It's Bedlam in the Mask Market, as Profiteers Out-Hustle Good Samaritans

Susan Houghtelling, the supply-chain manager for a hospital network, in Elmira, New York, April 1, 2020. (Shane Lavalette/The New York Times)

Last month, Susan Houghtelling, a hospital supply-chain manager in upstate New York, was facing a shortfall of medical supplies when her inbox suddenly flooded with offers.

There were advertisements for gallons of hand sanitizer, crates of isolation gowns and, most crucially, pallets of N95 masks — perhaps the most sought-after product on the planet. All were for prices that were multiples higher than what she normally paid.

“All of these people are coming out of the woodwork, and all of them mysteriously now have access to an abundant supply,” said Houghtelling, who works for three hospitals owned by Arnot Health, based in Elmira, New York. She forwarded dozens of messages to The New York Times from brand-new vendors. One offered her boxes of 50 surgical masks for $70 each; she used to pay $2.28.

One solicitor in particular caught her attention: Blank Industries, a company that offered N95 masks for nearly $5 each — and only if Houghtelling ordered 1 million. She figured it was a scam.

Blank Industries is a real company, but it’s an ice-melt manufacturer in Hudson, Massachusetts. In an interview, Andrew Blank, the founder, said he had upended his business to sell masks after hearing from a former Chinese supplier he had once hired to make a new kind of toothbrush. (Blank had invented it.) After the coronavirus hit, the supplier turned his dental-products plant into a mask factory. Blank told his 12 employees to stop selling rock salt and start selling masks.

Why was he charging $4.92 for each N95? “To be honest, I don’t even know what an N95 normally sells for,” he said.

I told him. “50 cents?” he repeated. His supplier was charging him $4.75. (His margin would cover shipping costs; he planned to take no profit.)

The eruption in demand for dwindling amounts of masks has resulted in a kind of global supply-chain bedlam. In the United States, the federal government has decided against commandeering American factories to create a new stream of masks. Instead, federal officials are competing against states, hospitals and medical suppliers for the same pool of masks, which come mostly from China.

Yet states and hospitals, whose typical suppliers are overwhelmed and overextended, have little experience negotiating directly with the Chinese supply chain. Thousands of middlemen — entrepreneurs, do-gooders and profiteers — have rushed to fill the void.

That frenzy has created a mess of confusion, according to interviews with hospitals, factories and mask buyers. Production of masks is soaring, but so are scams, logistical hurdles and, of course, prices.

‘We’re getting bombarded’

After the coronavirus outbreak began, China imported 2 billion masks. France ordered 1 billion and vowed to become self-sufficient by year-end. The U.S. government has done comparatively little to coordinate purchasing and ensure that American governments and hospitals aren’t competing.

Last month, federal officials agreed to buy roughly 600 million N95 masks over the next 18 months. But many states and hospitals are desperate for supplies right now, and the government has already nearly exhausted the supply of protective gear in the national stockpile. On Thursday, the White House said it had invoked the Defense Production Act, a 1950s law, to ensure the manufacturing giant 3M sends a certain share of its masks to the United States.

Some of the entrepreneurs stepping up in the government’s stead have succeeded. Operation Masks, a two-week-old nonprofit run by tech executives, said it had just closed deals for 1 million N95s for New York state and 200,000 for Hawaii, charging just over $3 for each mask, not including shipping and other costs. On Thursday, Massachusetts received 1.2 million N95 masks via the New England Patriots team plane.

Still, several hospital executives said that while they appreciated the surge of well-intentioned people, they were overwhelmed with new names in their inboxes, all offering products they need for prices far higher than what they typically pay.

“We’re getting bombarded,” said Ed Bonetti, head of supply chain for the UMass Memorial hospital network in Worcester, Massachusetts.

The hospital is prepared to pay more for masks, but it does not want to buy counterfeit gear. “You’re in this uncharted territory where you’re struggling to just at least validate,” Bonetti said. “The last thing we want to do is put product on a clinician that is not going to protect them.”

Medical-supply arbitrage

Not every new entrant to the market is a good Samaritan. Groups on Facebook, WhatsApp and Telegram are teeming with posts hawking thousands of masks at inflated prices.

Some are wholesalers who bought pallets of masks from China or in liquidation sales and then marked them up. Many more are simply middlemen who call themselves brokers. They scour the groups for masks advertised for a relatively low price, and then repost the offer for a few thousand dollars more. They don’t handle the masks or put up their own money.

Yaear Weintroub is one of those brokers. A 22-year-old community college student from Brooklyn, he typically sells wholesale electronics to Amazon sellers. But the online forums he searches for deals became flooded with listings for masks last month, so he now spends his days trying to connect buyers and sellers for a bit of medical-supply arbitrage.

