Foreign media: LeTV failed to change the world, but it changed China

Following this vision, Jia Yueting quickly expanded his company from a video streaming portal to a multinational corporation, or what he called the "shared ecosystem," selling products ranging from televisions, cloud computing, to smartphones to electric vehicles. Cars and so on. In January 2016, the company changed its name from "LeTV" to "LeEco" - LeEco is an abbreviation of Le Ecosystem to reflect its founders' global aspirations.

This move did not work, but the company became a quagmire with billions of dollars in debt, affecting the entire securities market in China.

Falling down

LeTV's former staff and external experts told CNBC that, in fact, it was Jia Yueting’s grand ambition—he and others’ “shared ecosystems” were too advanced—and this led to the fall of this once-famous tech star.

Both the domestic and the international, this ambitious company has fallen from the altar, in large part because it relies too heavily on debt for blood for ever-increasing projects, and most of these projects have failed to succeed.

These former LeTV employees are unwilling to give their names, so as not to damage their reputation. One of the former LeTV employees pointed out that when she reflected on some of the company's projects, she discovered that it was a gamble.

The woman who once worked in LeTV’s office in the United States stated to CNBC: “Jia Yueting’s strategy for the company has always been very advanced, but these strategies need to be implemented with extreme strictness to be successful.”

She said: "For ordinary companies or employees, it is rare to execute strategies perfectly, let alone a company that is experiencing such rapid expansion."

By the end of 2016, the company has experienced rapid expansion and its structure has become highly complex. In order to create a closed-loop ecosystem, users can watch exclusive content through LeEco application, and the content is played through LeEco's own hardware (from mobile phones to smart cars, etc.) - LeSeo quickly established 15 subsidiaries and 68 subsidiaries. the company.

In addition, although LeTV was still largely unknown to U.S. customers and its service was not widely available in the United States until December 2016, it did not prevent the company from establishing a U.S. headquarters.

In June 2016, the company acquired Yahoo’s approximately 300 acres of land in Santa Clara, Calif., and claimed that it plans to recruit 12,000 employees locally with the goal of establishing its global headquarters in Silicon Valley. In contrast, according to a report earlier this year, Facebook had only 9,000 employees at its headquarters in Menlo Park, Calif., and Google employed approximately 20,000 people at its headquarters in Mountain View, California.

Another former LeTV employee pointed out: "You can be optimistic, but you do not exaggerate." He worked at the company's Hong Kong office last year.

The former employee, who asked to be anonymous, said in an interview with CNBC: “Other companies are laughing at us. How can your employees jump from 200 to 10,000 in 2018? It's bigger than Facebook!”

The person familiar with the matter said that because he was disappointed with the company and was frustrated with the future of LeTV, he resigned from his job last year.

He also disclosed that: "Lokse is a hierarchical company, but the company's senior executives do not understand the market outside of China. He (Jia Yueting) wants to do a lot, but his knowledge is not enough to support his ideas. In addition, LeTV recruitment to The talents are not very strong or talented. What can money do? Money cannot solve strategic problems, and money cannot buy talents."

But in LeTV, even money is slowly becoming a problem.

When local media in Silicon Valley scrambled to report the new expansion plan for aggressive expansion in the region, investors began to worry about the health of Let's Finance.

Red light

Starting in 2016, Chinese domestic media and posts on social media such as Sina Weibo and Tencent WeChat began to point out that the financial reports released by LeTV’s subsidiary listed in Shenzhen had a red light.

The subsidiary company Leshi Internet Information & Technology Co. ("LeTV") stated in its 2016 full-year financial report that its accounts receivable has reached 86.8. Billion yuan, an increase of 5.32 billion yuan over the previous year.

In the same year, its revenue increased by only 8.93 billion yuan, so nearly 60% of LeTV's revenue growth in 2016 came from the increase in accounts receivable.

At the same time, the company stated that its operating cash flow in 2016 was negative 1.07 billion yuan, a decrease of 221.97% from the previous year.

Obviously, LeTV’s cash has been completely exhausted as accounts receivable surged and cash flows plummeted.

A former LeTV employee said: "I heard someone ringing the door of an Indian office. There is an advertising company to request payment, but we have no money to pay."

In addition, the transaction volume of LeTV and LeTV's related parties soared, causing widespread suspicion that LeTV may use financial techniques to exaggerate its sales data.

In 2016, LeTV reported that its sales to related parties reached 11.78 billion yuan, an increase of 655% over the previous year, accounting for more than half of the company’s total revenue.

