Fashion’s digital transformation: Now or never and, The Face Mask Global Value Chain in the COVID-19 Outbreak: OECD Evidence and Policy Lessons

Today’s Textile Newsletter will offer you two completely different subjects. Firstly, based upon a recent analysis by McKinsey treats the subject Fashion’s digital transformation: Now or never. Secondly, OECD has taken a deep and analytic look at the face masks and we would love to offer you the synthesis of its findings, titled “The Face Mask Global Value Chain in the COVID-19 Outbreak: OECD Evidence and Policy Lessons.” We do hope that you do find the two subject worthwhile to dedicate your time!

The first feature starts here:

Fashion’s digital transformation: Now or never

By Antonio Gonzalo, Holger Harreis, Carlos Sanchez Altable, and Cyrielle Villepelet from McKinsey. Antonio Gonzalo is a partner in McKinsey’s Frankfurt office, Holger Harreis is a senior partner in the Düsseldorf office, Carlos Sanchez Altable is an associate partner in the Madrid office, and Cyrielle Villepelet is an associate partner in the Paris office.

The authors wish to thank Achim Berg, Stéphane Bout, Martine Drageset, Aimee Kim, Althea Peng, Brian Ruwadi, Jennifer Schmidt, Ewa Sikora, Kate Smaje, and Tobias Wachinger for their contributions to this article.

Some apparel, fashion, and luxury companies won’t survive the current crisis; others will emerge better positioned for the future. Much will depend on their digital and analytics capabilities.

The COVID-19 pandemic is simultaneously an unprecedented health crisis and a global economic shock. Amid the pandemic, the apparel, fashion, and luxury (AF&L) industry has moved quickly to address urgent public-health needs—closing stores, manufacturing much-needed items such as face masks and hand sanitizer, and making donations to healthcare and community organizations. At the same time, AF&L companies are grappling with COVID-19’s business ramifications, including widespread job losses in an industry that provides livelihoods for millions of people worldwide.

Although no one in the industry foresaw the intensity of this crisis, some fashion companies are finding that they are better equipped than others—largely because of their digital know-how. In this article, we touch on COVID-19’s impact on the AF&L industry to date. We then propose a set of actions that AF&L companies can take to build their digital and analytics capabilities—not just to ensure business continuity and minimize the downside of COVID-19, but also to emerge from the crisis in a position of strength.

A deepening digital divide

Our consumer-sentiment surveys, conducted in April, show declines in purchase intent of 70 to 80 percent in offline and 30 to 40 percent in online in Europe and North America, even in countries that have not been under full lockdown. E-commerce is clearly not offsetting the sales declines in stores. Nevertheless, it has been a lifeline for fashion brands as stores have been shuttered—and it will continue to be critical during and after the recovery period. In China, the return of offline traffic has been gradual, with 74 percent of Chinese consumers saying they avoided shopping malls in the two weeks after stores reopened. 1 This suggests that some percentage of offline sales could permanently migrate to e-commerce.

Digital is not only an increasingly important sales channel; it can also help companies adapt cost structures and make each step of the value chain better, faster, and cheaper. For example, digitization can enable new logistics and sales-fulfilment options (such as click-and-collect and drive-through), fuel innovative ways of customer acquisition, and help predict and manage inventory to create a more resilient supply chain. The fundamental enabler to all this will be data—the transparency, governance, and accuracy of which have never been more important.

This all portends a deepening digital divide. Even before the crisis, companies that were digitally and analytically mature outperformed competitors that had not built robust digital and analytics capabilities (Exhibit 1). The COVID-19 crisis has only widened the gap between industry leaders and laggards. For leaders with the ability and willingness to invest, the pandemic has clearly been an accelerator. As a top executive of a leading apparel player recently declared, “We’ve accomplished two years of digital transformation in two months.”

Thus, for executives in the AF&L sector and all related subsectors (such as beauty products and sporting goods), the imperative is clear: make digital and analytics a core element of your company’s strategy.

A number of trends in the post-COVID-19 world—the “next normal”—could make digital and analytics play an even more important role. Physical distancing could continue, making consumers less likely to visit brick-and-mortar stores, and a contact-free economy could emerge—raising e-commerce and automation to a new level.

The implications of these trends will differ for each company, depending on its digital starting point and strategic orientation. Digital and analytics leaders (companies in which online sales account for 30 to 40 percent of total sales, parts of the value chain are significantly digitized, and online and offline channels are integrated to some degree) have an advantage today but could quickly lose it if other players accelerate their transformation. On the other hand, laggards (companies with less than 20 percent of total sales coming from the online channel, low digitization levels across the value chain, and siloed online and offline operating models) have an opportunity to make an “all in” bet on digital and analytics—and perhaps gain market share with smaller capital-expenditure investments, which used to be a limiting factor for many brands.

