outbreak in 2003, Li Hao's response was very rapid this time. He believes it's important to keep the jobs of employees so that everyone has something to do. So after receiving the government's demand, after discussions with shareholders, Li Hao converted a large chunk of his factories to producing masks.

Many companies have converted their factories to meet the demand, including China Petrochemical, SAIC-GM-Wuling, BYD, GAC Group, Foxconn, Gree, and other manufacturing giants.

Taking Gree as an example, on February 18th, Gree announced that it will spend 20 million to establish Zhuhai Gejian Medical Technology Co., Ltd. to produce anti-pandemic materials. On March 9th, these masks were put on sale at "Dong Mingzhu's store". According to Gree Electric, the daily production capacity will be 1 million masks.

Online store Dong Mingzhu selling boxes of 50 KN95 and 50 surgical masks
Online store Dong Mingzhu selling boxes of 50 KN95 and 50 surgical masks for 275 and 150 respectively

Manufacturers from the apparel industry, manufacturers of diapers and sanitary napkins with sterile workshops also joined, as well as garment companies in Ningbo, Wenzhou, Qingdao, and even the e-cigarette company Fluo FLOW is now making masks.

Previous to the conversion, many industries experienced a decline in sales during the pandemic.

Sales data released by the China Association of Automobile Manufacturers on March 12 showed that in February this year, automobile production and sales fell sharply by nearly 80% year-on-year; Gree Electric’s chairman and president of Dong Mingzhu also expected that the company's output value will decline this year.

In order to make up for the loss of the original business, the production of masks has also become a "self-help" method for enterprises for a while.

The barrier to entry in the mask business is low, an industry insider said. All that is needed is a sterile workshop, trial production testing, and a license application after passing the test. An investment of 1 million can be enough to start a small factory

Because of this low barrier to entry and the low costs, many have entered the business.

The South China Morning Post reported on April 17 that since the beginning of the year 38,000 new companies in China have registered to make or trade face masks. In all of 2019, there were 8,594 new companies.

But with so many new players, the supply chain is starting to crumble.

Buying a mask machine is the first challenge for new mask manufacturers. In the mask factory of Li Hao, from preparation to production of export masks, the longest link is waiting for the mask machine.

Full-automatic surgical mask machine
Full-automatic surgical mask machine

Due to large demand, mask machines that used to sold at 100,000 started to be sold for up to 2 million.

Even if you can get a machine at a high price, it can still take a long time until the machines are delivered. Li Hao said the prices of machines change daily, which makes the business harder to predict.

In addition to machines, the raw materials needed to produce masks have also skyrocketed in price. Liu Yifei said that during February, the price of all mask raw materials has risen rapidly, most of which to 6-20 times the usual.

Melt-blown fabric, the most important material, has risen more than 40 times in price. It used be 10,000 per ton. We then purchased at more than 200,000 per ton, and later it reached 400,000 per ton. Liu Yifei said. Global times reported similar prices on February 27.

Polypropylene raw material of melt-blown fabric

Price of medical adhesive tape, another key material, is changing almost every ten minutes. It's not an exaggeration as sometimes by the time we decided to place an order, all stock was already sold out. This kind of thing can happen on any day. Yifei Liu said.

Because manufacturers are eager to purchase, some scammers have the opportunity to take advantage.

Liu Yifei said that when her company purchased raw materials, the money was paid, but the other party disappeared. Other scams also exist: The goods sent are different from the samples sent, and then they cannot be contacted. The other party's factory is gone.

Li Meng also found that some people on the internet recently claimed to import melt-blown fabrics from Turkey and Russia, and the prices are lower than domestic products. As far as I know, Russia can't make a gram of melt-blown fabrics. They can only make low-cost substitutes. He believes the merchants of such imports to be fraudsters.

The production of masks is not trivial for newly converted factories that have no experience in manufacturing masks. When not used correctly the now expensive machines can be rendered useless.

Repairs of the machines are complicated, and now there are specialized repair teams in the market. One such team advertises a repair service costing 100,000 a day online.

Machines can't be run at full speed immediately and must be adjusted constantly. Taking Li Hao's mask factory as an example, currently it's making 100,000 masks per day, but he hopes to scale up to 1 million masks per day by April.

Sound investment or greedy speculation?

Mask machines work 24/7, but do they also generate profits consistently?

On the market, mask prices are declining quickly. At the beginning of March, the disposable KN95 protective mask fell from 15 to 9 a piece, and the factory price dropped to below 7. The price of surgical disposable masks has also seen declines.

Li Hao believes that there has been a peak in mask production capacity recently, masks made by factories built following the Wuhan outbreak have only been available the market for the last ten days

We must have been too late (making quick money), he said. The people who succeeded at making quick money were the ones which factories were up and running in February

Zhang Zetian, a practitioner in the mask industry, believes that most manufacturers who enter the mask industry in early March will face financial difficulty within half a year. Now the market is relatively pessimistic because everyone knows that the domestic pandemic is basically over.

He said it's similar to the stock market, where only early entrants can realize profits before a market downturn. When everyone finds out about a rare opportunity, it is not rare anymore

The attitude of government agencies that once actively urged companies to switch to mask production has also changed. It was revealed online that many enterprises invested more than 1 million into equipment and materials. After producing the masks, they did not get the government's approval and were told that we don't need masks now and you can stop your efforts.

A channel trader in the mask industry also believes that it is not a good time to switch production, and even said a price war could be on the way. He believes that the real money in this mask wave may not be the mask factories, but the mask machine manufacturers and raw material suppliers.

