Written by Frank Siedlok, Natasha Hamilton-Hart, Hsiao-Chen Shen.
As the SARS-CoV-2 virus and the related news spread for the last two years, the shortages of personal protective equipment (PPE) and medical equipment became apparent, causing policymakers globally to panic. Governments responded by implementing export controls, revoking Defence Production Acts or requisitioning orders, and issuing calls for industry to help. A range of actors responded to the call, redeploying their capabilities to produce needed goods. But, unfortunately, many of them failed to deliver.
One of the earliest and perhaps most significant challenges was to ensure a sufficient supply of medical facemasks, acute shortages of which exposed health workers to the risks of infection, as shown in the chaos in the United States. Public panic can also ensue as a result of the shortages. Despite their seemingly low complexity, medical facemasks became one of the most coveted commodities worldwide, becoming chips in geopolitical games, a subject of theft, ‘modern piracy’ and counterfeits.
Realising that market forces were insufficient to address the issue and posed a potential risk in the future, governments were forced to re-think industrial policies and raised calls for reshoring industrial capacity. However, in the United States, despite some government policies requiring federal agencies to purchase domestically produced medical equipment, these efforts have largely failed so far.
One of the exceptions is Taiwan, where the effective management of the supply and demand as well as the scaling-up production in record time not only helped to establish Taiwan as the second-largest producer of surgical masks but also contributed to what has become known as “mask diplomacy.”
Having learned from SARS in 2003, Taiwan foresaw the need to address the demand for facemasks. In our recent paper with Natasha Hamilton-Hart and Hsiao-Chen Shen, we analyse Taiwan’s facemask policy of 2020 to illuminate needed capacities for coordinated action by state and business actors while highlighting the perverse impact of SARS on institutional capacity during COVID-19.
We delineate three tasks: increasing mask production capacity, managing output, and distribution and sales monitoring. These highlight a range of coordination, commitment, and collective action challenges that must be addressed.
Increasing mask production capacity
Drawing on the experience during SARS, government officials were aware of the risks due to a potential shortage of face masks. The first challenge faced by the government was to ascertain the extent of the shortfall in production capacities. This called on the established bureaucratic monitoring capacities of the Taiwanese state sector and specific organisational structures in the state sector, created in the wake of the SARS. A raft of regulations, laws and administrative structures allowed to centralise control to improve communication and coordination.
Consequently, the Ministry of Economic Affairs (MOEA), in collaboration with three public research institutes (PRIs), was able to rapidly assess current and needed daily production capacity and invoke necessary action: there were sixty-six mask manufacturers and two manufacturers of mask machines left in Taiwan, with the maximum daily production capacity of 1.88 million masks.
As the potential demand was assessed at 10 million masks, the government set the goal to develop 60 production lines in 45 days, with an additional 32 production lines being added later: an ambitious target considering that creating one production line usually takes two to six months. Unfortunately, the remaining two manufacturers lacked both the resources or willingness to assist the government as they remembered how the industry was left to collapse after SARS. They were also reluctant to share their knowledge, fearing other companies would enter the market.
Yet, the strong legal mandate and organisational structures developed after SARS proved insufficient. Instead, scaling-up production required voluntary business–state cooperation. Unexpectedly, the Taiwan Machine Tool & Accessory Builders’ Association (TMBA) contacted the MOEA, volunteering top engineers and equipment and offering to assist the three public research institutes as well as the two machine manufacturers in scaling up the production. Rather than attempting to reverse-engineer production lines, TMBA’s offered public assurance not to enter the market, leading the two remaining manufacturers to lend their precious know-how and assist the government efforts. This enabled the development of trust.
Finally, high levels of visibility and transparency about project progress along with workloads instigated commitment and healthy competition among members of the Taiwan Face Mask Team (TFMT): under peer pressure, the companies sent their best employees who were willing to work overtime, and none of the TFMT member companies left before completion of the task.
In Taiwan, similarly to the US, a sudden spike in demand for masks did not automatically create sufficient incentives to increase supply by manufacturers. When the MOEA contacted facemasks manufacturers to increase their production, the response was rather frosty. The perverse legacy of the SARS experience came to light as manufacturers who invested in their production capacity during SARS were left with over-capacity, sunk costs, and diminishing demand, further compounded by a shift to a ‘lowest price’ purchase policy. The MOEA apologised for abandoning the industry the last time, promised a Made-in-Taiwan purchase policy and now supports developing export capabilities.
To alleviate the cost of investment, the production lines developed by the TMFT were given to 29 facemasks manufacturers, free of charge if they met a predetermined output. Once the targets were met, the government purchased any additional masks at a price that was above the market price. In addition, a flexible bonus payment system was put in place that allowed manufacturers to fulfil export commitments first, thus not to jeopardise future export opportunities and motivate them to operate at maximum capacity.
Distribution and sales monitoring
Utilising its centralised regulatory authority, the government took complete control of production, distribution, and price regulation of medical masks, both for medical and public use, preventing the bottlenecks and bidding wars seen in the US. To preclude price gouging, the government requisitioned masks and production facilities and introduced a name-based rationing system to ensure the public had access to sufficient masks at a set price, while the MOEA released daily updates on production outputs to the public. The distribution of masks was achieved through collaboration with the Taiwan Pharmacy Association, Chunghwa Post and active engagement of civil society. Once the local demand was met, manufacturers were permitted to sell freely any surplus above their quotas, ensuring compliance.
Monitoring was necessary as a safeguard against opportunism as some firms and individuals have been caught attempting to illegally export masks during the export ban while others were found illegally importing industrial masks from Chinathat were labelled as medical masks, claiming to be ‘Made in Taiwan.’ The government introduced additional measures to control and monitor all imports and exports of masks, medical and industrial. It also introduced a requirement that all masks made by the TFMT needed to be appropriately embossed. High-visibility sanctions for rule-breakers ensured compliance and allowed for self-monitoring.
Understanding and overcoming the challenges to coordinated action
The analysis shows that Taiwan’s ability to rapidly increase mask production required the government and industry to overcome a series of cooperation challenges in three domains: the state sector, business-government cooperation, and cooperation among private firms. Such concerted action is difficult. The capacity to achieve coordinated action within and across state and private sectors depends on specific attributes of formal and informal institutions that structure action by both state and private sector players.
Across these tasks, our research teased out three types of cooperation problems, and Taiwan’s institutional solutions. First, coordination problems prevent mutually beneficial cooperation when transaction costs impede multi-party agreements or some players corner the gains. Taiwan used existing state-private relationships and post-SARS institutional capacities to identify relevant actors, assess production capacities and connect key players.
Second, eliciting private investment posed commitment problems: where would-be co-operators pre-emptively forgo beneficial coordination because they suspect others will renege. State promises of market support – made credible by established links with the industry – overcame these.
Third were collective action dilemmas: some players have ongoing incentives to defect despite others’ guaranteeing cooperation. In taking the risk of sharing technical information and resources, firms relied partly on social capital and previous interfirm cooperation. TMBA members kept their word while those high-visibility sanctions buttressed compliance. The findings confirm that business-government and business-business cooperation remain complementary and interdependent. Taiwan’s COVID response vastly outperformed both the UK’s neoliberal regulatory state, which ordinarily only remedies market failures and the chaotically uncoordinated US, proving demand alone cannot guarantee supply. It further helped (re)embed core industrial manufacturing capability.
Frank Siedlok is an Associate Professor of Strategy and Enterprise at Heriot-Watt University, Edinburgh, UK. His research focuses on collaborative innovation and knowledge development. The full article can be accessed here: https://onlinelibrary.wiley.com/doi/full/10.1111/dech.12702