That said, digitisation won’t be a panacea. Companies should direct investments to areas in which the highest business value lies—which might not be in sales but rather elsewhere in the value chain. Equally important, companies should avoid “gold plating,” aiming instead for the fastest minimum viable digital solution that will achieve the business goal. Finally, the sequencing of initiatives will play a big role in making a company’s digital transformation as self-funding as possible.

Navigate the now: Immediate priorities

The health and safety of employees and customers, of course, has been—and remains—the absolute priority. By now, AF&L companies have closed stores, introduced new hygiene and safety processes in warehouses and distribution centers, and set up digital tools for remote working and collaboration. Although the situation remains uncertain and is evolving daily, there is a clear set of actions involving digital and analytics that AF&L players should implement now to keep the business going, stem sales losses, and plan the comeback.

Engage with customers in an authentic way

Email, social media, and other digital channels have seen significant spikes in usage during the crisis (Exhibit 2). AF&L brands must therefore continue to communicate frequently with consumers, even if most consumers aren’t currently spending. Use digital channels to launch genuine, purpose-driven communications regarding health, safety, business continuity, and community building. If you decide to send consumers relevant content, be sure to do so in an appropriate and empathetic tone (for example, a global sports-apparel player now offers yoga lessons on Instagram).

Whether it’s a personalised offer or outreach from a personal stylist, the best brands are maintaining customer relationships even while stores are closed. Staying in touch with your most loyal customers doesn’t just keep your brand on top of mind but also helps to boost sales. On a leading Chinese e-commerce platform, transaction volume for fashion-brand miniprograms (brand-powered apps embedded within the platform’s interface) more than doubled between January 2020 and February 2020, during the peak of China’s outbreak.

Refine and scale up your online operation

We expect the online share of fashion and apparel in Europe and North America to increase by 20 to 40 percent during the next 6 to 12 months. In April, traffic to the top 100 fashion brands’ owned websites rose by 45 percent in Europe. 2 Some of the larger players have even reduced their promotion intensity to be able to handle the volume of orders.

Delivering an excellent customer experience online is crucial, so reallocate your resources and shift management attention from offline to online. Also, scale up capabilities in both demand generation and fulfillment (Exhibit 3). Seek to eliminate points of friction in every part of the online customer journey—for example, by improving your website’s search function and expanding your online assortment. Some retailers have redeployed store personnel from closed stores to support online fulfilment or to assist consumers via digital call centers.

While most AF&L players already have an e-commerce presence, some still don’t. Companies without one can launch a basic online platform in 10 to 15 weeks. A private-equity-backed retailer did it in 13 weeks (Exhibit 4).

Prioritise digital-marketing levers as demand rebounds

In anticipation of a shift toward online sales, allocate more of your marketing budget to digital channels. Establish or improve your digital-marketing “war room” and increase its visibility in the organization—for instance, by establishing a C-level digital-performance dashboard that provides a cross-channel view of e-commerce, customer relationship management, and social media, thus enabling rapid identification of opportunities for efficiency optimization or growth.

Retrain your look-alike models to capture value from the new consumer segments and behaviors that have emerged during the crisis. Upgrade your digital-marketing activity to be best-in-class—for example, by adding sophisticated imagery to your social-media posts and conducting “social listening” to inform the development of new services and offers.

Use granular data and advanced analytical tools to manage stock

The value of excess inventory from spring/summer 2020 collections is estimated at EUR 140 billion to €160 billion worldwide (between EUR 45 billion and  EUR 60 billion in Europe alone)—more than double the normal levels for the sector. Clearing this excess stock, both to ensure liquidity and to make room for new collections, will become a top priority.

At the best-performing companies, an “inventory war room” uses big data and advanced analytics to first simulate dynamic demand scenarios specific to locations (channel, country, store) and SKUs, then to synthesize the resulting inventory risk—thus enhancing decision making. The war room decides, for example, whether to redistribute SKUs, transfer inventory to future seasons, or accelerate markdowns (Exhibit 5). A company’s investments in developing advanced analytical tools to steer markdowns during the crisis will pay off almost immediately.

Optimize costs using a zero-based approach

In light of crisis-related sales decreases, cutting costs is an obvious imperative for most companies. However, reducing all budget lines across the board is risky. We recommend a zero-based budgeting approach instead.

Identify two categories of projects: critical projects linked to core digital and analytics priorities that must proceed as planned or at a slightly lower speed (for example, building a new data lake to enable personalized marketing) and core projects that can be delayed (such as those that don’t enable emergency response). Continue only the projects that fall into those two categories; stop all others. A range of savings levers—such as vendor renegotiations and tactical moves to the cloud—can help dramatically reduce your operating costs. Reset your digital and analytics priorities and budget and adapt them to a post-coronavirus world.

