Shownotes
Elliott Zaagman is the co-host of the China Tech Investor podcast and works as a PR and leadership consultant for Chinese tech founders and executives. He is a frequent commentator on issues facing China and its tech industry, and his work has been published by The Lowy Institute, Foreign Policy, SupChina, and TechNode, as well as in Chinese on Huxiu.com.
“This entire thing (LeEco) that he (Jia Yueting) had built, he built it basically within a year to 14,000-people offices all over the world, all these different verticals of business and then it all collapsed.”
– Elliott Zaagman
Worst investment ever
Elliot tells the story of what he sees as the worst investment for probably many people in the rapid rise and fall of what was at the time China’s Netflix, Le.com LeEco (Leshi Internet Information & Technology Corp, (300104:CH; 300104.SZ).
He had been working in China for many years when he was approached to work one of the group’s companies, LeEco, around the beginning of 2016 to consult for LeEco. The company had been streaming video since around 2012 and in were moving into making smart TVs. Elliot believed this was a rather savvy business venture – to combine the streaming video with smart TVs and create a kind of hardware and content ecosystem.
They had some success and founder Jia Yueting had aspirations to become the Steve Jobs or Elon Musk of China, as he had also made forays into electric vehicle production, establishing Faraday Future, a California-based start-up tech company set up to develop electric vehicles in April 2014.
Jia Yueting is described by Elliot as a futurist, very interested in the potential of technology. And China had said it wanted to have some global tech champions, so this was a chance for Jia Yueting and people like him to build this empire and raise a lot of money. So he used a very capable kind of PR and media team and just expanded at an exponential rate. He went into smartphones, wanting to be the next Apple Inc, virtual reality, sports contracts, music, cloud services.
The company opened a 500-employee office in Silicon Valley, a 100-employee office in India, a few thousand employees in 2014 to 7,000 in 2015. And by the end of 2016, it had 14,000 employees. So the company was expanding in every direction, to the point that there was no way to hit its deadlines.
Part of the corporate culture was that Jia Yueting had filled his C-suite with “Yes People”, so when they went to present themselves to the US market, they sent someone (a person Elliot had worked with) who could barely speak a word English, to run their US office in Silicon Valley. The ambassador of the company had also rarely been to the US, didn’t understand the US market and he was running their go to market. The entire company, not just in the US, had chaotic atmosphere.
The beginning of the end was an enormous product launch to introduce themselves to the US market at the Innovation Hangar (now also permanently closed) in San Francisco. It was excessive and people failed to understand why the company was holding such a large event. Three weeks later, founder Jia Yueting sent out a company-wide message that said something like: “We expanded too quickly and we’re out of money. And now we need to fix it.”LeEco has debts in China of around US$442.3 million (3 billion yuan), and Jia Yueting is under investigation by regulators and has remained outside China since 2017.
Some lessons
You cannot grow quickly, in many areas business. Jia Yueting had built the entire empire within a year to all over the world, with different verticals of business and then it all collapsed.
Look deep before involvement in China’s tech ecosystem and economy. Chinese banks tend to lend loosely to companies that are aligned with government or Communist Party (Party) initiatives. Venture capital firms are willing to invest in areas that the Party wants to promote.
Appearances can be deceiving, especially for tech-naïve lenders in China. A lot of the people in charge of the money did not really understand technology, so they were fed excuses by people who wanted the money, such as “This is just how tech businesses operate.” Jia Yueting got a lot of funding through smoke and mirrors, making good video presentations and display products without a solid core to his business.
“Look under the hood a little bit when it comes to these companies, especially I think in China.”
- Elliott Zaagman
Andrew’s takeaways
China doesn’t have to be our enemy. There are many things that Chinese people admire about America and a lot of the transformation that happened in China came because the People’s Republic implemented some free market principles. It is sad to see US politicians gaining points at home by pitting Americans against China.
Be careful of over-diversifying because you’ll lose focus. Don’t be seduced by greatly diverse businesses such as Apple or Microsoft. They have been growing for a long time and may expand into different areas, but they have a very strong core. They might do something like Amazon Web Services, for example, but they built up to that point slowly.
When money is available freely and at low cost, you find malinvestment. Undisciplined investment. What’s happening in the world, in America, and also in China is that so much money has been poured into the industry that you cannot avoid the type of situation where you have faults such as lower asset utilization rates.
The problem of “yes people”. One of the benefits of a developed company is that it has a board of directors to provide the kind of checks and balances system necessary to curb the visionary excesses of CEOs such as Jia Yueting.“Having ‘Yes Men’, either in management or at the board level, can turn out to be a real disaster.”- Andrew StotzThat is why we see great people surrounding some of the best businesses. Such people are serious professionals who are not afraid to stand up to the CEO and say “No! This is the way we have to go.” So getting such people is highly valuable.
No. 1 goal for next the 12 months
Elliot writes a lot about Chinese tech companies and companies such as Huawei, and is concerned about the decoupling that US and Chinese technology, ecosystems and expertise appear to be undergoing. He hopes in the next year to continue to add his voice to that conversation and offer clear analysis, allowing his readers and listeners to gain a clear picture of the broader situation, one that is honest and respectful and in service of the truth.
Parting words
“Seek truth from facts.”
You can also check out Andrew’s books
- How to Start Building Your Wealth Investing in the Stock Market
- My Worst Investment Ever
- 9 Valuation Mistakes and How to Avoid Them
- Transform Your Business with Dr.Deming’s 14 Points
Connect with Elliott Zaagman
Connect with Andrew Stotz
Further reading mentioned
- Zhang Yu, Han Wei (30 April 2019) Fugitive tycoon Jia Yueting and Leshi under probe CX Live, Caixin Global
- Asia Times staff (29 April 2019) Jia Yueting under investigation by regulator Asia Times