Not many industries can cite Barack Obama and swine flu as their biggest drivers of growth, but so it is with the makers of rubber gloves.
Despite fluctuating oil and latex prices, the industry is expected to grow between 8% and 13% during the next 10 years, thanks in no small part to President Obama's healthcare spending and a rising fear of pandemics prompted by the recent global outbreaks of swine flu, bird flu and Sars.
Such things are good news for latex glove makers. Last year, global demand for gloves grew by more than 16% and the outlook remains strong. The US and China have pledged $10 billion in healthcare reforms this year and the World Health Organisation continues to class the swine flu outbreak as a pandemic, all of which means the demand for gloves is sure to rise further.
That, in turn, is good news for Malaysia, which is home to the world's top three producers -- Top Glove, Supermax and Kossan. These three companies churned out 74 billion gloves last year. (These are not pairs, but rather individual gloves. The industry refers to them as pieces because surgical gloves are sold in boxes and there is no distinction between left and right gloves.)
The success of Malaysia's rubber glove industry -- it has cornered 67% of the global market -- is no overnight phenomenon. The country has had the upper hand on the global market for the last 25 years.
With a well-established rubber industry, as well as low domestic production costs, Malaysia has taken advantage of economies of scale to emerge as the leader in natural and latex rubber gloves.
The industry started to grow in Malaysia after the Aids epidemic in the late 1980s triggered a surge in global demand for medical-grade equipment. This prompted the government to release some 250 licences to small entrepreneurs who were looking to branch out from the rubber industry and venture into making gloves.
Success breeds copycats. Intense competition drove down margins and within five years the industry had consolidated from 250 manufacturers down to just 45 players. Today, the top six companies account for 51% of global supply.
On the demand side, 70% of the world's glove supply is consumed by about 12% of the global population. The biggest buyers of gloves remain high-income developed markets, such as the US, EU, Japan and Australia. Among those, Americans are the biggest spenders -- not surprising given that they fork out the equivalent of 15% of their GDP on healthcare.
But long-term growth is expected to come from emerging markets. China, for example, spends just 4.5% of its GDP on healthcare. As that figure rises, so too will the demand for rubber gloves.
"A lot of these big population countries, where the percentage of allocation to healthcare has increased correspondingly, like Russia, China and India, are starting to use gloves on a very aggressive basis, " said Kim Meow Lee, managing director of Top Glove, "and it is the same scenario being repeated all over the world."
With these key indicators for growth, the market's major roadblock may potentially be the rise in global oil and latex prices. The price of latex concentrate hit record highs during the past three years, but despite this the main market leaders have managed to leverage efficiencies of scale to maintain net profit growth for the past 10 years.
That is a small miracle when you consider how sensitive glove makers are to moves in latex prices. For example, every 1% increase in the price of latex concentrate can result in a 3% drop in Top Glove's net profit. For Supermax, the result could be a 2.4% dip in net profit.
However, all glove manufacturers have to deal with the cost of latex, so prices go up across the board when the price of latex concentrate rises.
Malaysia's edge is its experienced manufacturers and its vast and growing neighbours: India and China. As these countries demand more gloves -- and they will -- Malaysia is the natural place for them to turn.
This story was first published in the June 2010 issue of FinanceAsia magazine.