As Washington state officials raced to buy protective gear for combating COVID-19, they bet big on a Chinese automotive conglomerate that has built what it calls the world's largest face-mask factory.
Washington state has ordered $227.5 million worth of supplies -- mostly masks -- from a subsidiary of China's BYD Co., accounting for more than half the value of all the state's orders for COVID-19 supplies. Of the BYD orders, three-quarters are weeks behind schedule, while more than a million masks it has delivered are idling in a state warehouse awaiting federal regulatory approval, according to records reviewed by The Seattle Times. A federal worker safety agency on Wednesday denied initial approval for BYD's N95s, placing the state's order in limbo.
As delays have mounted, hospitals, nursing homes and other long-term care facilities have turned elsewhere for personal protective equipment (PPE) because the state's pipeline has yielded just a trickle of supplies, industry leaders say. The urgency is now growing as officials ramp up testing.
"We were without the basic tools of preventing the spread of the virus," said Deb Murphy, CEO of LeadingAge Washington, an association of nonprofit nursing homes. "We're not sitting around waiting for the state to provide us PPE."
BYD is far from the only vendor to fall behind schedule delivering COVID-19 equipment. The pandemic has profoundly disrupted global supply chains, leading to critical shortages across the globe. Yet Washington's heavy reliance on the company, which hasn't been reported previously, highlights the complexity that states face in finding reliable sources.
By Friday BYD had delivered 4.4 million masks to Washington, made up of roughly equal parts N95 respirators, KN95 respirators -- the most comparable standard in China -- and single-use surgical masks, according to state officials.
The state's purchase orders show that BYD should have delivered about 23.9 million masks by now.
Washington officials negotiating with BYD have taken a more cautious approach than other states, including California, which struck a nearly $1 billion deal for the company's N95 masks and paid half the sum up front. BYD refunded some of the payment to California due to delays. By contrast, Washington state has paid only on delivery, which totaled $2.7 million as of May 7.
Some state officials have fumed over BYD's repeated setbacks. "It's becoming an increasing concern of BYD's ability to deliver the ordered quantities," one procurement official wrote to a BYD representative in late April, warning the state might cancel some orders.
BYD acknowledges that it hasn't delivered all the promised supplies to Washington state on time. The company has provided a range of explanations for the holdup, from politics to enhanced scrutiny in Chinese customs to problems with the middlemen who ship the supplies.
Regarding the denial of its N95 certification by the National Institute for Occupational Safety and Health (NIOSH), an arm of the U.S. Centers for Disease Control and Prevention, BYD said the masks passed a battery of physical tests and the rejection was for "easily fixable" paperwork errors.
"We had the impression that we would be fully certified by the beginning of May. Now we think it's more likely to be the end of May," BYD spokesman Frank Girardot said.
"It's a paperwork issue. It has nothing to do with the quality of masks," he added. NIOSH, in a statement, declined to cite the specific reasons for denying approval but said that a review of documentation for the "design, manufacturing and quality inspection of the device was concerning," and that an on-site assessment was rated "Not Acceptable."
Linda Kent, a spokeswoman for the state Department of Enterprise Services (DES), said the manufacturer's products have so far passed state quality tests but its N95 orders will be contingent on the company getting the federal approval. More generally, she said, delays are part of a "new normal."
"In this environment, we are hesitant to cancel orders where a vendor has delivered quality products without exploring every route possible to resolve delivery issues," she said.
In early March, DES, the state's main buying agency, suspended the competitive bidding requirement to acquire goods and services. That has left all manner of companies to maneuver for no-bid contracts. In what has become a common feature of contracting in the COVID-19 era, state officials connected with BYD outside conventional procurement channels -- an introduction facilitated by an alliance of Seattle's largest companies and a hedge-fund manager that has invested in BYD.
Foreign factory, local connection
BYD, which stands for "Build Your Dreams," is based in Shenzhen, China, and manufactures everything from rechargeable batteries for phones to electric buses, according to S&P Global Market Intelligence. It counts Warren Buffett's Berkshire Hathaway as one of its major investors. In the U.S., however, it has drawn bipartisan criticism over Chinese government subsidies that its critics say allow it to compete unfairly against American businesses.
U.S. Sen. Mike Crapo, R-Idaho, lashed out at BYD and another Chinese company at a March 5 Senate hearing. "It is impossible for other bus and rail manufacturers to fairly compete when these two companies have the unfair advantage of the financial support of the Chinese government," Crapo said in his prepared remarks.
BYD hit back the next day, invoking Buffett as an investor and saying it abides by U.S. procurement laws. The enterprise is publicly traded in Hong Kong.
At the time, the company was in the midst of a dramatic pivot in reaction to the outbreak. As the novel coronavirus ravaged central China, BYD built an operation in Shenzhen capable of churning out 5 million masks and 300,000 bottles of disinfectant a day. On March 13, it announced it had created "the world's largest mass-produced face masks plant." BYD has subsequently quadrupled mask production, a spokesman said.
Washington state officials were scrambling to secure masks, hand sanitizer and other protective gear as it became clear that the federal government stockpile would not cover the need. As the call for leads on such supplies spread through Seattle's business community, executives at Himalaya Capital arranged an introduction.