In a recent interview, he said he was working with a partner to close a deal for 280,000 surgical masks that would increase their price 20% and net the pair a roughly $40,000 profit. He said many of the brokers sold to other brokers, each one marking up the price, until the masks presumably make it to a nursing home or a hospital. He said he would prefer to sell directly to hospitals.

“They’re just more serious,” he said. “So if I have the goods, I want a serious buyer for them. And besides, it’s a morally good reason.”

To these sellers, medical supplies are simply another hot product to flip for a profit. Avraham Eisenberg, a New York wholesaler who is trying to ship masks from China, compared the rush for masks to the fad several years ago for fidget spinners.

The Justice Department said last month that it would investigate people manipulating the medical-supply market. Five days later, federal authorities charged a Brooklyn man with lying about price gouging after he tried to sell 1,000 masks and other supplies to a doctor for $12,000. (He also was charged with assault after he claimed he had the coronavirus and coughed on FBI agents.) Federal officials are now distributing the more than half a million supplies they confiscated from him.

Global demand and stacks of cash

In China, the competition is intense. A small number of Chinese factories are certified by the Food and Drug Administration to make N95 masks, and “those are the diamonds right now,” said Lily Liu, a Chinese hospital executive turned Silicon Valley entrepreneur who now helps run Operation Masks.

“What’s happening at those factories is France shows up in the morning, and then they get Germany at breakfast, and then Italy after lunch, and then the U.S. in the afternoon,” she said. “In between they get distributors showing up at their doorstep with stacks of cash.”

That demand has fueled the spike in prices. While some factory owners are probably making handsome margins, much of the price increase is likely spread across the supply chain, from the firms that ship and inspect the masks to those that make the masks’ fabric and the machines that assemble them.

Take Zhou Hua, the owner of a factory in Xuancheng, China, that months ago made children’s clothing. In February, as the coronavirus swept across his country, he rushed to buy mask machines and spent roughly $500,000 transforming his plant. Now his staff has nearly doubled to 75 employees, and they make 1.6 million masks a day.

He said his margins were modest, and blamed higher material costs for much of the price increases. Most masks use melt-blown fabric to stop tiny particles. Zhou said the price of that material had risen 90% to about $53 a ton. He added that the price for machines that weld straps to the masks had tripled, to roughly $2,100.

From pool noodles to masks

The people jumping into the mask market come from across the spectrum. Dan Schonfeld, for instance, sells pool noodles. He’s pretty good at it, too. He found a reliable supplier in China, slapped sports teams’ logos on them and built a steady business through PoolPartsToGo.com.

When the coronavirus spread last month to his home state, New York, Schonfeld thought he could use his connections in China to get masks to American doctors. He dropped his pool-supply business and began pursuing masks, vowing not to earn a cent.

“The fast-forward button was pressed at that moment, and it really hasn’t stopped,” Schonfeld, 40, said. “I don’t think I slept for four nights straight.”

He worked his iPhone around the clock, calling American hospitals by day and Chinese contacts by night. The hospitals were all interested, but reliable masks were in short supply.

Then, just before midnight on March 19, his pool-noodle supplier in Ningbo, China, Jensen Jiang, emailed with news. He had secured a deal with a nearby factory for 100,000 N95 masks at $2.70 each. But competing orders were coming in, he said, so Schonfeld had to decide quickly.

“Tomorrow is too late,” Jiang wrote. Schonfeld told him to place the $35,000 deposit.

The next day, Schonfeld excitedly called the hospitals. But executives who had expressed such desperation for masks were suddenly wary of turning over $270,000 to a man who was selling pool parts just days before. One replied “We just don’t know you,” Schonfeld said. “It turned into me needing help.”

Eventually, his lawyers found a new buyer: a network of nonprofits that care for 35,000 New Yorkers with intellectual disabilities. They wired the money, and Schonfeld booked a cargo flight.

Then he awoke to more bad news. “I am afraid that I made big trouble to you,” Jiang said in a March 26 email. “All the masks were taken by government.” The email included a photo of a closure notice on the factory’s doors, dated 11 days earlier. Schonfeld didn’t know what to believe.

As Jiang negotiated a refund, which still hasn’t arrived, they decided to find and ship a different mask: the so-called KN95, China’s effective version of the N95. Schonfeld ordered 150,000 from a new factory and booked a freight plane for April 3.

But then there was another catch: The FDA’s guidelines for medical use of KN95 masks in the United States were murky, and Schonfeld’s lawyers warned that officials could seize them. (On April 2, the agency said it would not block imports of the masks.)

“Every day I wake up, there’s a new hurdle,” he said. “I just never thought it would be this hard to help.”

Whatever happens to the shipment, it will end his fling with medical supplies, he said.

A day later, he mentioned he was looking into ventilator suppliers. “I told my wife, ‘All right, I’m done,’” he said. “But if I see on the news that they’re begging for ventilators, and I see that there’s just inaction, I don’t see how I can just sit back.”

This article originally appeared in The New Yourk Times.

Reference: Yahoo News