Analysis |

Israel Encouraged Mask Production, Then Left Local Companies in the Dark

Sami Peretz
Sami Peretz
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An Impertech factory in Israel.
An Impertech factory in Israel.Credit: Or Kaplan
Sami Peretz
Sami Peretz

The hysteria that gripped Israel in the early days of the coronavirus last February prompted officials to encourage local production of what was needed to contend with the pandemic. Facing a worldwide shortage and panic buying, the government was flying in masks, ventilators and other gear to ensure critical supplies. Even the Mossad was recruited to help airlift necessary equipment.

The hysteria has passed, and many of those coronavirus babies have been left adrift with manufacturing facilities and no customers. One of them, Impertech, is threatening to shut down because it can’t compete with much cheaper Chinese imports and because the government won’t commit to buying any more masks from it.

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Impertech took on 75 workers for its plant in the Barkan Industrial Zone in order to begin making the masks. “If the production line is closed, they’ll be fired,” warned Yaniv Hadad, CEO of Impertech’s parent company, the Supergum Group.

Other businesses will be hurt, too. The raw materials for the masks come from another Israeli company, Avgol, a maker of nonwoven fabrics ordinarily used for products like disposable diapers, which Hada said makes his masks more comfortable to wear. Imperfect buys 10 to 15 tons of fabric from Avgol every month.

As Hadad explains it, last March the Prime Minister’s Office made an “unwritten” strategic decision to begin making products critical to the coronavirus fight domestically, so that Israel wouldn’t have to compete with other countries to procure them from overseas. However, in the months since then, Israeli distributors have gradually shifted to easily sourcing masks from foreign makers. They don’t need the more expensive Israeli product.

Another company in the same position is Sion Medical, a maker of surgical dressings and related products that was asked by the Defense Ministry to make masks. In March, the Health Ministry asked it to start up a production line to produce the more sophisticated and effective N95 mask – a total of 11 million of them for 55 million shekels ($16.1 million).

In spite of the orders, the PMO issued a call for bids to import 400,000 masks from China. Sion CEO Daniel Lav was livid when he heard about the tender.

Prime Minister Benjamin Netanyahu has called on Israelis to “buy blue and white” during the pandemic and lend a hand to the struggling economy. Ronen Peretz, the acting director general of the PMO, sent a letter last July to the directors general of all government ministries to do the same.

As he explained it, “government procurement plays a central role in the Israeli economy and it’s appropriate that it helps to accelerate growth. The annual procurement budget is in the tens of billions of shekels and we can use it to encourage Israeli industry and services.”

Acting on Netanyahu’s instructions, Peretz told the directors general to give Israeli products and services priority, but he didn’t say whether that preference should come at any price. In the case of masks, making the policy line clear is important.

Chinese masks cost just 25 agorot each, while Impertech’s cost 70 agorot. Hadad said the yawning difference reflects the cost of setting up the production line.

“We set up four production lines for coronavirus masks very quickly. When we signed a contract with the Health Ministry for masks at 70 agorot, which took into account the money we invested in the lines, the market price for masks was 2 shekels. They were very happy with our price. Except that since then, mask prices have fallen to pre-coronavirus levels. The health maintenance organizations and the hospitals say it’s too expensive and prefer to buy them abroad,” Hadad explained.

Impertech is now left with just two customers – the health and defense ministries. It produces 10 million masks a month. When the company fulfills its contractual commitment for the remaining 30 million of the 60 million, it will have no one else to sell to, and the production line will have to shut down.

Hadad said he could now lower the price from 70 agorot, but not enough to meet Chinese prices; locally-made masks would have to be 50% to 60% higher. “If the government wants there to be a local production line for strategic reasons, it needs to preserve our capacity and buy at the price we charge,” he said.

The machinery cost Impertech 5 million shekels, which Hadad and the government had agreed would be reflected in the masks’ price during the first six months of production. “I’m ready to sell them at 40 to 50 agorot per mask, but that’s still more expensive than Chinese masks,” he said.

Part of the problem for local makers is that masks have become “loss leaders” for many retailers – that is, they are products they sell at a loss or at almost no profit to lure in customers to buy other goods.

Hadad isn’t making the case that consumers should be forced to buy Israeli masks, but he does want the government to commit to buy locally so that factories like his aren’t forced to close.

Governments around the world face the same dilemma as Israel about preserving local production. On the one hand, the coronavirus exposed how dependent many countries were on imports – more often than not from China – for critical goods. Relying on the global supply chain not only made them vulnerable when the coronavirus struck but was contributing to unemployment and undermining the business sector.

On the other hand, international organizations such as the World Bank and the International Monetary Fund have warned that protectionism will hurt world trade, hurt export-oriented economics (like Israel’s) and raise the cost of living. In the end, a “buy local” policy could hurt local economies.

What may be a rational policy in a time of crisis may not make sense when we return to normal times. There’s a parallel with consumers, who logically cut back spending and save more during the uncertainty of a crisis. But if they don’t eventually resume spending, it will be harder for economic recovery to gain momentum.

Compared to the cost of fighting the coronavirus to the Israeli economy, which amounts to about 200 billion shekels to date, the cost of keeping two small factories making masks that employ a few dozen workers isn’t going to break the budget.

But the government has to look at the big picture, not at individual cases. Unfortunately, the government has no big-picture strategy at all to deal with the coronavirus crisis. Instead, it operates by the seats of its pants with a horizon that doesn’t stretch past a couple of weeks. While the pandemic continues, no business should gamble its capital or time on a project reliant on the government.

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