Hong Kong dangles incentives for local face mask production as coronavirus stretches supply

March 18, 2020, 7:29 AM UTC

Since the first outbreak of COVID-19 struck Hong Kong in January, wearing a surgical mask has become de rigueur for residents of the Special Administrative Region. The surge in demand has led to empty shelves of a once common product, prompting thousands to line up overnight and pay premiums for new shipments. With no sign of the pandemic coming to a close, local entrepreneurs are being encouraged to set up new production facilities.

“There is a global shortage of [masks] and more so with the epidemic spreading to other countries. So this will increase the difficulties for Hong Kong to acquire sufficient numbers of masks and other protective equipment for our own use,” said Secretary for Commerce and Economic Development Edward Yau, announcing an HK$1.5 billion ($193 million) subsidy scheme to encourage entrants to the mask-making business.

Under the scheme, companies can apply for an HK$3 million subsidy to support the operation of a surgical mask production line. The government set a quota of 20 production lines for subsidy payouts, totaling a maximum of HK$60 million. Applications for the subsidy are open until the end of the year. The remainder of the HK$1.5 billion fund will be used to purchase masks from the companies, which must commit to a yearlong guarantee of supply.

Evidently, Hong Kong’s leaders are preparing for prolonged high demand. However, conditions for receiving a subsidy might be too strict: Over 90% of subsidy applicants have been rejected, with only two of the 74 applicants qualifying, according to the Commerce and Economic Development Bureau (CEDB), in charge of the scheme.

According to the CEDB, 65 of the applications failed to meet all eligibility criteria—such as the need to have production equipment already in Hong Kong, or to have amassed a large enough supply of raw materials. The remaining seven applications are currently being reassessed.

Masking tape

In order to qualify for the scheme, applicants need to have all the equipment and materials ready in Hong Kong. They need to have rented a space to house the equipment and be able to guarantee the quality of the finished product.

The successful applicants are also required to produce a minimum of 500,000 masks per month with the first 2 million masks produced each month earmarked for the government. Any excess on 2 million can be sold to the public but are not allowed to be exported.

“Since the government is only subsidizing 20 production lines I think we’ll be quite lucky if we can get it,” says Denis Huen, founder and CEO of masHker—one of the numerous new mask manufacturers springing up in Hong Kong. Huen says his team has sunk about HK$2 million into setting up a production facility already and expects to be operational by the end of the month.

MasHker opened preorders for masks on March 10, allowing 20,000 people to register to order up to two boxes. All the registration slots were gone in a minute, Huen says. The company says it has also received inquiries for orders as large as 1 million masks per month already.

“At the moment I’d say it’s still possible to run the business without the subsidy, because there’s such a big gap in supply and demand,” Huen says. “But after six months, I’m not sure. That’s when the government orders would be helpful.”

Going alone

Some companies are forgoing the government subsidy scheme altogether, spending their own money to bolster supplies. Real estate developer New World Development (NWD) is investing HK$10 million through its charity unit to create its own mask production facility, establishing two production lines to churn out 200,000 masks a day. The company says the masks will be distributed for free to those “most in need,” such as low-income families.

“We have no shortage of scientific research capabilities, talent, and resources in this city, and we are absolutely equipped to produce high-quality masks locally to tackle immediate and long-term needs,” NWD general manager Adrian Cheng said.

However, many of the resources—such as the polypropylene, which commonly forms the mask’s inner filtration layer—are actually imported. With demand increasing globally, supply lines are tight, and prices are high. Huen says his company is sourcing fabric materials from Indonesia, China, Turkey, and Germany to maintain a constant supply; the costs have surged from roughly HK$100,000 per ton to HK$400,000. NWD sources its materials from places like Turkey and Israel.

The cost of the machines has jumped as well. One budding entrepreneur in Hong Kong paid twice the usual rate to secure a machine for $114,000—also imported from mainland China. Huen is sourcing machines from China, too, but says Beijing has prohibited the machines from being exported wholesale. They might need to be shipped in parts instead.

Long-term needs are another issue. Demand for masks won’t ride high forever as the coronavirus pandemic eventually abates. Companies that enter the business now could be left at loose ends. NWD says it will redirect production to meet internal company needs once the pandemic eases and will shift some supply to NGOs, while Huen says his company might expand into other protective gear or filters for air conditioning units.

“I think filters are actually a good investment for the future, because nowadays all offices are searching for them. Not many factories in China can produce those types of high-quality filter, so there’s room for Hong Kong to expand,” Huen says.

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