LeEco Lessons Part 2: Beware of the Buzzword

This week’s column picks up from a popular one I did at the start of the month, looking at the lessons that business partners and investors can learn from the colossal corporate meltdown known as LeEco. I received several emails after that column with more insights on the many warning signs that were emanating from this Chinese house of cards well before its notorious implosion that began a year ago this month.

LeEco superficially looks like a textbook case of a company that simply grew too fast. Such tales abound in the West, and the dot-com bubble of the late 1990s was basically an entire book on the phenomenon. But LeEco’s story also has many special “made in China” red flags that would have been relatively easy for someone on the outside to spot if they knew what to look for.

One of the easiest of those was the company’s name itself, which falls into the category of industry buzzwords that are hugely trendy in China and can often be warning signs when they become the central message in a company’s growth story. Some quick research would have revealed that the company was known as LeTV for most of its life, a reference to its successful original business model of providing online subscription video services over customized internet-connected TVs.

But around two years ago the company began referring to itself in English as LeEco, saying that it was more than just an online video provider. People in China might recall that right around that time the word “ecosystem” was making the rounds as buzzword of the moment, and the name LeEco was almost certainly a play on this. For a brief period, no one was building individual products or services anymore, and instead entire ecosystems of linked products and services were the flavor of the day.

In LeEco’s case, founder Jia Yueting suddenly got the idea that his core video services, equivalent to paid internet TV in the West, were just one block in a much bigger empire he was going to build. That included a network of video entertainment that would be delivered over a range of devices, including not only TVs but also smartphones and internet-connected smart cars. That new vision led Jia to launch his breakneck expansion that included major investments in many of those areas, which ultimately created the cash crunch that led to LeEco’s downfall.

Other buzzwords that have made the rounds in China over the last few years include virtual and augmented reality (VR and AR), robotics and most recently artificial intelligence (AI). While obviously not every company that uses such words is destined to fail, business partners and investors should probably be wary of firms that rely just a little too heavily on such words in their promotional efforts.

Watch out for big egos

One American who worked briefly at LeEco in the U.S. described his own experience and jokingly called the company “LeEgo.” That’s a not-so-subtle reference to the hugely self-confident Jia, and raises a second warning flag to look out for in the form of extreme hubris at some of these high-flying startups that are ultimately destined to crash and burn.

This insider recalled how LeEco zoomed into Silicon Valley a few years ago with the message that it was the wave of the future, and that hometown giant Apple was “the old way.” Another Chinese company that liked to compare itself to Apple was former smartphone sensation Xiaomi, which later crashed in a similar mountain of hubris, though it now appears to be making a lower-key comeback.

Few CEOs would dare to make such comparisons in the West, mostly because they would get instantly laughed out of town. But clearly that’s not the case in China, where many of these brash young company founders aren’t afraid to make such boasts and probably even believe what they’re saying.

There are a few smaller but notable red flags, including a company’s hiring practices. The U.S. LeEco worker told me he was hired after just two phone interviews, which sounds eerily familiar to other cases I’ve seen and heard about. Such instances see similar high-growth companies, frequently flush with millions of dollars in private equity, often seem more interested in quickly filling up their offices with bodies than hiring qualified people in a coordinated way.

Another warning sign is sloppy after-sales service. One woman who contacted me noted how she was largely stonewalled by LeEco’s customer service channels when some smartphones she bought experienced problems. Such tales are quite common in China before a big meltdown. One other red flag for LeEco could also be spotted with a trip to its corporate headquarters, where unpaid business partners camped outside the building in protest.

At the end of the day, the LeEco case had plenty of warning signs that could have been easily spotted by anyone who cared to look. For those who don’t live in China and may have found the landscape too foreign, there are also private investigators who make a nice living by providing such services. But as one of my contacts pointed out previously, many of LeEco’s investors and business partners simply didn’t want to see those warning signs. Instead, they found it much easier to lap up the steady stream of buzzwords and boasts coming from the company until the crisis finally exploded.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com.