The Seattle-based hedge-fund manager has invested in BYD, according to company records. On March 20, Paul Teng, a managing director at Himalaya, contacted a Kaiser Permanente executive who was helping the state find leads for protective equipment and introduced the executive to BYD executives, according to correspondence reviewed by The Times. The contact was facilitated through Challenge Seattle, an organization composed of executives from the city's largest companies.
"In our efforts to help our local communities of Seattle, King County and Washington state deal with the pandemic, Challenge Seattle provided us with a list of PPE needed by the state and mentioned that they were helping the state vet suppliers," Teng told The Times. Himalaya founder Li Lu also started a foundation to donate PPE to health care workers and first responders, Teng added.
Within hours of the introduction, a DES procurement official was discussing ordering masks from BYD. On March 23, DES ordered 2.2 million KN95 masks from a BYD subsidiary, Global Healthcare Product Solutions LLC, with a first installment due by April 1 and the rest a week later.
On April 3, BYD became one of the first Chinese manufacturers to receive an emergency approval from the U.S. Food and Drug Administration for its KN95 respirators that hadn't been certified by NIOSH. That same day, the company delivered its first installment of 250,000 masks to Washington state -- not quite on schedule, but not far from it.
"Woohoo!" Jaime Rossman, assistant director for procurement, emailed when he heard the news.
The commander of the Washington National Guard wanted to promote the first BYD shipment as a success.
"Just spoke with the Governor," wrote Maj. Gen. Bret Daugherty. "Can we do a media event next week where we show PPE being loaded onto trucks for distribution to hospitals?" An event was ruled out, a Military Department spokeswoman said.
BYD's FDA authorization and initial delivery helped establish it as a reliable vendor, and the state began ordering more supplies. Washington state has ordered 55 million of the N95 masks from BYD at an average of $3.24 apiece, for a cost of $177.9 million, along with 6.5 million KN95 masks, 48 million single-use surgical masks, and 100,000 bottles of hand sanitizer.
Soon after the first order, however, frustration began to set in.
As DES analyzed the progress of its COVID-19 purchases overall, officials realized that there was a large discrepancy between expected deliveries and actual shipments.
"This is highly concerning," Robert Ezelle, head of the state's Emergency Management Division, wrote of the discrepancy on April 15. "How badly does this skew our timeline?"
The delays involved multiple vendors, but the largest orders were from BYD. "It looks like we might be behind a couple of millions of respirators/masks right now," Elena McGrew, a DES procurement official, wrote to her contact at BYD.
The company had a reassuring response for DES. BYD was in the process of having its newly made N95 respirators reviewed by NIOSH. "They are getting NIOSH approval now on N95s and expect to get it within a week," McGrew wrote her colleagues on April 15.
But as days went by, BYD's shipments did not arrive as expected. Oscar Su, a BYD senior director, apologized for the delays, attributing them to mechanical maintenance and lapses on the part of a logistics firm it had hired.
Meanwhile, nursing homes and other long-term-care facilities were placing orders for state supplies, typically through local health departments. Until mid-April they were not considered a top priority by the state for PPE, unless they had a confirmed or suspected COVID-19 case.
"They had become very dependent on the state," said John Ficker, the executive director of the Adult Family Home Council of Washington State. "But very little PPE was actually distributed."
Smaller hospitals without much buying power have also struggled to place equipment orders during the pandemic, said Cassie Sauer, the head of the Washington State Hospital Association. In the absence of public sources, her organization has bundled supply orders and purchased 2 million masks directly from Chinese companies.
McGrew and other state officials were particularly keen on the status of BYD's N95 respirators, which they hoped would be of superior quality to past shipments. To finalize the order, though, the N95s must be approved by NIOSH.
On May 6, Su notified McGrew that BYD had "passed the test," and attached reports from NIOSH. But it was not yet a done deal. A few hours later, McGrew told colleagues that the final paperwork for NIOSH approval wasn't ready. "BYD claims politically motivated delays, but reason doesn't matter at this point."
Still, DES was keenly aware of the competition for the supplies. Even without the official NIOSH sanction, some other buyers were ready to snap them up.
"We will ship these N95 without the NIOSH logo," Stella Li, a BYD executive, emailed a Texas emergency-operations official. "Please confirm if this is ok."
"Yes -- we are good with that," the Texas official wrote back, according to the exchange that BYD forwarded to DES.
A few hours later, DES officials reconsidered their position. Texas confirmed that the BYD N95s passed their own quality testing. They'd also passed muster on tests in Washington state. The Department of Labor and Industries wasn't concerned about the lack of a NIOSH stamp on the packaging, as long as the masks ultimately got federal approval.
"Let's do it," Rossman, the assistant director for procurement, said of ordering more N95s rather than KN95s in a chat log on May 6.
A week later, with the news that NIOSH had denied approval, DES shrugged off the setback. Three more truckloads were en route Friday with BYD N95 masks, destined for storage. Kent, the DES spokeswoman, said the state could return the shipments if needed.
"Our acceptance and distribution of a new model of mask is contingent on the regulatory approval," she said. "Once approved, DES would proceed with the order; should they ultimately fail to receive approval, DES will cancel the order."