Shape the next normal: Longer-term strategic actions

Although time frames remain uncertain for now, AF&L players should start planning how they will compete in—and perhaps even influence—the industry’s next normal. Consumer habits, companies’ interactions with consumers, and the number and types of touchpoints will all change. The requirements for supply-chain speed and flexibility will continue to increase. Digital and analytics will play a critical role in helping companies emerge stronger from the crisis.

Set an ambitious aspiration and define a clear road map

A digital and analytics transformation is typically an 18- to 24-month journey, requiring an ambitious aspiration, a clear plan, and concrete milestones. In our experience, successful digital and analytics transformations have the following elements in common:

  • Strong support (or even direct sponsorship) from the CEO during the entire journey.
  • A pragmatic approach that starts with an understanding of the consumer and the drivers of value creation; digital for digital’s sake will not deliver results.
  • A clear road map and prioritization of initiatives, combining actions that help set up the enablers for the organization with the implementation of use cases that generate quick wins.
  • A focus on getting to a minimum viable product (MVP) within two to three months—a rapid timeline that allows the company to iterate while generating value, avoiding large up-front investments.
  • A central team to monitor value capture. This team also helps build the road map by scanning opportunities, allocating budgets, and coordinating implementation, ensuring that all efforts are focused on delivering tangible impact rather than gold plating.
  • Well-defined key performance indicators (KPIs) to measure success.

The first step in the transformation programme should be the definition of digital priorities, which will differ based on each company’s business model and digital starting point. Digitization is much more than just selling online; a quick diagnostic may be required to select and align on key value areas.

Typically, digital and analytics priorities can be categorized according to their place in the value chain: customer experience (front), distribution and supply chain (middle), and product development and support functions (back). Exhibit 6 shows high-impact use cases in each of these three areas.

Provide an excellent omnichannel experience

The pandemic has elevated digital channels as a must-have for AF&L players. Therefore, take this opportunity to leapfrog into the digital arena by making it the center of your operating model: move your traffic- and engagement-generation engine to digital, and leverage digital channels to drive store traffic and vice versa.

Besides scaling up digital sales efforts, reconfigure your store footprint accordingly—for example, by reducing presence in “B” areas (markets with lower population density and lower profitability per square meter), devoting less store space to product categories with high online penetration, experimenting with innovative formats (such as drive-through windows or pop-up stores), and making it easy for customers to perform any omnichannel operation, including complex ones (such as buying online from a store if the product isn’t in stock there, and then picking it up from another physical store in the next 12 hours). Use data and analytics to tailor the assortment in each store and to streamline and optimize assortments overall.

In our experience, fully integrated management of stock in stores and warehouses is core to any omnichannel operation. Making all stock (even stock shortly arriving to warehouses) visible to customers in any channel has proved to boost sales.

Bet on personalisation

Personalisation has helped several industry players achieve 20 to 30 percent increases in customer lifetime value across high-priority customer segments. It has proved even more valuable in subsectors with more stable and predictable purchasing patterns, such as beauty products.

Use cases for personalisation have mostly centered on personalized offers, personalised promotions and benefits (such as access to new products), and reductions in generic traffic-generation costs. To go further, add personalisation capabilities to your digital war room—for example, by collecting and analyzing all the available data to generate detailed insights about your customers. Build actionable microclusters based on customer behavior. For instance, entice the highest spenders with special incentives (such as triple loyalty points for purchases of at least $1,000), target customers who tend to buy in the categories where you have the largest inventory buildup, and give online customers coupons to redeem in-store once physical stores reopen.

Prioritize use cases based on your business context, advanced-analytics capabilities, and customer segments. Create a prioritized use-case road map and a technology-investment plan. Integrate personalization into all delivery channels to ensure consistency in your customer communications.

Leverage big data and analytics to manage the supply chain

Digital and analytics can not only drive top-line growth but also significantly improve speed, cost, flexibility, and sustainability across the supply chain. For instance, some leading companies are using radio-frequency identification (RFID) to track products more precisely and reduce in-store merchandising manipulation. Companies’ RFID investments typically yield operations simplifications and service-level improvements.

In addition, automating logistics through digital warehouse design and predictive exception management can significantly increase efficiency. The benefits will flow to consumers as well—in the form of better product availability and faster, cheaper, and more accurate deliveries. Leading online players, for example, are using models powered by artificial intelligence (AI) to predict sales of specific products in certain neighborhoods and cities, then stocking the predicted amount of inventory in nearby warehouses.

