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.
The U.S. state of Washington, another of BYD's customers,
canceled an order for 2 million KN95 masks, China's equivalent of a
N95 mask, on May 26 after significant delays, a spokeswoman for the
state said. The contract was worth $6 million, emails obtained by
the Journal show.
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 Liza.Lin@wsj.com
(END) Dow Jones Newswires
June 02, 2020 22:03 ET (02:03 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.