The billionaire chairman of China’s LeEco has admitted his technology empire is running out of cash to sustain a headlong rush into businesses from electric cars to smartphones. In a lengthy letter to employees, company co-founder Jia Yueting apologized to shareholders and pledged to slash his income to 1 yuan (15 cents), slow LeEco’s madcap pace of expansion, and move the company toward a more moderate phase of growth.
LeEco is the umbrella holding company for a sprawling family of businesses that includes sports media, automobiles, smartphones and TVs. The company known for its LeTV streaming service has aggressively pursued funding and placed bets on new ventures, from an electric car plant in Nevada to a $2 billion acquisition of California TV maker Vizio Inc.
“No company has had such an experience, a simultaneous time in ice and fire,” Jia wrote in a letter, obtained by Bloomberg News, describing LeEco’s rise and subsequent issues. “We blindly sped ahead, and our cash demand ballooned. We got over-extended in our global strategy. At the same time, our capital and resources were in fact limited.”
Shares in Leshi Internet Information & Technology Corp. and Coolpad Group Ltd., the two listed companies Jia chairs, fell Monday as word of the letter spread. Smartphone manufacturer Coolpad dived as much as 25 percent to its lowest since Feb. 2013, while Leshi slid as much as 7 percent to a one-year trough. Some analysts have begun to question LeEco’s longer-term prospects, given the opacity surrounding investments by its various subsidiaries.
Jia’s memo circulated widely on social media Monday and prompted a testy exchange with rival smartphone maker Xiaomi Corp. Xiaomi co-founder Lei Jun called attention to the opacity surrounding LeEco’s outstanding debt, according to a screengrab of his WeChat message account that LeEco posted. That prompted a sharp riposte from Jia’s company, which blasted Xiaomi and Lei for spreading rumors. An hour later, one of Xiaomi’s official Weibo accounts fired back, asking Jia to focus on LeEco’s debt rather than distract the public.
Jia highlighted measures to lessen the company’s burden in his memo. LeEco will immediately begin cost-cutting programs, decrease subsidies for customers and focus on existing businesses instead of new ones, he added, apologizing to shareholders of Leshi in response to criticism that he hasn’t paid them enough attention.
A self-made billionaire who got his start working in IT at a local tax bureau, Jia founded Leshi Internet Information & Technology in 2004, one of the first companies in China to stream TV shows and movies to paying subscribers. He entered the smart TV businesses in 2013 and the smartphone market in 2015.
But his growing empire relies on a risky financing model. Leshi is publicly listed on the Shenzhen Stock Exchange and the only profitable entity, according to Winston Cheng, LeEco’s head of corporate finance. Jia has borrowed against his shares in Leshi for cash that he invested into his other companies, regulatory filings show.
That practice has invited scrutiny in the U.S., where Jia is trying to get electric car-making venture Faraday Future off the ground. LeEco’s envisioned car plant in Nevada needs government support for power lines, water mains and roads. That in turn requires investment by the state, but Nevada treasurer Dan Schwartz balked at issuing the necessary bonds. Jia’s reliance on loans backed by Leshi equity could leave taxpayers vulnerable to the whims of China’s volatile stock market, and he expressed doubts Jia could raise the billions of dollars needed to bankroll the project.
Leshi’s stock has plummeted by almost a third since the start of 2016. Jia has showed off an electronic concept car dubbed the LeSee, and in September raised more than $1 billion from a consortium of Chinese investors to make it. But in his memo on Monday, Jia singled out the car division for its profligacy, saying it had already spent 10 billion yuan in early development.
“Our fundraising ability isn’t strong,” Jia wrote. “The scale of our external fundraising had trouble satisfying the demands of our rapid expansion.”