Caixin
Dec 05, 2016 03:01 PM
BUSINESS & TECH

LeEco, Gree Come Unplugged After Drifting Too Far From Home

(Beijing) — What do electric vehicles and smartphones have in common?

Both could well be the undoing of two of China's most visible high-tech executives and also even their companies — online video service provider LeEco, and air-conditioner maker Gree Electric Appliances Inc.

The two businesses have very different backgrounds, one starting as an internet video company and the other a traditional home-appliance maker. Each became a household name in its respective original specialty but has run into recent trouble for venturing too far from its core competency, including bets of $1 billion or more in areas where they had little or no experience.

Such behavior is more common in less-mature markets like China, where most companies are relatively young, have less-developed corporate structures and as a result are frequently searching for the next big thing, said Zhou Zhanggui, a market strategy consultant.

"China is like the U.S. was 70 or 80 years ago," Zhou said. "The Chinese companies are always thinking, 'This is a race, can you become a winner?' U.S. companies are more conservative. It's a more mature market."

Both LeEco, formerly known as LeTV, and Gree were regular headline fixtures in November, as scandals grew around their high-profile longtime CEOs, who brought the companies original fame.

LeEco's crisis began after reports emerged saying it was facing a credit crunch and was failing to pay some of its suppliers, following a multibillion-dollar expansion over the last two years that took it into smartphones, electric cars and film production, among other things. The company's charismatic CEO — Jia Yueting, 43 — denied his company was failing to pay some suppliers, but admitted that he had perhaps expanded too quickly and needed to become more conservative.

Around the same time, Gree's longtime and more-seasoned chairman — Dong Mingzhu, 62, often called China's most powerful businesswoman — received her own unexpected setback when she tried to take her company into electric-vehicle production by purchasing of Zhuhai Yinlong New Energy Co. Ltd. in a deal that valued the company at 13 billion yuan ($1.9 billion).

The major blow came from her own shareholders, who voted down 15 proposals to create an additional fund of 9.7 billion yuan to help cover the expenses of integrating Yinlong into Gree. The usually composed executive was taped after the vote blasting her own shareholders for what she saw as their greedy behavior. After that veto, Yinlong's own shareholders also voted down the deal.

Dong stepped down as chairman of Gree's state-owned parent company a short time later. She remained as chief of the publicly listed Gree Electric Appliances Inc., which quickly denied any connection with the shareholder rebellions and Dong's departure from its parent company.

Gree Shares Rise, LeEco Slumps

Gree shares have rallied about 25 percent since the Yinlong rejection — apparent evidence of its own shareholders' relief. LeEco shares have moved in the opposite direction, losing nearly 14% of their value in November, when most of the bad news occurred.

LeEco's overly rapid expansion at such a young stage of its development may have been a big factor behind its current woes, said Edward Tse, founder of consulting firm Gao Feng Advisory. He added that Gree is a more mature company, but still was making a big leap by attempting to go from its core competency in home appliances to the vastly different world of electric cars.

"It's quite usual for people to migrate and not get stuck in one area, but it depends on how far you want to make the jump," Tse said. "To jump from providing content to vehicles and mobility services, that's a huge jump for LeEco. … For Gree, to jump from appliances into making cars, that's also a pretty big jump."

Tse noted that some politics may have motivated both companies' move into electric cars, since China was offering big subsidies and other incentives in a bid to quickly build up the high-tech industry. But results of that campaign have been mixed, with many companies flocking to the field simply to cash in on Beijing's largesse, which totaled 90 billion yuan in various forms of support last year, according to an estimate by UBS Securities.

LeEco was a relatively recent arrival to the space, announcing its initial plans in 2014 and later pledging to build a $1 billion manufacturing plant in the U.S. state of Nevada along with U.S.-based Faraday Future. Yinlong is a more-typical domestic new-energy automaker, but Gree's 13 billion yuan buyout offer would have made it a costly investment for its shareholders.

"There's probably some (political element) involved," said Tse, commenting on both companies' decision to move into electric cars. "If you don't have the ability, the bandwidth to run the operation successfully, there's still some risk."

Smartphone Forays

Both companies also made forays into smartphones last year, a controversial decision due to their own lack of experience in a space that was already rife with intense competition. China is the world's largest smartphone market, with more than 400 million units sold last year. But many of those are cheap look-alike models, sometimes costing less than $100. As a result, most companies are losing money due to stiff competition and failure to develop significant brand recognition.

Gree rolled out its first smartphones last year, and said it would carve out a niche by making products that worked with internet-connected smart home appliances like air conditioners and refrigerators. But more than a year later, it has made little headway into the market.

LeEco entered the arena around the same time, saying smartphones would become part of a bigger ecosystem it aimed to build involving entertainment delivered over a wide range of products like TVs, smartphones and car-based systems. It later purchased nearly 30 percent of Coolpad, an early smartphone maker that is now struggling. Earlier this month Coolpad said it would incur a loss of about HK$3 billion ($387 million) for 2016, reversing a HK$2.3 billion profit a year earlier.

"We can't blame them for taking risks," said market strategy consultant Zhou. "Sometimes they do the right thing, but sometimes they take too big a risk."

Contact reporter Doug Young (dougyoung@caixin.com); editor Ken Howe (kennethhowe@caixin.com)

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