Tech Talk: LeEco Offers Lessons in Spotting Problematic Tech Highflyers

A recent flurry of residual headlines surrounding LeEco has made me slightly nostalgic, recalling the headier times for this former high-tech superstar and its subsequent slow-motion collapse. At this point remnants of the company are more an afterthought than anything serious, consisting of a few mostly inconsequential parts like its original online video service and a sputtering new-energy car business.

But given we’re on the cusp of the dog days of summer and there’s not a lot of other major tech news right now, I thought I’d indulge myself this week by looking back at the LeEco story and trying to zero in on some of the many warning signs that preceded its collapse. Such signs are key to anyone trying to invest in some of these tech companies, not to mention do business with them.

For the uninitiated, let’s step back first and review the case of LeEco and how it went from being a visionary to yesterday’s news in the space of about 15 years — a relatively long period for a Chinese internet company. LeEco was founded in 2004 by Jia Yueting, a name now familiar to most Chinese techies as a former internet icon who is currently a pariah and persona non grata in most circles.

The company first came to my attention around 2010 when it was a relative visionary for its early entry into online video. At that time China’s video arena was still largely dominated by state-owned local TV stations, and content providers with national distribution were extremely limited. Back then LeEco was known by its earlier name of LeTV, and it quickly found a niche selling internet-connected smart TVs at very low cost bundled with subscription packages to its wide array of programs.

The company quickly took off after that and was a fast rising star due to its early arrival in the space. But then something happened in late 2014, when Jia mysteriously vanished for a couple of months in a disappearing act that was never fully explained. Whatever the case, he suddenly reappeared late in the year in a Beijing hospital room, complete with a new-and-improved vision for his company.

From there Jia took LeEco on a breakneck expansion that included moves into such a wide array of areas as sports programming, movie-making and even smartphones. But the granddaddy was his move into new-energy cars. Jia explained the massive expansion by saying he was building an ecosystem of entertainment and devices that would deliver that content.

Things were on steroids for the next couple of years until Jia finally acknowledged that maybe he had expanded a little too quickly and taken on too much debt late in 2016. From there the company embarked on a slow downward spiral that ended with Jia’s ouster from the main LeEco. He managed to stay involved with his new-energy car making business, but now even that appears to be running out of fuel, which is one of the recent headlines I referenced at the outset of this column.

Warning signs

With the LeEco story now largely in the rear-view mirror, we’ll spend the second half of this column looking at some of the warning signs that were out there and relatively easy to spot before the collapse. Here I have to pat myself on the back just a little, as I predicted the company’s downfall not long after Jia emerged from his hospital bed and embarked on his massive expansion.

The biggest warning sign was right there for everyone to see — the breakneck expansion into so many new areas, some often only very tangentially related to LeEco’s core online video business. To be fair, most of those new areas did have a certain logic, as they fed into the general categories of video content and devices to deliver that content. Still, all of that costs money, and often lots of money. The big “this is going to end badly” moment for me was the move into new-energy cars, which really did seem like a bit of a stretch, not to mention being very costly.

Another notable warning sign was the company’s name change from LeTV to LeEco. This kind of move is particularly common in China, and is often aimed at grabbing attention by trying to link one’s company to a buzzword of the day. In this case the flavor was “ecosystem,” which was quite the trendy word at the time. No one was building individual products anymore, but instead everyone was creating interconnected ecosystems of products and services.

Another cause for wariness is long stock suspensions, which became a relatively regular trick of LeEco’s whenever sentiment was turning negative. It’s also a practice that’s regularly abused in China overall. LeEco’s main Shenzhen-listed stock was suspended several times before the big collapse, mostly using the boiler plate excuse of doing so for “reorganization” purposes.

The boss’ disappearance in 2014 could be viewed as another sign in hindsight. But perhaps an even more important sign was the transformation that saw Jia start to become bigger news than his company. That reflects a cult-like devotion that sometimes occurs at hot Chinese companies, as people fixate more on a charismatic personality like Jia and pay far less attention to the actual business.

At the end of the day, larger-than-life bosses like Jia are probably always reason for caution when considering Chinese tech companies, especially when they are listed on less-stringent domestic stock markets on the Chinese mainland. Rapid expansion is also something to look out for, again especially when such expansion builds off a relatively modest base like LeEco’s original online video service.

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