Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

It's starting to get ugly in China tech land and those throwing the mud would be silly to think they're going to come out with their pretty white dresses still clean.

The latest scuffle reached a crescendo Monday after LeEco's chairman and co-founder Jia Yueting admitted last week that his sprawling empire may be struggling just a little. Going by the dictionary definition, sprawling is precisely what his business has been doing.

It all started about a dozen years ago when Jia got the idea to start a streaming video service, dubbed LeTV. While it's often called the Netflix of China, the moniker should be swapped -- Jia's business got going when the U.S. company was still shipping DVDs, so Netflix is more correctly the LeTV of America.

But streaming wasn't enough for Jia, so he broadened out to create LeEco. Along with device maker Coolpad, which he also chairs, the plan was to build out an "ecosystem" that included TVs, tablets and smartphones. And cars, but more on that later. The unsustainability of this enterprise led to his written confession:

We blindly sped ahead, and our cash demand ballooned. We got over-extended in our global strategy. At the same time, our capital and resources were in fact limited.

Le Slide
Shares of Jia Yueting's two major listed companies have taken a hit amid revelations his empire may face a cash crunch
Source: Bloomberg

So you have a Chinese technology guy trying to build an ecosystem linking software and content to hardware and devices. Needing money to build out his grand plan, he raises funds since his core business barely generates enough cash to keep things going. Sound familiar?

Slinging mud at LeEco -- according to reports by Bloomberg News, the Beijing Times and others -- is Xiaomi founder Lei Jun. Taking to WeChat, Lei cast aspersions on LeEco's debt and its ability to pay. The two traded barbs on social media before the head of LeEco's North American operations, Brian Hui, went on stage at the TechCrunch Beijing forum Tuesday where he clarified Jia's original letter.

“It’s not about running out of money. It’s how you can spend your money wisely," Hui told moderator Jon Russell. Which brings me back to the question of how the heck a streaming video company got into high-performance electric cars.

The goal of Jia's automaking venture, Faraday Future, is "to usher in the next generation of premium, hyper-connected electric vehicles in the next few years." To get there it's hired 1,400 people and has already burned through 10 billion yuan ($1.5 billion) in early development. You can turn to its website for an explanation of how this fits in to the LeEco vision, but let me save you some time: It doesn't.

Burn
Leshi Internet Information & Technology has posted positive free cash flow just once in the past 12 quarters

Luckily for investors in Jia's publicly traded businesses -- Leshi Internet Information & Technology Corp. and Coolpad Group Ltd. -- most of the cash burn for these hobby projects hasn't been coming out of company funds. Unluckily, that hasn't stopped them churning through cash of their own accord. Instead, Bloomberg's David Ramli writes, Jia uses shares in those companies as collateral against loans going into his moonshot projects.

If one day there is a reckoning, smart investors will be diving deep into the books of Leshi and Coolpad. The same can be said for all number of technology players in China who are rushing headlong into building out "ecosystems," relying on continued rounds of funding to hide the fact that their fundamental business might not be sustainable and such synergies are more myth than reality.

Mudslingers take note: If Jia has one thing going for him, it's the fact that the first step to fixing a problem is admitting that you have one.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net