Digitise product development and support functionsDuring the COVID-19 crisis, the digitisation of product development has proved to be a competitive advantage. Companies that were already using cutting-edge tools such as 3-D product design, virtual sampling, digital material libraries, and AI-supported planning have fared better than their peers during the crisis. Their designers and merchandisers can react faster to market trends, significantly reduce both sample costs and time-to-market and, collaborate remotely across teams. The past several weeks have shown, that it’s possible to do much more on this front than some in the industry initially thought. Indeed, the pandemic may have shattered historical preconceptions and biases against digitization in core product-development processes.

Digitisation of support functions is another key lever for improving efficiency. By automating repetitive tasks in back-office functions such as indirect purchasing, finance, legal, and HR, you can simultaneously reduce costs and free up time and resources to reinvest in more valuable activities. Companies that have automated their finance processes—such as claims collection and financial reconciliation—have found that they have also increased the agility and accuracy of these processes while capturing significant synergies. Speed up the digitization of all support functions through robotic process automation and other leading-edge technologies.

Build data and tech enablers to support your transformation

Technical enablers play a key role in powering digital and analytics growth. In our experience, three core principles are the most relevant:

  • Use cloud infrastructures to sustain scaling and to access best-in-class services, particularly for use cases that best benefit from the cloud’s features (for instance, data consumption across the globe, very high storage and processing needs).
  • Think data from the start. Build solid data foundations as part of every digital and analytics initiative in a way that allows rapid scaling and forward compatibility. Design and build out pragmatic data governance focused on enabling business value by helping to ensure data breadth, depth, and quality. Establish a strong data culture and ethics.
  • Design your technology stack for faster integration and development, with applications broken down into microservices and isolated through the use of application programming interfaces; use unified DevOps toolchains to enable automation and reduce time-to-market to a matter of hours instead of weeks.

These enablers should not become causes for delay. Rather, they should follow the same agile timelines and sprints as the core initiatives. Implementation should be pragmatic and clearly linked to value generation.

Attract and retain top digital talent

After the crisis, financially stable companies may be able to attract top-notch digital talent, including in-demand profiles such as digital-marketing specialists, data scientists, data engineers, user-experience and user-interface designers, and software and data architects. Retaining these kinds of employees will require AF&L companies to develop new talent processes—with tailored initiatives in recruiting, career growth, learning and development, and performance management—specifically for engineering and digital talent, similar to what many fashion players already do for designers and creative directors.

In addition, AF&L players should adopt agile ways of working to speed up development of digital and analytics products and projects. Agile techniques enable companies to release MVPs into the marketplace quickly and refine them iteratively based on consumer feedback.

There’s no denying that the COVID-19 pandemic will make for a difficult 2020. For some AF&L companies, even survival may be a struggle. However, if they lead with empathy and undertake bold actions in digital and analytics—particularly around e-commerce, data-driven stock management, and digitization of key functions—we believe they can not only endure the crisis but also build competitive advantage and strengthen their business for an omnichannel, digital-centered next normal.

www.mckinsey.com

The Face Mask Global Value Chain in the COVID-19 Outbreak: OECD Evidence and Policy Lessons

This note provides information on the global value chain for the production of surgical masks and N95 respirators in the context of the COVID-19 crisis. It analyses the causes of the current shortage of these key medical supplies needed to prevent the spread of coronavirus, and reviewssome short-term and long-term policy options, with a focus on the role of trade and investment policy.

Key findings and implications

•             COVID-19 has caused a shortage of face masks

•             Surgical masks and N95 respirators are used to prevent the spread of respiratory infections. They are part of the personal protective equipment (PPE) used by health workers and are different from other types of masks used to protect from pollution or dust.1 Surgical masks are loose fitting and designed to trap sprays and droplets from coughing and sneezing.2 N95 respirators fit more tightly and can also protect from smaller airborne particles. While N95 respirators are designed to protect the wearer from infections, surgical masks are mostly used to prevent the wearer from disseminating germs and viruses (such as in the case of a surgeon operating on a patient). Surgical masks do not offer full protection against the coronavirus but are recommended for health workers, particularly when both the patient and the worker wear one.

•             Both surgical masks and N95 respirators are disposable, explaining the high and recurrent demand. Once used, their external layer may become covered with germs. Moreover, humidity from the mouth slowly alters their filtering properties. Masks are therefore effective only for a few hours (four hours for surgical masks and one day for N95 respirators) and there is a risk of contamination when manipulating them or re-using them. Therefore, the strategy is to have cheap and disposable protective equipment that can be safely disposed of and replaced. Re-usable masks have been found to create higher risks of contamination.3

•             As the coronavirus is transmitted via droplets of fluid from the nose or mouth, face masks are essential for health workers who are in direct contact with infected patients.4 They can also play a role in preventing sick people from spreading the virus when coughing or simply talking or breathing. While the recommendation initially was to wear masks only when taking care of people suspected of COVID-19 infection, WHO issued new guidance on the use of masks for healthy people in community settings5 on 6 April 2020 and health authorities are increasingly recommending the broader use of masks.

