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Business Observer Thursday, Apr. 22, 2021 4 months ago

Mask company battles supply and demand dynamic

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Running a mask manufacturing business isn’t the cinch it was 12 months ago. One company’s path shows the pitfalls — and promise.     
by: Elizabeth Djinis Contributor

In April 2020, investing in masks seemed like a sure thing. 

Demand was arguably at an all time high — China, for one example, was making some 200 million masks a day.

Tampa’s American Surgical Mask Co. was born in the wake of this moment. Co-Founder and Chief Strategic Officer Kalu Watanabe, an entrepreneur who has been involved in energy and health care entities, was planning to start a hemp venture when COVID-19 mired his plans. An investor from Singapore asked if he had looked into the mask industry. At first, he laughed. 

Then he started researching and realized there was a real opportunity. And when he spoke with his co-founder, Charles Young, he found genuine eagerness. Young believed he could drum up interest quickly and he was right — in total, the company received about $2.5 million from investors.                                   

“Next thing we know,” Watanabe says, “we had the money we needed to start.”

But the road has not been easy, and the trajectory has not been straight. At the start of the pandemic, there were only a few mask manufacturing companies in the U.S. — one of the factors that led to such a crisis and intense demand. Now, because of COVID-19, estimates put the number at between 50 to 75 mask-making facilities, according to the American Mask Manufacturer’s Association.

At the same time, as supply has greatly increased, demand has sunk in turn. In April 2020, a surgical mask could sell for as much as $1. By December, that price dipped to $0.05 In recent weeks, American Surgical Mask Co. furloughed a large number of its 30 employees.

“This should have been the easiest thing I ever did,” Watanabe says. “I buy a machine, I get the material, and we’re off to the races. I didn’t take into account that this was also the most difficult business to start in the worst environment probably ever in history. This is the toughest thing I’ve ever done.”

 

Global game

The first obstacle? Getting equipment. Watanabe thought it might take American Surgical Mask Co. one to two months to acquire machinery. Instead, it took almost double that time.

The company purchased four different machines, with the least expensive $59,000 and the most expensive $180,000. And the expense wasn’t even the problem. Instead, the company experienced every shipping issue possible. Officials heard their equipment couldn’t be found or that it was secured but the paperwork was lost.

It received the machines in early July. Finding material was another challenge. It lost about $15,000 working with a South African front company. Executives were offered material from Turkey from a Polish group that promised they could cross the country’s closed borders.

Eventually, American Surgical Mask made some progress. It bought their nose wires online, asking employees to order the maximum amount possible each time. It purchased elastics from Turkey.

Where Watanabe excelled was in mining his relationships with Tampa city officials. He knew Ed Johnson, former manager of the East Tampa Community Redevelopment Area, from previous business deals, and he saw an opportunity there.

‘This should have been the easiest thing I ever did. … I didn’t take into account that this was also the most difficult business to start in the worst environment probably ever in history. This is the toughest thing I’ve ever done.’ Kalu Watanabe, American Surgical Mask Co.

Watanabe reached out to Johnson to let him know about the budding mask company and ask whether he knew of any potential locations. Johnson connected him with the Tampa-Hillsborough Action Plan, a nonprofit that aims to help build social equity in the region. He knew the organization had a vacant warehouse available and suggested American Surgical Mask Co. lease the space. 

Watanabe’s political relationships also helped other factors move quickly. The company received approval for its electrical permits, for instance, the day after it submitted them. “You try to do that in normal circumstances, [and] you can’t,” he says. “You have to have the connections and the right relationships. There are a lot of moving parts here.” 

Finding qualified workers was, in a pleasant surprise, relatively easy because so many people had been laid off during the pandemic. Within a day of putting up an ad on Indeed, Watanabe received more than 1,000 applications. 

“I thought my computer was broken,” he says. “The email started going, ‘ding, ding, ding.’”