Changes in costs and profits have greatly extended the company's payback cycle. Mask machines used to pay for themselves in 15 days of operation. A mask factory that was put into operation in early March expected that it could recover its costs in three months, while another company that put into production in late March said, It would be good if we could pay back the investment in a year to a year and a half.

Export market as a last resort

While the pandemic situation in China is stabilizing and the domestic demand has slowed down, overseas demand for medical supplies has increased significantly. The mask producers are now setting sight on the export market, especially as reports of rising mask prices continues to spread in many countries.

Due to the substantial increase in demand, many countries have relaxed the import policy for masks. According to Yonhap News Agency, on March 17, the Ministry of Planning and Finance of South Korea suspended tariffs on imported masks and core raw materials for masks, from 10% and 8% respectively.

On March 20, France announced that it would expand the import of masks from countries such as China; earlier, the United States announced that it granted exclusions from import tariffs for dozens of medical products imported from China, including face masks, hand sanitizing wipes and examination gloves

According to Alibaba statistics, global buyers have recently increased their willingness to purchase mask-related products, disinfectant hand sanitizers, thermometers, and other pandemic-related products. Among them, the demand for medical mask buyers increased by over 130 times.

In a foreign trade forum, masks have become the most popular topic for many consecutive days, and a large number of domestic companies are seeking to export masks.

With current domestic prices we can't sell at profit, said a mask enterprise in Ma'anshan. They now plan to export all the masks overseas.

However, entering the overseas market is not easy. The two key issues that companies need to solve are: qualifications and customer acquisition

The EU and the United States currently adopt CE and FDA certifications for imported masks, respectively, and the price of relevant certifications has skyrocketed.

CE certification is usually not expensive. The cost of certifying PPE certification is 3000 - 8000 , and the cost for certifying medical products is 3000 - 5000.

However, according to the quotation of a certification agent, the certification fee for non-medical masks is 17,500 and 19,500 for medical masks.

But for mask manufacturers who are eager to export, price may not be the most important issue. The key is time. The US FDA and CE certification takes a long time, Zhang Zetian said.

The agent providing the price quotes also confirmed this, he said that the US FDA certification application cycle is about 2 weeks, while the EU CE is about 3-4 weeks, posing a risk as the market is hard to predict for even just that period of time

However, due to the shortage of masks recently, the European Union and the United States have relaxed the requirements for related materials. On March 20, the EU issued a directive to meet the growing demand for masks and protective clothing, allowing some pandemic prevention materials to be sold even if not CE certified yet.

In addition to certification, customer acquisition has also caused headaches for Chinese manufacturers.

The foreign medical system is very closed, and it is very difficult to get in; it is close to impossible. Li Hao said that his existing contacts already in place from his luggage business, which can ease market entry overseas.

Foreign medical customers will keep buying from me for a long time once finding out my stuff is reliable. They don't switch vendors casually, Li Hao explained that this is a good opportunity to step foot in the overseas medical market.

But for most mask manufacturers, in the absence of upfront resources, most of them need to rely on "intermediaries". But it also means that most of the profits of companies going overseas will be earned by middlemen.

Therefore, Zhang Zetian has doubts that the export market can save domestic mask manufacturers.

The majority of foreign orders are relatively large, mainly purchased by the government or medical institutions. The ordinary people do not wear masks out of principle. He believes that the focus of the mask market is still domestic, Basically after mid-April domestic demand will plummet.

Post-pandemic outlook

Practitioners have different views on the development trend of the mask industry after the pandemic.

Li Hao believes that this pandemic will bring huge changes to the mask industry. After being educated, wearing masks may become mainstream in the future.

There are also converted-factory owners who are not optimistic. They think that the market will eventually return to its original normal state and masks will return to being a niche item.

On social media, information about the sale of mask machines is increasing. Some people are even selling machines that have been "debugged": The technology is mature, the production capacity is stable, the machine is ready-to-go, it just needs to be unpacked and plugged in

Some practitioners told All Weather Technology that they are preparing to sell part of the ethylene oxide sterilization cabinet because the market demand is becoming saturated.

The cabinet is a key equipment for the production of protective clothing and medical masks. Medical masks are usually sterilized by ethylene oxide. After sterilization, there is residual ethylene oxide on the mask, and ethylene oxide is a toxic carcinogen.

Generally speaking, the newly produced masks need to be analyzed for 14 days before they can be put on the market, but the masks processed by the ethylene oxide sterilization cabinet can shorten this time to 3-4 days.

Not only are mask companies starting to withdraw, but upstream companies are also beginning to realize the risk of overcapacity.

On March 9th, Dawn Co., Ltd., an enterprise specializing in the production of polypropylene melt-blown materials for masks, issued an announcement, prompting the risk of overcapacity of polypropylene melt-blown materials. Dawns announcement reminded that with the effective control of the pandemic, it is expected that the order for this product will gradually decrease in the future.

At the same time, in order to sell off existing stock, the mask raw material market also experienced a price drop. The price of melt-blown fabrics, for example, on the market has been lowered from about 500,000 per ton to about 300,000.

However, for many companies that have entered the mask production in the short term, the change of production is only a temporary contingency measure, not a full investment. They still hope to return to their main business.

I hope that the pandemic will pass soon, and that we can still operate our clothing business normally, Liu Yifei said that the pandemic has caused no small losses to their businesses. We basically lost (the equivalent of) a house in Guangzhou.

However, she also mentioned that it was fortunate that after the factory conversion, they could make up for some of the losses caused by the main business in the past two months - the company might not have survived otherwise.

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