•             Meeting demand for face masks has become one of the main issues for governments fighting the pandemic. Masks may play an even greater role in the next phase of the crisis, when lockdowns are gradually lifted and economic activity resumes, while the virus remains a threat.

Notes:

1             Viruses are very small and require specific fabric for effective filtering. The SARS-CoV-2 virus (responsible for COVID-19 disease) has a diameter of approximately 60 to 140 nanometres (i.e. one thousandth of the diameter of a human hair). It is much smaller than bacteria or dust.

2             Surgical masks provide different levels of protection based on the effectiveness of the filtering. Level 2 (US norms) or FFP2 (EU norms) is regarded as effective against the COVID-19 virus. N95 is the grade required for respirators (it filters 95% of particles smaller than 300 nanometres).

* The term “face mask” generally refers to surgical masks (also known as “procedure masks” or “medical masks”). This note also covers N95 respirators as they have a similar value chain and trade data do not distinguish them from surgical masks.

Masks have a relatively sophisticated manufacturing process

Surgical masks are basic products and are relatively cheap (when they are not in short supply).6 However, their production involves several types of inputs and the assembly of different parts in a relatively sophisticated process.7 The filtering property of masks is a function of a multi-layered structure made of non-woven fabric. The most commonly used material is polypropylene, a polymer derived from petroleum oil. Polypropylene is “melt-blown” in order to obtain fibres of a small diameter in a random pattern that can trap small particles. The fibres are electrically charged so that particles are attracted while the air passes through (electret treatment).

Different layers of non-woven fabric and textile are then assembled through ultrasonic welding. The minimum is three layers: an inner layer in contact with the mouth that can absorb moisture (generally white), a filter layer made of melt-blown electret non-woven material (as described above) and an outer layer protecting against liquid splashes (blue, to be distinguished from the inner layer). Cotton or other types of fabric can be used for the inner and outer layers (but they can also be made with non-woven fabrics).

Nose strips are added in order to bend the mask around the nose bridge, made from metal (aluminium, galvanised iron or steel). Simple masks have ties in the same material as the rest of the fabric, while more elaborate masks have elastic ear loops (made, for example, from nylon spandex), which need to be separately manufactured and attached to the filtering layers. These latter operations are relatively basic and most textile companies can perform them, including with workers manually operating sewing machines for ear loops, for example. But a full production line performing all the operations and combining several machines is more efficient. Starting from bobbins of non-woven fabrics, specialised machines weld the layers together and stamp the masks with nose strips and ear loops. Fully automated production lines can produce up to 1 000 masks per minute for the best-performing, although somewhere between 35 and 200 masks per minute is more usual. Masks are then sterilised before going to testing and packaging.

Respirators have a similar production process, with two differences. First, one of the layers passes through high-temperature and pressure calender rollers to become stiffer and form the desired shape. Second, the filtering is enhanced through high efficiency melt-blown electret non-woven material, involving higher tech machines and increasing production costs.

Notes:

3             Re-usable masks may still be one of the solutions to address the current shortage. At the end of March, the US Food and Drug Administration (FDA) issued an emergency use authorisation for a decontamination system developed by the Battelle Memorial Institute that allows certain types of N95 respirators to be re-used. Washable masks, where only the filter is replaced (still ensuring the required level of protection), have also been developed by some companies.

4             OECD, Beyond Containment: Health Systems Responses to COVID-19 in the OECD, updated 16 April 2020.

5             https://www.who.int/publications-detail/advice-on-the-use-of-masks-in-the-community-during-home-care-and-in- healthcare-settings-in-the-context-of-the-novel-coronavirus-(2019-ncov)-outbreak

6             According to Nielsen Retail, the price of face masks increased by 319% in the United States between end-January and end-February 2020. Before the crisis, a box of 100 masks could be bought for less than USD 4 in the United States. However, at the end of February, there were reports that single masks were being sold for USD 20. The same phenomenon has been observed with respirators, with the price of a box of 20 increasing from USD 17 to USD 70. Several countries are now implementing measures to curb prices and protect consumers.

7             Chellamani, Veerasubramanian and Vignesh Balaji (2013). “Surgical Face Masks: Manufacturing Methods and Classification”, Journal of Academia and Industrial Research, Vol. 2(6), pp. 320-324.