Johnson knew Watanabe wanted to prioritize hiring people from underserved communities at market rate wages. American Surgical Mask Co.’s pay started at $15 an hour.

“That’s another one of the reasons why we chose the Tampa-Hillsborough Action Plan,” Johnson says. “They had access to folks in the community to provide the kind of training that’s going to be needed to provide these manufacturing jobs.” 

The company didn’t start producing masks until July, and it took until October to get up to full speed. At peak capacity, it made about 100,000 masks a day. But machines are fickle, and it probably averaged around 50,000 masks most days.

And just as the supply chain improved, just as materials and equipment became easier to secure, Watanabe started noticing the declining costs of masks. At one point, it seemed China was selling masks to the U.S. for lower than the cost of the materials. 

“Once we started seeing those numbers, we were like, ‘We either do something or we die,’” he says.

That’s led to the American Mask Manufacturer’s Association. What started as just a few companies quickly turned into more than 20 interested firms. 

The companies in the association have a common goal: to ensure American private health care systems rely partially on American manufacturing companies to provide mask supplies. 

Mark Wemple. American Surgical Mask Co. was born in the wake of this moment. Co-Founder and Chief Strategic Officer Kalu Watanabe has guided the company through a turbulent first year.

 

Masking a Question

Brent Dillie, the managing partner of Virginia Beach-based Premium PPE, comes to the mask industry from a different path than Watanabe, but they are now in a similar place. Premium PPE was founded in 2008 but only began manufacturing masks in the pandemic.

At its peak, Premium PPE had almost 300 employees making 1.2 million masks a day. But like American Surgical Mask Co., it had to make changes a few weeks ago and lay off a “significant number” of people, officials say.  

“The prices from China just got so astronomically low that patriotism only goes so far,” Dillie says. “When you’re looking at a profit and loss statement, especially if you’re a health care system, you need to be profitable as well.”

It’s a far cry from the market the company saw at its height when it was selling masks for 40 to 50 cents a piece. 

Dillie’s goal with the American Mask Manufacturer’s Association is to create a stronger public and lobbying voice for U.S.-based PPE manufacturing companies. Both Watanabe and Dillie call this a national security issue. If American mask companies shut down because of competitive issues with China, then how will America fare in the next pandemic? 

“Are we going to sit there and leave ourselves hanging in the breeze again, or are we going to do something to make sure that we have the ability to at least sustain ourselves in the event of another pandemic?” Watanabe asks.

“The goal,” Dillie says, “is to make sure there are enough machines in the country, raw materials in good working order and human expertise that can operate those machines and turn them up to high speed in the event of a future crisis. We’re trying to make sure that that goal is met.” 

The AMMA’s priorities include encouraging the U.S. government to use the recent $1.9 trillion COVID-19 relief package to buy out some American-made masks and rebuild strategic reserves. The organization hopes one day hospitals will purchase a percentage of masks from American suppliers directly. 

 

Fixer upper

Watanabe’s experience, meanwhile, offers lessons to anyone starting a manufacturing business. He learned two key maxims from starting American Surgical Mask Co. The first, for efficiency, was establishing relationships with the city of Tampa and in politics in general. Working on the Tampa-Hillsborough Action Plan campus became a source of networking. 

“Politics matters,” he says. “Working with them, knowing them, putting ourselves on their campus and leveraging their political leverage in the city helped.” 

In turn, 75% of the company’s original staff were women, Black or Hispanic, he says. And having the right people in leadership helped productivity, especially having people on hand who understood how the machines worked — even when they didn’t work.

“I think we hired MacGyver’s son,” Watanabe joked about one of their employees. “Some of the things we had to do with those machines were crazy. He not only understood it, but he could also fix things and rebuild things.” 

It’s a good mantra to carry into any business, Watanabe says. “If you’re the smartest person in the room,” he adds, “you’re in trouble.”

(This story was updated to reflect the correct price a mask had dipped to in December.) 

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