Due to concerns about the risks posed by LeTV’s cash flow problem, investors began to sell LeTV’s shares. By the end of 2016, the company's stock price has plummeted by 55% from the highest point in 2015, and dropped again by 14.3% in 2017. Subsequently, the company asked to suspend trading.

The former employee of LeTV’s Hong Kong office recalled: “I know that the company may face cash flow problems around July of last year (2016). I’ve heard that someone presses the doorbell of an Indian office and an advertising company asks for payment, but We have no money to pay."

LeTV spokesman declined to comment on issues such as poor management, suspected financial fraud and cash shortages.

Domino effect

At the end of 2016, Jia Yueting acknowledged that the company faced serious financial difficulties. Soon after, LeTV’s situation worsened, which triggered a series of domino effects: the company stopped its electric vehicle manufacturing plant project in Nevada, USA; disclosed plans to sell the company’s headquarters in Silicon Valley and lay off hundreds of people; The cancellation of the acquisition of Vizio, an American television manufacturer, led the latter to sue for Lexus' compensation of $100 million for the termination of the contract.

At a time when suppliers concerned sued LeTV for not fulfilling its debt obligations, a Shanghai court ruled on July 3 this year that a loan owed to China Merchants Bank incurs a breach of contract and freezes the value of LeTV and Jia Yueting’s holding of 1.24 billion. Yuan's assets.

A few days later, Jia Yueting resigned from all positions in LeTV, including LeTV's chairmanship, and stated that he would instead focus on building Lexus’ automotive subsidiary, Faraday Future. This is a potential for Tesla. Competitors.

Under a series of lawsuits and damaged reputation, LeTV was handed over to a new management team. Sun Hongbin, chairman of China Real Estate Developer Sunac China, was appointed as the new chairman of LeTV.

Earlier this year, Sun Hongbin invested $2.4 billion in LeTV in exchange for shares in the company's core television and movie business.

The fall of LeTV is a lesson for Chinese regulators. Recently, Chinese regulators have begun to pay close attention to the so-called "shared ecosystem" and crack down on suspicious related party transactions.

Government involvement

In early October, the Chinese newspaper "21st Century Business Herald" quoted industry insiders as saying that the China Securities Regulatory Commission has begun requiring listed companies to disclose more information and reduce related party transactions.

According to the report, sources said that the China Securities Regulatory Commission has begun tightening its supervision of technology companies with complex corporate structures or numerous related parties.

The source told the 21st Century Business Herald: “The risks exposed by LeTV have caused the entire market to be learned and regulators have begun to investigate related party transactions in the name of the so-called 'shared ecosystem'.”

This trend can be seen from the latest ban issued by the China Securities Regulatory Commission. Since the beginning of this year, the China Securities Regulatory Commission has banned five insurance companies from conducting financial transactions with their parent companies, including Bohai Life Insurance, a subsidiary of the HNA Group.

The China Securities Regulatory Commission also tightened the approval process for initial public offerings (IPOs) and required companies applying for IPOs to follow stricter accounting standards, capital requirements and information disclosure requirements. According to data released by the China Securities Regulatory Commission, as of the end of the third quarter of this year, the approval rate for IPO approvals was 80.99%, which was nearly 10 percentage points lower than 2016's 90.96%.

In the fourth quarter, the China Securities Regulatory Commission (CSRC) seemed to be starting to implement stricter standards for IPO approval: Since the new issue of the China Securities Regulatory Commission's issuance review committee took office at the end of September this year, the IPO approval rate has dropped to only 56%. According to Reuters, on November 7, the committee approved only one case for six IPO applications, setting the lowest one-day pass rate for IPOs since 2015.

A source at a securities brokerage in Beijing told CNBC: "The recent regulatory oversight of compliance audits has become more stringent."

He added: "The overall approval rate for IPOs has dropped to the lowest level in the past decade." Due to professional reasons, he requested anonymity.

The future of LeTV

At present, LeTV is still at the center of the storm.

It is said that Jia Yueting has stayed in the United States since he resigned. He has remained relatively silent. This makes domestic debt holders and LeTV employees not know where he is and when he will return.

Last month, a Chinese science and technology news media reported that Jia Yueting intended to apply for a future bankruptcy of Faraday in the United States and then sold it to U.S. investors.

The LeTV spokesman denied rumors that Faraday will go bankrupt in the future.

However, whether Jia Yueting continues to work low-key or ultimately returns through Faraday's future, one thing is clear: “Shared ecosystem” was once a symbol of China’s global expansion and multinational conglomerates, but it has now become a risky term.

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