There are bottlenecks in the face mask value chain

Specialised inputs can be in short supply and are hard to manufacture quickly

The face mask value chain is illustrated in Figure 1. In terms of inputs, oil and metal are the main raw materials for the manufacture of non-woven materials, metal strips and ear loops (and sometimes other textile materials such as cotton). Additionally, paper pulp (forestry) is needed for cardboard in packaging.8 Metal is only needed for the nose strips, and a variety of metals can be used. The main bottleneck in the value chain in terms of inputs has been the non-woven fabric manufactured with polypropylene.9

Note:

10“New Manufacturers Jump Into Mask Making as Coronavirus Spreads”, Wall Street Journal, 21March 2020.

China  addressed  the  issue  of  the  supply  of  non-woven  fabric early  on by  also  establishing  a  plan  to increase the production of melt-blown polypropylene. One hundred and three companies were involved in stepping up production so that mask manufacturers would not face a shortage for their key input.

Polypropylene (PP) is one of the most commonly produced plastics in the world and, as a polymer derived from oil, can be easily supplied (although dependent on oil prices and access to oil). Manufacture of PP non-woven fabric is also quite widespread, as it is used in baby diapers, feminine hygiene products, and disposable wipes, as well as in the automotive and construction industries. However, PP electret melt- blown non-woven is a specialised fabric, produced by a limited number of companies globally due to the high initial investment required in heavy machinery, such as hoppers, extruders and melt spinning systems. For this reason, it has been more difficult to increase supply during the crisis, or to find companies that can switch to this production within a reasonable time and without massive investment.

As ultrasonic welding is used in a variety of industries (including, for example, the automotive industry), the rest of the value chain is more accessible, although specialised machines are still needed at the assembly stage. Some manufacturers buy the non-woven fabric and just weld the layers (in particular, those manufacturers who switched to mask production during the crisis). Based on the number of companies in different countries that were able to convert their production lines, it seems that the assembly stage is less of a bottleneck. Most of the potential new manufacturers are currently held back by the shortage in PP non-woven fabric.10

Manufacturers of machinery for mask assembly lines – found, for example, in The People’s Republic of China (hereafter “China”), Chinese Taipei, France, Germany, Turkey, and the United States – have seen an increase in demand, as have manufacturers of testing machines (testing is important to guarantee the safety of masks). However, while some entrepreneurs are investing in creating new capacity for the future, most supply increases during the crisis have come through conversion of existing production lines.

Distribution has also been a bottleneck – including domestically

Another bottleneck in the face mask GVC during COVID-19 is seen at the distribution stage. Disruptions in transport and logistics have made the delivery of masks to final customers more complicated.

First, in terms of the international supply chain, several countries have put in place export restrictions or equivalent measures (discussed further below), or introduced new authorisation or certification procedures, which can cause delays in exports.

Second, domestic transport and logistics infrastructure, and domestic distribution, have also been disrupted by COVID-19. While varying across countries, including due to the extent of preparedness of the health infrastructure, masks have sometimes been in short supply, not because of a shortage of goods but because they were not reaching health workers. This, essentially domestic, downstream part of the value chain can be as disrupted as the more international part upstream. Here, the main challenge has been in assessing needs in real-time, and prioritising deliveries and anticipating changes at a time when the whole health system is under stress. In addition, the shortage of masks in some countries has led to thefts and the hijacking of some shipments.

Fundamental supply shortages exist, and current demand might be ten times higher than world production capacity

China was the main producer of masks at the start of the crisis, accounting for approximately half of world production. But even this was insufficient to meet its own demand related to COVID-19, and China imported a large quantity of masks.11 In January 2020, China could produce 20 million masks per day12, which was insufficient to meet a total demand estimated at 240 million masks per day to equip health, manufacturing and transport workers.13 As a result of extensive efforts by the government and companies, Chinese production increased six-fold and reached 116 million masks per day at the end of February and possibly 200 million per day at the end of March (a ten-fold increase). The carmaker BYD, a joint venture between SAIC and General Motors, DaddyBaby (a manufacturer of baby goods), Foxconn (the company manufacturing iPhones for Apple), and China Petroleum and Chemical are all examples of companies that started to produce face masks at a large scale (i.e. more than 1 million per day).14

China addressed the issue of the supply of non-woven fabric early on by also establishing a plan to increase the production of melt-blown polypropylene. One hundred and three companies were involved in stepping up production so that mask manufacturers would not face a shortage for their key input.15

Providing face masks to healthcare workers and COVID-19 patients all over the world already brings global demand to a level above pre-crisis production capacity. There are about 43 million healthcare workers in the world.16 Masks are generally assumed to be effective for about four hours and need to be regularly changed. Assuming that only around one third of healthcare workers need a mask (accounting for the fact that not all countries are affected at the same time, and not all health workers are in contact with COVID- 19 patients), and that each health worker uses on average two masks per day, global demand for surgical masks would be around 28 million per day. Adding in care givers and suspected COVID-19 patients further increases this demand, possibly by another 12 million per day.17

Notes:

11          “China may have imported up to 2 billion masks during the COVID-19 crisis. ‘China Delays Mask and Ventilator Exports After Quality Complaints”, New York Times, 11 April 2020.

