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US ban of TOPGLOV (7113) TOP GLOVE CORP BHD, my reaction and speculations.

The Reaction

“Has the Trump Administration gone insane?!”

The Situation

Upon reading the US ban on Topglove (highlighted by Glovehaircut), I could not believe my eyes.Just a week ago (July 7, 2020) I was monitoring news about the acute shortages of PPE being experienced by US states due to the Covid19 pandemic.



Extracting the information from the above 2 articles we have the following situation. America is comprised of 50 states, so

25 % (12 States) have less than 30 days of PPE supply

70% (35 States) have 60-90 days of PPE supply

5% (3 States) have more than 90 days PPE supply (My guess New York , New Jersey and Connecticut)

The situation can only be worst now, a week late, as the number of new cases per day of Covid19 continue to climb and the death count starts catching up.

So how bad is the ban of TG to the American PPE supply chain? From the Topglove 6th July 2020 Investor presentation, we find that TG sells 78.7 billion gloves annually, 24% is sold in North America, and TG currently has a 400 day backlog of orders to fulfil. From this we can estimate that TG sells an average of 1.6 billion gloves a month to the US. Topglove has indicated that only half of the sales to the US will be affected, thus leaving the US with a short fall closer to 9.4 billion gloves annually or 790 million gloves per month.

While not as severe as was initially though, this is still an intolerable situation for the US as 25% of US states are less than 30 days away from running out of PPE. So it begs to question, what was the Trump White House thinking when they banned Topglove and where will the US even find an alternative supplier for 790 million gloves per month?

The question of finding a supplier is not a simple one. Remember, due to the Covid19 pandemic, TG and most other glove companies have very long backlog of orders that stretch hundreds of days. Hence it is unlikely that US buyer will cancel their orders with Topglove. If they attempt to move to another supplier, they risk being placed hind most in a very long queue. US states do not have the luxury of time. If this ban drags out longer than 30 days, 25% of America will have run out of gloves and in this pandemic you will see medical staff falling ill soon after. 60 days and the US healthcare system would be on the verge of collapse as more than half of US states would be without gloves.The American people need their gloves now, and if forced to join a long queue will pay a premium price to get ahead of the line. This is a very profitable proposition for the glove companies and a very expensive one for the US customer.

And even then, I am unsure if there is sufficient spare capacity in all other Glove companies to make the 790 million gloves a month, (the equivalent of 9.4bn gloves annually) shortfall that the US needs within the next 60 days. Topglove produces 26% of all gloves in the world and Malaysian glove companies make 70% of all gloves produces. Hence our domestic glove production is essentially the global glove production. And here Topglove is king as it produces nearly as many gloves (78.7bn annually) as all its major competitors combined (90bn annually) (Topglove 78.7bn , Kossan 28bn, Hartalega 38bn, Supermax 24bn @ The Big Four).

Realistically, there are very few options to fulfill for such a large volume of gloves in  such a short space of time. The Governors of the 50 States of America, who still have to source medical supplies independently and on their own, would almost certainly start playing shell games with US customs to meet their needs. When the bodies of your citizens start mounting in your State within meat refrigerator trucks, and the Federal government is seemingly in another world, independent action would increasingly feel appropriate.

From the view of Topglove.
It is a seller’s market, plain and simple. Only half of Topglove exports to the US are affected by the ban and that half is easily sold, for example to South American countries like Brazil where the Covid19 pandemic rages out of control. Topglove has a 400 day backlog of order to fulfill and has no shortage of customers.

It may take a week but I can already feel the hint of desperation from hospital supply managers as they watch supplies dwindles in stock rooms, the emergency meetings with directors and senior staff, and finally the phone calls to Senators and members of Congress to put political pressure to reverse this ban.

If TG management were ruthless, they could demand payment from US customers for the gloves held back by the ban and simply leave the shipments in Canada or Mexico for the customer to pick up. TG get the cash and the ban is no longer their problem. If the customer is unwilling pay, TG cancels the order and fulfils its 400 day backlog instead. Then when this ban is lifted, all new US orders will be placed at the back a very long backlog. However as the US states are desperate for PPE/glove, and cannot wait hundreds of days, they will be forced to pay top dollar to have their orders expedited and flown across the pacific (by Airasia who needs the work). Of course I don’t see Tan Sri Dr Lim Wee Chai doing such a thing. It would damage the company’s reputation and its customer relationship. There is a world after the Covid19 pandemic.

So why the ban? Speculations and Conspiracy theories.

At face value, this is a case of human right abuse, one of force labor, the equivalent of modern slavery. However dig a little deeper and we will find that this is about Worker Recruitment agencies forcing recruitment fees on the people that they recruit and holding back their passports once they are here to ensure they pay up. While Topglove had engaged the services of these agencies, it was not Topglove that engaged in such behavior. Logically it would have been better to go after the recruitment agencies rather than Topglove but Topglove is an easier bigger target. Nonetheless, by January 2019, Topglove implemented a Zero Recruitment fee policy and now bares all recruitment fees of its migrant workers. It is also extensive tracing former employee to pay back the money the recruitment agencies took from them. The case seems pretty much closed.

Step back and peel one more layer and this whole scenario makes little sense. While the United States may consider itself a shining city on a hill, we all know that is just an image that the US often fails to live up to. A nation faced with a disaster has to be practical. And the US has shown its practical side during this pandemic, going so far as ordering immigrant workers back into Tyson meat processing plants to ensure that food remains available at the store. This was done even though there was a massive Covid19 outbreak amongst the workers,and management had not provided sufficient PPE for protection or financial incentive to return to work. (Their extra $1 an hour 'danger pay' was revoked once their job was made essential)

Hence this ban, one that occurred without much warning is odd. The US doesn’t just have a need for gloves and other PPE, it has a shortage that is just weeks away from turning into a catastrophe. Once medical workers start becoming infected in large numbers, the healthcare system rapidly loses its ability to care for Covid19 patients, and once that occurs, the mortality rate of the virus will climb drastically. The US denying itself and its medical workers vital supplies for a 2 year old human rights case involving non-US citizens in a foreign country that is largely resolved, does not make sense.

Hence, I feel this decision is politically motivated. It is known that Jared Kushner was tasked by his father in-law, President Trump to buy PPE for the US government. Thus far he has been hording this supply rather than distributing to States. Maybe this ban is an engineered supply shortage like what Enron used to do in California to make money. Worsening the shortage by cutting off state Governors from a major manufacturer of an article of PPE would have an immediate effect. President Trump popularity and importantly his control over Republican Governor has taken a beating recently. We can even see hints of the dissent within the Republican party by the lack of general party push back of anti-Trump attack ads produce by the dissenting members within the Republican party. Every state Governor that obeyed his directive to open early to boast the US economy is now heavily infected with Covid19, some are even considering closing their economy again to control the virus, despite earlier promises that there will be no shut downs again. Perhaps this ban and resulting severe shortage is his attempt to reinstate his influence over them. Jared has PPE stocks which he can sell or distribute. All it would take to be saved is a kind word and a show of support for President Trump.

Thank you for reading. And what a week it was.

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