Why Globalized Production Can Suffice Demand Spikes for PPE

The COVID-19 pandemic is spreading like fire all around the world and has put the global health-care supply chain in the limelight. As countries devise response strategies, policymakers from different countries have suggested focusing on producing essential goods. Suggestions for nationalizing segments of supply chains, however, run counter to experiential evidence of how the industry works. This blog describes how the fragmentation of production over the past two decades and the new personal protective equipment manufacturers in developing countries have increased, and not diminished the ability of countries to the unprecedented demand experienced during the COVID-19 outbreak.

There is an increased demand for personal protective equipment (PPE), a wide array of health and safety products, especially low-value single-use items such as facemasks, gloves, isolation gowns, and medical devices (MD) including more sophisticated and technology-intensive equipment such as mechanical ventilators, MRI scanner machines, etc.

Reasons Why Globalized Production is an Ideal Solution to Meet Demands of PPE and MD

First Reason

The increased global demand has bolstered the globalization of PPE and medical device supplies over the last 10 years; traditional exporters have observed their exports surge over this period, however, non-traditional exporters have increased significantly.

Since 2008, the global trade in PPE and medical devices has doubled in value (UN Comtrade, 2020). The main reason behind this was the rising demand, which resulted from huge health-care expenditure in the developing world and from aging populations in both rich and middle-income countries.

Exports from traditional locations including Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, United Kingdom, and the United States have increased by 45% since 2008. Meanwhile, non-traditional exporters have doubled (100 percent), both from large, newly industrialized, global manufacturing hubs including China, the Rep. of Korea and Mexico, and some smaller, specialized locations including Costa Rica, Malaysia, New Zealand and Singapore) (Hamrick & Bamber, 2019).

In the present situation, essential PPE apparel including facemasks, gloves, and gowns are produced predominantly in developing countries while medical devices were produced and supplied by PPE suppliers in medical industry in developed nations. Yet, many non-traditional exporters have emerged rapidly in both categories. In all of these essential products, the degree of interdependency between nations has grown. For example, the number of bilateral trade relationships in N95 facemask (HS9020) increased from 1,835 in 2002 to 3,521 in 2019.

Second Reason

Although global production has increased, outsourcing in the industry has been very limited, and prominent firms from developed countries dominate global PPE and MD supply.

The global trade in MD is led by large, leading, multinational vertically-integrated firms headquartered in traditional PPE and MD manufacturing locations with global production facilities. Very few leading medical devices and personal protective equipment manufacturers have emerged thus far from non-traditional locations. They have developed global platforms to access the unprecedented demand in emerging markets while diversifying risk and leveraging complementarities in the PPE and MD supply-chain capabilities of different locations (Bamber & Gereffi, 2013).

However, unlike many other industries, contract manufacturing has been slower in PPE and medical devices because of strict regulatory oversight related to quality and performance. Given the serious consequences relating to medical devices and PPE, and therefore leading MD and PPE suppliers in medical industry maintain the highest levels of control over their supply chain, and thus prefer to keep it in-house. All personal protective equipment manufacturers must hold ISO:13845 certification to sell medical devices and PPE to major markets - an expensive and time-consuming process (Hamrick & Bamber, 2019). Nonetheless, they still rely on others for raw materials and non-critical components. PPE is less technologically complicated and faces lower regulatory barriers than medical devices. This leads to increased external contracting, however, certification is still mandatory.

Third Reason

Since COVID-19 broke out, global PPE and MD supply chains have helped to reduce shortages experienced by the adversely affected countries.

Since the spike in demand for PPE and MDs following the COVID-19 crisis, developing countries’ production has helped in reducing the acute shortages experienced by the severely affected countries.

China has been the source of about half of the imports of PPE into the USA and the EU (Bown, 2020). Chinese exports of predominant PPE supplies reduced by 15% in the first two months of 2020, compared to 2019, when domestic demand for these essential products spiked in response to COVID-19. This contraction was less than the 17% drop in other Chinese exports during the same duration. Bulk PPE suppliers in the USA who relied on Chinese exports faced difficulty in producing essential PPE apparel for its country people.

The growing demand subsequently created intense pressure on the bulk PPE suppliers in the USA to increase the production of PPEs and MDs. However, China has rapidly scaled up the production and export of essential PPE such as facemasks, gowns, and medical devices such as ventilators. By late March, China started producing 116 million facemasks a day, which is 12 times its supply before the outbreak.

Furthermore, within a very short duration, buyers across the globe have been able to find optional sources of supply from other non-traditional exporters. For example, import of gloves from Sri Lanka and Thailand, and hospital gowns from the Dominican Republic, Honduras and Vietnam (UN Comtrade, 2020).

Fourth Reason

The large-scale production and supply during the COVID-19 crisis are quite challenging from a pure production and processing standpoint. Taking advantage of inter-firm relations to spread knowledge and ensure international coordination on regulations can accelerate responsiveness.

Many personal protective equipment manufacturers are scaling up production, however, none can meet the spikes in the demand and all are obliged to extend their delivery times. Therefore, firm partnerships are being established to assist in expanding the production of essential PPE apparel and medical devices, and also bring new innovative solutions to the table.

New manufacturing provisions include Ventec Life Systems partnership with GM to assist the firm fulfill its Defense Protection Act requirements to produce 30,000 ventilators by the end of August, and 3M with Cummins to develop HEPA filters for its respirators (3M, 2020; Assis, 2020; Criddle, 2020).

The massive demand for inputs has also bolstered innovations among new companies (Chambers, 2020). Here, firm-to-firm partnerships play a vital role. For example, the Mercedes-Benz Formula 1 team partnered with University College London to create a new design for largely-produced ventilators. The team is already producing 1,000 units a day and open-sourcing its design (F1, 2020).

However, scaling up production is not so easy, and bringing in new producers and products is even more challenging. It requires staffing factories with skilled and trained personnel and speeding up supply chains takes considerable time. This also involves major shifts in personnel and factory configuration, doubling shifts, hiring and training new workers, or transferring them from other facilities (Honeywell, 2020). All these activities are not easy when production locations themselves are under quarantine. In such cases, easing regulation on international trade and labor mobility has been a part of the solution, and not an issue. In some situations, raw materials and components are not readily available since these are also sourced globally. Contingency plans, more diversification of PPE and MD manufacturing locations and suppliers, and proactive government action to ease stringent regulatory and quality standards all help in overcoming the bottlenecks. Meanwhile, re-shoring or near-shoring minimizes the range of options in facing unpredictable shocks.

Policy Implications

If nations want to effectively fight the COVID-19 pandemic, they need to understand the significance of the global interdependency of the health-care sector.

The personal protective equipment manufacturers’ globalized production base provides a solid diversified foundation on which to source essential items for the health-care sector. The two primary shortages for PPE can be addressed by two unique sets of countries. Less technologically sophisticated PPEs, such as N95 respirators, facemasks, hospital gowns, gloves are produced predominantly in middle-income countries (non-traditional exporters).

Without these essential consumables, various major developed countries will find it difficult to contain the spread of the infection, particularly among medical personnel, increasing the demand for ventilators as more people are infected. Conversely, lifesaving ventilators are produced primarily by traditional, high-income exporters, and without these machines, developing countries will face challenges in reducing the death rates, even if they’re using PPE to contain the virus.

To ensure these GVCs functioning are at maximum capacity, it is important to

1. Permit international free flows of goods;

2. Allow the movement of essential workers across borders;

3. Facilitate trade logistics, for example, fast-tracking customs clearance of final as well as intermediate products.

4. Most importantly, think wisely before opting for nationalizing any parts of the supply chain.