12          There are no official statistics sufficiently disaggregated to provide information on the output of masks. Figures in this section are estimates based on press articles and the information released by the Chinese government. In 2019, China produced 4.2 billion masks according to the government, thus implying a world output of about 22 million masks per day.

13          Estimates provided by Hua Chang Securities. Even if the whole population may not need one mask per day, governments who give masks to their whole population (e.g. Chinese Taipei and Korea) distribute two or three per week for people above 15 years old. In China, the population above 15 years old is 1.1 billion, thus giving an estimate of between 320 and 480 million of masks per day for the whole population to have access to a similar number of masks each week. The estimate of 240 million masks needed each day in China is therefore already conservative.

14          “China pushes all-out production of face masks in virus fight”, Nikkei Asian Review, 19 February 2020. 15 “Mask mobilization during wartime from 5 billion to 200 million per day”, Sina Finance, 16 March 2020. 16 World Health Organization, Global Strategy on Human Resources for Health: Workforce 2030, Geneva.

17          As of 20 April 2020, there were about 2 million active (i.e. not recovered) confirmed COVID-19 cases according to John Hopkins University Coronavirus Resource Center. About one-third of tested people are positive, thus suggesting a population of at least 6 million suspected cases. With their family and care givers, the figure can be multiplied by 2 (with a conservative estimate of one mask needed per day).

Many countries have also introduced restrictions on the export of masks

To  address  domestic  shortages  of  masks,  many  countries  have  put  in  place  restrictions  on  exports  or equivalent measures such as the compulsory purchase by governments of all available stocks. In China, there was no regulation prohibitingexports but a form of compulsory purchase, with all orders in January and  February  going  to  the  government  and  exports  resuming  in  March.  Chinese  Taipei  was  the  first economy to ban exports of masks on 24January 2020; many others have subsequently introduced export bans (Table1).

These export bans or compulsory purchases are generally temporary, with some already removed. Countries banning exports are not all producers or exporters of masks (see Figure 2 for the main exporters); non-producers can be motivated by a desire to prevent hoarding or to avoid the export of masks already imported to be sold at a higher price abroad.While some EU countries producing masks have enacted export bans, an EU-wide regulation was adopted on 15March 2020 introducing export authorisations. Exports are not banned, but the needs of EU countries have to be taken into account before authorising exports.18A similar system has been implemented in the United States since 10April 2020, with a temporary rule from the Federal Emergency Management Agency banning  exports  of  masks,  but  providing  a  list  of  exemptions  (e.g.covering  pre-existing  commercial relationships).  Export  licenses  or  permits  for  face  masks  have  also  been  introduced  in  other  countries (Table1).

Notes:

18          The export authorisation was first for all personal protective equipment and narrowed down to protective masks on 14 April 2020 (https://trade.ec.europa.eu/doclib/press/index.cfm?id=2132) . EU licenses are limited to humanitarian purposes and foreign operations of EU governments.

Notes:

19 Source: Global Trade Alert, Market Access Map and WTO.

20 EuropeanCommission, “Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452 (FDI Screening Regulation)”, C(2020) 1981 final, 25 March 2020.

Trade and global production have an important role in addressing the current shortage

International trade and investment along the global value chain for face masks is an essential part of the policy response to the COVID-19 crisisin the short term. Nocountry can meet the increased demand  for  face  masks  alone.  Some  countries  have  created  new  production  capacity  and  supply expected to continue to increase as governments encourage firms to shift production and companies see new business opportunities. But, some countries do not have the manufacturing capacity, the specialised machines nor, more importantly, access to inputs. As the shortage diminishes, the objective should be to restore a more co-operative and open trade environment where export bans are lifted and the face mask global value chain can fully deliver to all in need, particularly in countries where the epidemic is expanding.

Transportation and logistics infrastructure (especially air cargo) is critical. Materials to manufacture masks are usually transported by sea, but severalmanufacturers report having switched to air transport to ensure that deliveries are on time. This poses an extra cost, but one offset by higher prices for the masks.

