US tariffs: Challenges and opportunities

LOCAL listed glove makers have experienced a bad week after investors sold down on the sector following a downbeat earnings performance and outlook from Hartalega Holdings Bhd for the early part of this year.

Hartalega’s nine-month earnings came in way off the mark at some 45% of consensus expectations, which triggered the selling which has wiped out RM3.25bil of its market capitalisation, while peer Top Glove Corp Bhd has lost RM1.6bil in market value since Tuesday.

Hartalega’s numbers were a disappointment and indicate the new tariff regime in the United States presents both opportunities and challenges alike for local glove makers.

While the higher US tariffs on Chinese gloves (60% tariff in 2025, rising to 100% in 2026) will price out Chinese glove makers, Hartalega expects little change in sales in the near term as US buyers have already stocked up ahead of the tariffs.

Hence, it has prepared for a lower production capacity level in the first quarter of 2025.

Analysts believe destocking by US buyers may last till mid-year, but Top Glove officials tell StarBiz 7 restocking orders from the United States will likely start to materialise from next month onwards.

“Yes, Top Glove stands to gain from the tariff-driven trade diversions, as tariffs imposed on glove exports from China to the United States will see glove sales channelled back to Malaysian glovemakers, which augurs well for the local glove industry in its bid to reclaim its dominance in the world market.

“We have been able to raise average selling prices (ASPs) even prior to the imposition of tariffs on the back of continual glove replenishment as the market recovers. The enforcement of tariffs may strengthen our ability to command pricing, but ASP increases will be gradual and subject to glove demand and supply,” Top Glove says.

The better demand supply balance and improving ASPs was also reflected in Hartalega’s recent third quarter ended Dec 31, 2024 (3Q24).

While about 50% of Hartalega’s medical glove exports are to the United States, the market only accounted for 18% of Top Glove’s sales volume in the first quarter of financial year 2025 ended Nov 30 above about 15% in its financial year 2024 (FY24).

Prospects of Chinese glove makers circumventing tariffs through Vietnam or Thailand are unlikely, as US surveillance is likely to be high, according to Top Glove.

Could the competition and margin pressure return on the horizon once China-based producers get their production lines running in places like Medan and elsewhere as part of a way to circumvent the US tariffs in 2025 and 2026?

They definitely are not short of funds. JP Morgan notes Chinese manufacturers could deploy the RM4bil or 6.5 billion yuan from the capital raised over the past 18 months to reinforce its aim for market share.

AmBank Research, in a report, noted the new capacity may exacerbate the current glove oversupply situation and potentially exert downward pressure on pricing in non-US markets.

Currently, Chinese glove manufacturers are selling the gloves at US$15 per carton in non-US markets.

Top Glove officials believe any new capacity from Chinese players outside of China will not be sizeable, given the possibility that the United States may impose tariffs to cover these operations too, as was seen with the solar panel industry.

They also think glove demand will continue to grow annually, as the glove market is dynamic, especially post-Covid, and will absorb the new supply.

More importantly, all the major industry players are managed by entrepreneurs, who will ensure that every investment yields a reasonable return and take into consideration the available capacity in the market.

“It is also noteworthy that operating outside of China in the absence of a home court advantage would mean the China-based producers may not enjoy the same level of benefits as they did in China.

“Moreover, challenges associated with managing a workforce comprised of different nationalities and cultures may also arise,” Top Glove states.

Industry people say the new Chinese production capacity is anticipated to come onstream by the end of the year, which means glove makers like Top Glove and Hartalega still have some time to build the sales to the United States.

However, any immediate gains from the tariffs in the US market could be offset by losses in other markets for local glove makers, as China producers are bound to divert production and compete more aggressively for market share elsewhere.

The fear is real as Chinese glove makers have in the past used their price competitiveness, by some accounts 10% lower than Malaysian glove makers, to dominate the US market.

According to a JP Morgan report, Malaysian glove sales fell some 45% from pre-pandemic levels in the US market as Chinese glove makers made inroads there to hold some 50% of the market by end-2023.

US glove imports account for some 25% of global demand.

The world’s largest glove maker, Top Glove, has seen exports to the United States fall by some 67% in the past five years while Hartalega’s sales have slipped by 31%.

The threat is very real to Top Glove as the European Union (EU) is its main market. The world’s largest glove maker is confident it can stand its ground against any potential Chinese onslaught to gain market share there.

“We have loyal customers in the EU and globally, with whom we have forged very strong business relationships and we will continue to focus on continuous improvement, so we are always able to provide them with quality gloves at cost-efficient prices,” the company says.

Hence, it is targeting a 60% growth in the sales volume for FY25 and expects a return to pre-Covid levels in 2026.

Whether that will come at the expense of profit margins will also be of major interest to analysts and investors throughout much of 2025.