Malaysia has a long tradition with rubber. For decades, the country was one of the most important suppliers to the global rubber industry – initially under British colonial rule, later as an independent export nation. Today, Malaysia is no longer the global number one, but it has continued to occupy some niches for itself. Including: condoms.
One in five condoms ultimately comes from Malaysia – a country with just 36 million inhabitants. At the center of this industry is the company Karex. The company from the state of Kedah claims to produce more than five billion condoms per year. Customers include global brands such as Durex and Trojan as well as international health organizations and government procurement programs. And this is exactly where the problems begin.
Anyone who takes a look at Karex’s share price quickly realizes that something is obviously going wrong. The stock has been sagging quite a bit since last fall at the latest – and is now 36 percent lower compared to December. Karex addresses the problem more or less aggressively. Ultimately, it is Donald Trump whose policies have created a macroeconomic worst-case scenario for the condom industry – and thus also directly affect Karex.
Trump is hitting the industry on two fronts: Firstly, through cuts in international aid programs. This noticeably dampens demand from large health organizations for contraceptives, and particularly affects export business to the Global South. With an export quota of over 90 percent, Karex is particularly hard hit.
Condom manufacturers are struggling with higher costs
On the other hand, the Iran war has led to higher prices for silicone oil, an important raw material for lubricants and condom packaging. Prices here have now risen by more than 30 percent, which Karex is trying to pass on to customers. However, these react extremely price-sensitively, especially in emerging markets.
Karex therefore had to report its second quarter of losses in a row. With the exception of the Corona crisis, this is a novelty for what is actually a crisis-proof business model. After all, consumers have little alternative options, especially in poorer regions of the world. Although there were also accounting effects, such as the weak dollar, the decline of 12.7 percent in the most recent quarterly sales clearly exceeds the decline in the dollar.
It is questionable whether Karex can work its way out of the crisis again – similar to after Corona. The model actually seems robust. Unlike many consumer goods manufacturers, the group is often not visible. A significant part of production takes place in the so-called OEM business: Karex produces for other brands that then sell the goods under their own name. This means that the business model remains lean because, for example, there are hardly any marketing costs. However, it increases the dependence on major customers like Durex, who can also easily switch. After all, condoms are a very standardized product, which means there are numerous competitors – such as Thai Nippon Rubber Industry and Cupid Limited. Indian manufacturers like Cupid in particular are currently gaining market share because they can produce more cheaply and are entering into sometimes ruinous price competitions.
The way out is specialization
For Karex, one strategy lies in specialization. Demand for premium products is growing, especially in industrialized countries: The company is increasingly investing in condoms made of synthetic nitrile – a thin material that is said to cause fewer allergies and could be cheaper to produce in the long term than classic natural rubber. The technology is intended to make Karex more independent of the fluctuating latex price. However, nitrile is based on petroleum – and its price development is currently difficult to calculate.
After all, Karex’s financial situation is solid. Despite losses in the last two quarters, cash holdings of $109 million are roughly at the level of the previous year and ultimately at the level of 2016. What is a concern, however, is the gross margin, which at 27 percent is now well below the industry median of 37 percent. Not everything can be blamed on Trump; some of it is also home-made problems. And that’s probably why the stock market punished the stock so heavily.
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