When the company previously known as LeTV announced plans to create a global ecosystem of products, it shocked many and would pit itself against some of the industries biggest leaders such as Samsung and Google. Just one short year after entering the US market, though, and the plans have resulted in disaster for the Chinese company. Back in January of 2016 when the company rebranded itself as LeEco, its global plans seemed pretty impressive and the Chinese brand was sure it could pull it off. So sure, in fact, that the name LeEco itself is short for Le Ecosystem and was meant to represent Yueting’s big ambitions. But in order to make the plans a reality, the company relied heavily on cash injections from investors and banks, which translated into high amounts of debt for the company.
The company already had a wide range of products that included a range of smartphones and an alternative to Netflix, but after the new plans were announced, a process of rapid expansion began. In early summer of 2016, the company announced the purchase of huge amounts of land in Silicon Valley, where a new global headquarters was to be built, along with plans to hire over 12,000 local employees. In addition to this, LeEco announced the purchase of VIZIO for $2 billion, an acquisition that would buy the Chinese company an instant presence in the US market, and would allow them to offer their online content services through VIZIO’s TV products. Shortly after, the company once again confirmed its commitment on the US market through Faraday Future. Jointly, the companies announced plans for a brand new manufacturing plant set to be built in Nevada and valued at $1 billion.
The CEO’s goal for LeEco certainly made sense on paper, and would essentially create an ecosystem similar to Apple’s, just much broader than that of its American counterparts. But with LeEco bleeding money at much higher rates in 2016 than ever before, and revenues increasing at a slower pace than its expenses, the constant spending on LeEco’s part was simply unsustainable. The company initially denied any money problems on a number of occasions, but shortly after LeEco’s official debut in the US market in November 2016, CEO Jia Yueting was forced to admit that the company was facing financial problems.
At that point in time, LeEco’s rapid expansion had been so significant that it had created 15 subsidiaries and had 68 affiliated partners. Unsurprisingly, though, shortly after its money problems were confirmed, the company’s worldwide expansion came to a rapid halt and it began to retreat back to China. By April 2017, LeEco cancelled its VIZIO acquisition, with the latter then filing a $100 million lawsuit against the company due to terminating the contract. Faraday Future’s Nevada factory was also scrapped, and over $300 million in incentives were returned to the state, with the company then confirming plans to sell off its Silicon Valley headquarter and lay off employees.
Meanwhile, LeEco’s shares continued to decrease, dropping 55 percent in 2016 and a further 14.3 percent in the first few months of 2017, something that eventually led the company to halt trading. After a big period of declines, on July 3 $182 million in assests held by LeEco and its CEO were frozen after the company defaulted payments on a loan to China Merchants Bank. This ultimately led to Yueting resigning, and LeEco was handed over to Sun Hongbin who had invested $2.4 billion into the company as emergency funding. Yueting, on the other hand, stated that he would now be focusing on getting Faraday Future back up and running. Interestingly, though, it was recently reported that the automobile startup would file for bankruptcy in the US, and Yueting would then proceed to sell the company to American investors, but LeEco has so far denied this.
Now, undeniably LeEco is by far the company worse affected by its own mistakes, but it appears other Chinese companies are also feeling the pressure after LeEco’s failed business model. Because of the recent events, it appears Chinese regulators are now paying much more attention to companies and how they do their business, to the point that listed companies are now being forced to disclose much more information, as well as reduce the amount of affiliated-party transactions, especially in the case of tech companies. The actual process of becoming a listed company in China has been tightened significantly, with the IPO aproval rating now at just 56 percent- nearly a 10-year low and down from over 90 percent last year. No matter what LeEco does from now on, the company will be forced into taking a much safer approach when conducting its business, but ultimately, the consequences of LeEco’s mismanagement are much more widespread and could leave a lasting effect on China’s tech industry, not just the company itself.