LeEco Billionaire’s Car-Hailing Ambitions Suffer a Setback

EghtesadOnline: Chinese billionaire Jia Yueting’s cash crunch may be starting to affect his expansion into new businesses.

News ID: ۷۷۱۱۸۹

10 November 2016

Jia made a fortune from his Netflix-like video business and used the profits to move into a dizzying array of businesses, including smartphones, TVs and electric vehicles. But his effort to take on Uber-killer Didi Chuxing in car-hailing may have hit a serious roadblock, Bloomberg reported.

Yidao Yongche, the limo service 70-percent owned by LeEco, has been trying for months to hit its fund-raising targets and fallen short, according to Technology Vice President Zhang Fan. The distant runner-up to Didi has been unable to close the round amid shifting local regulations and intense competition. Yidao’s aiming for up to 8 billion yuan ($1.2 billion), according to people familiar with the process.

The startup’s struggle to secure cash underscores the upheaval gripping LeEco, the holding company for a coterie of enterprises from online streaming to cars and phones. In a memo to employees this week, Jia admitted his ambitions had run ahead of reality, and LeEco faced a cash crunch after years of breakneck expansion without adequate capital-raising.

Leshi Internet Information & Technology Corp., his flagship listed company, has denied reports it owed its suppliers more than 10 billion yuan in back-payments, which had forced a halt to production. Jia told the state-owned China Daily newspaper that LeEco’s revenue will more than double to at least 50 billion yuan in 2016, driven by its video streaming business. Still, Coolpad Group Ltd., his other listed unit, has lost more than 25 percent of its value since Jia’s missive emerged.

LeEco’s new endeavors “are at an early stage but the company isn’t likely to cut current businesses despite a cash shortage,” said Zhu Dalin, an analyst with Beijing-based Analysys International. “To do so, LeEco will try to cut cost.”

Yidao, which operates independently from other parts of LeEco’s empire, is going through an ownership structure overhaul that may be giving investors pause, Zhang said. The company is dismantling its so-called VIE or variable-interest-entity structure -- a controversial framework intended to allow foreign investment in sensitive Chinese companies -- after abandoning a plan to list overseas, he added.

“In terms of when it will close, it’s hard to nail down a time because the VIE structure tear-down will take some time to get done,” he said of the fundraising effort.

Yidao said in a statement after the interview that Zhang has no oversight over strategic matters and that the latest fund raising effort remained “stable.” The company said in a press release in October after Zhang joined that he reports directly to Yidao President Peng Gang. Zhang also represented the startup this month at a ride-sharing industry conference in Dubai.

Zhang said he understands fears from some investors about returns but said similar problems plagued China’s O2O -- or online-to-offline -- industry, and affected other companies to a greater degree. Hefty subsidies and discounts on everything from food delivery to movie tickets have proven unsustainable and spurred heavy losses across the sector. Uber Technologies Inc., for one, threw in the towel rather than continue waging a costly war with Didi.

In his letter, Jia flagged cut-backs and decreased subsidies for customers. That’s something that will have a direct impact on Yidao, which like Didi relies on incentives to get and keep riders and drivers.

“Other O2O companies like food delivery businesses and others are facing the same problem, which is how to set up an exit mechanism,” Zhang said. “It’s perplexing the whole industry.”

One investment firm approached by Yidao passed because of the uncertainty around pending regulations that may allow only locals to drive for ride-sharing companies -- depriving Yidao or Didi of the majority of their chauffeurs. But Zhang argues that Yidao’s diminutive size actually means it can adapt more quickly to the new regulations and it’s already changing its systems to match the forthcoming rules on drivers.

Yidao’s raised more than $860 million in four rounds since its 2010 inception, the company said in a recent presentation. But more is needed as it tries to preserve its premium-car niche against Didi: the company now operates 3 million cars in 152 major cities versus Didi’s more than 400.

It’s also working on allies. It plans to join the “Splyt Alliance’,” a coalition of taxi and ride-hailing companies from around the world that will compete against the likes of Uber. Yidao’s riders can then use the services of its partners around the world, and vice versa, although the financial details have not been finalized. That echoes arrangements Didi has in place with partners such as Lyft Inc. in the U.S.

But Zhang echoed Jia’s broader mission statement, saying his company will try to raise prices and focus on wealthier and corporate customers willing to pay more for cushier cars and services. It will choose margins and profitability over market share.

“We want to use less money to do more things,” he said. “In some certain areas we’re not as precise as we want to be. That’s something we need to review.”