By Liza Lin and Eva Xiao
BYD Co., a Chinese electric-car maker turned mask producer, said it had secured a second reprieve on a troubled $1 billion deal to sell N95 masks to the state of California after missing a Sunday deadline to win a required federal certification.
The Shenzhen, China-based company — which earlier in the coronavirus pandemic signed contracts to sell medical goods to high-profile customers, including multiple U.S. states and the Japanese conglomerate SoftBank Group Corp. — has faced delays in delivering hundreds of millions of masks.
BYD’s snafu stems from a single, critical problem: It still hasn’t received certification from the U.S. Centers for Disease Control and Prevention for the promised N95 masks. The case is a high-profile example of the chaotic, trans-Pacific mask-procurement business that sprung up virtually overnight during the pandemic.
Among BYD’s biggest mask deals is its $1 billion contract with California that was signed in early April. The bulk of the purchase, a deal to buy the N95 respirators that can filter out very small particles, was set to be canceled on Sunday if BYD failed to obtain the necessary certification from the National Institute for Occupational Safety and Health, a unit of the CDC.
Niosh on Monday said “there are no additional updates at this time,” indicating that BYD didn’t obtain the certification by Sunday.
A senior BYD executive said in an interview Monday that its contract with California wasn’t being revoked. Stella Li, who heads BYD’s North American business, said the contract instead had been extended for a second time and that BYD could obtain the approval as soon as next week. California officials didn’t reply to a request for comment.
Ms. Li, based in Los Angeles, said external auditors hired by the CDC would conduct factory audits at BYD’s China plant this week.
“It is also a learning curve for us,” Ms. Li said. “Niosh people, their staff are very professional. …They are tough, right?”
When the coronavirus exploded in China in January, BYD — which is backed by investor Warren Buffett — moved quickly to make protective face masks, as Beijing called on manufacturers to produce medical goods. In weeks, BYD built what it claimed was the world’s largest mask factory, now capable of producing 50 million masks a day.
In March, as the virus spread in the U.S. and medical supplies from American companies such as 3M Co. and Honeywell International Inc. became scarce, BYD emerged as an attractive option for U.S. government buyers, according to states looking for the protective gear.
Within a few weeks, BYD — which stands for “Build Your Dreams” — signed more than a billion dollars worth of contracts for medical goods including N95 masks.
Those deals were signed before BYD had obtained U.S. federal certification for N95 masks. Ms. Li said BYD always disclosed its lack of Niosh certification and that it started reaching out to regulators in March.
BYD “did not overpromise to customers,” she said, adding that they were transparent with delivery schedules throughout.
In a brochure posted on its mask site BYD Care, the masks were falsely advertised as Niosh-approved. The brochure stayed online as late as May 7, The Wall Street Journal found, days after Niosh notified the company that its on-site assessment was rated “not acceptable.”
In a statement shared with the Journal on May 13, Niosh also said a review of BYD’s design, manufacturing, and quality inspection documentation was “concerning,” which contributed to its decision to deny the company certification.
BYD said the inaccurate brochure had been inadvertently uploaded by an outside contractor. It said it would never misrepresent the certification status of its products.
Ms. Li said the company had underestimated the rigor of the regulatory process and assumed with high confidence that BYD would secure approval. She said BYD failed to obtain approval in early May because it lacked the right documentation, but that the masks had passed product tests by Niosh.
When BYD failed to meet the California contract’s initial deadline for N95 mask certification, the company returned around $250 million of what the state had prepaid. The purchase had been contingent on BYD obtaining this approval by then, but the contract then got extended until May 31.
The pivot to masks was an unusual but lucrative move for BYD, once a darling of investors like Mr. Buffett, whose Berkshire Hathaway Inc. took a 10% stake in the company in 2008.
While BYD’s car sales plunged this year alongside global auto markets, it told analysts at the end of April that its second-quarter profit this year would roughly double from a year ago.
That profit guidance was more than 16 times what equity research firm Bernstein Research had forecast. “They are making so much money from these masks,” said Mark Newman, a senior analyst there.
For instance, BYD could earn a hefty margin on a standard blue surgical disposable mask that costs roughly 10 cents to make, he said. BYD sold those masks at 55 cents each to California, according to the contract released last month, a price that Mr. Newman said was in-line with market rates.
BYD hasn’t delivered any N95 masks to SoftBank as of June 1, a person familiar with the company said. The order is contingent on BYD obtaining Niosh-approval, the person said. Ms. Li said BYD also was seeking to obtain an equivalent certification from Japanese regulators.
BYD’s struggles underscore the scrutiny on Chinese companies amid the mistrust between the world’s two largest economies, U.S.-China business watchers say.
“State buyers have to be transparent from the start. And for Chinese suppliers, have your certification set first, as no one is going to get you back if you strike out once,” said Kenneth Jarrett, Shanghai-based senior adviser at the Albright Stonebridge Group.
–Austen Hufford and Mark Maremont contributed to this article.
Write to Liza Lin at [email protected]