The Role of Manufacturing Industry Amid the COVID-19 Storm

I believe much has already been said about COVID-19’s impact on both health and the economy. The latest I read was the macroeconomic impact of COVID-19 according to Professor McKibbin and his student Fernando’s model. They use several shocks, including reduced labor supply, increased risk premia, and higher production costs. All of these are naturally relevant, especially for manufacturing, which makes work from home difficult since factory workers must operate machinery on-site.

Of course, demand has also become quite unusual. People suddenly value items like toilet rolls, antiseptics, and there’s been a sudden spike in demand for instant food and rice. But above all, the need for personal protective equipment for healthcare workers and antiseptics has probably become the most important right now, especially for healthcare facilities and their staff who are currently risking their lives for us.

In this post, I want to highlight an interesting phenomenon: the shift in production function for some factories that are starting to produce goods they don’t normally make. LVMH, the company behind Louis Vuitton, Bulgari, and brands I’ve never purchased, has repurposed its perfume and cosmetics factories to produce antiseptics. BYD, a Chinese company that normally makes electric vehicles, has started making face shields and disinfectants. Nissan, GM, Rolls-Royce, Foxconn, and even Airbus appear to be doing the same – helping make ventilators, PPE, and disinfectants.

This all makes sense. In the midst of such uncertainty, who in their right mind would spend their savings on a new car? Bond yields are even going negative. People buying bonds until yields go negative clearly means they’re desperate for secure cash in the future, right? Better for manufacturers to shift production to something the market actually wants. The government will certainly buy all of it.

This temporary factory repurposing has already been initiated by governments around the world, such as Canada and the United Kingdom. In China, 2,500 factories are now making masks – factories that used to make other things.

As far as I know, other countries are still asking industry to help make PPE and disinfectants but haven’t offered incentives yet (CMIIW). In the People’s Republic of China (PRC), they’re using industrial policy to incentivize factories to pivot to mask production. Some of these incentives include subsidies, tax breaks, interest-free loans, and expedited permits. For SOEs, they probably just get told what to do. But clearly, these incentive-driven efforts appear to have successfully and efficiently redirected national production during this crisis.

On my social media feed, I keep seeing posts saying our healthcare facilities are running short on PPE. This shortage persists even after the Ministry of Trade issued Regulation No. 23/2020 on the temporary export ban for PPE and disinfectants. The likely explanation is that our production capacity can’t keep up with the sudden demand surge.

Many citizens are trying to help. I’ve seen on Twitter so many initiatives to make masks. Here’s one example and its replies:

But if the government wanted to do something, it certainly could.

Regarding cheap/interest-free loans, this falls under Bank Indonesia or OJK’s authority, to ensure banking has sufficient liquidity and is healthy enough to supply the market. Government incentives, tax cuts, and import duty reductions are the authority of the government, especially the Ministry of Finance. The Ministry of Health handles distribution permits or medical device standards (probably needed?). As I recall, many of our textile products have imported components that are restricted by the Ministry of Trade. So if desired, the Ministry of Trade could issue regulations facilitating the import of mask inputs. Interestingly, we’ve already banned PPE and disinfectant exports. If scaling up PPE production massively requires importing raw materials, it feels a bit awkward. Especially if the PRC successfully ramps up mask production massively and quickly, and we end up being the ones who need it. Sad, really.

The Ministry of Industry doesn’t seem to have much of a role, despite being the ministry overseeing manufacturing. At minimum, it could coordinate with factories that might be repurposable, while asking the Ministry of Finance and Ministry of Trade to provide necessary incentives. Of course, if there are subsidies for factories that temporarily pivot, the channel would likely be the Ministry of Industry. So budget revisions might also be possible. But how the process works and whether it can be fast probably depends on the bureaucracy.

In closing, I want to encourage everyone to try to stay home. If you can work from home, then work from home. Leave the roads clear for those who can’t work from home. Stay as healthy as possible, wash your hands frequently, and improve personal hygiene. Leave space at healthcare facilities for those who are truly sick. I believe this already helps a lot. Hopefully we can all get through this together.

Stay at home if you can. Make it safer for those who can’t.