But  free  trade  and  trade  facilitation  are  not  enough  to  solve  the  current  shortage.  An  important increase in supply is required in the short-term, requiring government planning and incentives for firms to convert  existing  assembly  lines  and  create  additional  capacity.  Certification  procedures  should  be expedited to allow masks produced by new companies to be traded as soon as possible. While the most efficient ‘level 2’ surgical masks can be reserved for healthcare workers (with N95 respirators for the most exposed of them), lower grades of masks could be used in other sectors or re-usable washable masks(as already recommended by some governments and health authorities).

Inputs are as important as final products. More emphasis should be put on the access to inputs and the  development  of  capacity  in  the  production  of  melt-blown  polypropylene non-wovens.  Governments should prevent hoarding and speculation: producers of non-woven fabric have reported receiving orders from companies not manufacturing masks wanting to resell at a higher price. Measures facilitating trade should  also  be  extended  toinputs  and  co-ordination  across  countries  could  facilitate  specialisation  and division of labour to avoid a situation where companies having invested in being able to produce masks are unable to do so because of limited access to inputs.

Open markets provide access to innovation. Maintaining open trade and investment during the crisis can facilitate access to innovation that can help in combatting the crisis. In the short-term, access to new technologies  or  products  will  occur  through  trade.  For  example,  several  companies  are  working  on technologies to safely re-use face masks after a sterilisation process. An open trade environment is key for the diffusion of such technologies.

Ensuring provision of key medical supplies should be part of a global health strategy in the long term

Unilateral actions raise uncertainty and costs. Looking ahead, it would be excessively costly for each country to develop production capacity matching the demand observed during the crisis and encompassing the whole value chain. Lower demand in the absence of pandemic would not make the activity profitable and overcapacity would disrupt the world market for masks and trigger protectionist policies. While some countries could develop some kind of self-sufficiency, it is not clear thatthis situation would improve the supply  of masks  in  another  crisis,  due  to  scale  of  the  surge  in  demand.  It  would  also  be  unrealistic  for smaller or poorer economies to become self-sufficient in the whole array of protective equipment needed.

A multi-pronged approach is needed to mitigate risks. An alternative, more effective and cost-efficient solution  may  involve  a  combination  of  the  development  of  strategic  stocks,  upstream  agreements  with companies  for  rapid  conversion  of  assembly  lines  during  crises  and  international  trade.  As  masks  can easily be stored over a long period (at least ten years), strategic stocks allow countries to manufacture or import a large quantity of masks over time and then be ready to meet a very high demand during crises. It is acost-efficient strategy, as through global production and trade, costs can remain low and masks do not need to be bought in the middle of the crisis when prices soar. Stocks can also be built at the country level, through national strategies, but a globally co-ordinated approach could also ensure that all countries are prepared and create solidarity mechanisms that would further mitigate risks.

Countries seeking to developlocal production capacity as part of a strategy to address future crisis, need to  ensure  sufficient  local  demand.  Strategic  stocks  create  such  demand,  but  only  with  regular  public  or private procurement contracts. The regular use of masks in the population (as a protection against pollution or during the flu season) can also make production economically sustainable (and is one reason production capacity was higher in East Asia than in the rest of the world at the beginning of the COVID-19 crisis). Yet a crisis may be long and stocks insufficient, so contingency plans and strategies to increase supply during crises  will  still  be  necessary.  Such  strategies  involve  creating  a  list  of  companies  that  can  potentially convert their production lines. These companies need to be prepared with the relevant capital investments and  access  to  inputs  (some  of  which  will  have  to  be  imported).  The  government  can  co-ordinate  such efforts and provide subsidies or financial incentives for private companies to participate in a contingency programme.

Robust supply chains require transparency, agility and reactivity. Robust supply chains can ensure that  masks  can  be  produced  during  a  crisis  by  maintaining  operations.  This  is  achieved  through  firm strategies that prioritise risk assessment and planning, information sharing, redundancy in suppliers, agility and reactivity.

Some companies might prefer to rely on domestic suppliers to ensure the robustness of their supply chains. But creating constraints through trade and investment policy can result in limiting the options available for firms to maintain their operations (e.g.access to foreign suppliers for redundancy). Multinational enterprises generally have experience dealing with crises and disruptions in value chains and policies  should  support  their  efforts  in  building  robust  supply  chains.  A  stable  trade  and  investment environment offers them the visibility needed to manage risk.

Notes:

21Brandon-Jones, Squire, Autry and Petersen (2014), “A Contingent Resource-Based Perspective of Supply Chain Resilience and Robustness”, Journal of Supply Chain Management, Vol.50(3), pp.55-73

This paper is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of OECD member countries.This paperiswithout prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area..

www.oecd.org

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