Outspoken Billionaire Works to Salvage His Tech Empire in China

  • Jia had called Apple ‘outdated’ and ‘extremely slow’
  • 43-year-old borrowed against his stock to fund expansions

As China’s Jia Yueting expanded his tech empire, he wasn’t shy about critiquing industry giants. In his first international TV appearance in April, the 43-year-old billionaire called Apple Inc. “outdated” and its innovation “extremely slow.” As for Tesla Motors Inc., he later said it may be a “great” company, but he aimed to surpass Elon Musk and “lead the industry leapfrogging to a new age."

What a difference a few months make. Jia admitted in a memo to employees last month that his LeEco holding company had expanded too aggressively into smartphones, electric cars and other ventures, and was struggling to raise the cash it needed. Jia cut his own salary to 1 yuan (15 cents) and warned of hard days to come. “We blindly sped ahead, and our cash demand ballooned," he wrote. "We got over-extended in our global strategy.”

Jia Yueting

Photographer: David Paul Morris/Bloomberg

Now, the cash crunch is spreading. Two Taiwanese suppliers to LeEco hardware divisions have warned the company is behind on its payments. Another supplier, MediaTek Inc., has been demanding cash before delivering products to the company, according to a person familiar with the matter. As for the electric-car division that was supposed to challenge Tesla, the construction contractor building its $1 billion plant in Nevada has suspended work after more than $20 million in missed payments.

The foundation of Jia’s empire looks shaky too. He made his fortune from an online video business called Leshi Internet Information & Technology Corp., a Chinese version of Netflix that’s worth more than $10 billion. But Jia used his stake in Leshi as collateral to borrow billions and fund his expansion. Leshi’s stock has plummeted recently, raising the prospect Jia will have to come up with more cash, sell assets or see his loans called back. Leshi suspended its stock from trading on Wednesday in Shenzhen as the company checks on its share drop and reports on Jia’s loans.

"The entire ecosystem has just burned too much money," said Ray Zhao, an analyst at Guotai Junan Securities. Jia has been effective at concocting shiny visions of future opportunities but lacks the funding to execute, he said. “All these businesses need money.”

Jia, LeEco and Leshi declined to comment for this story. Jia said in the memo to employees and local press interviews that the company’s funding problems are a temporary setback that will be overcome in the next two years as various businesses are restructured to generate cash.

Dan Schwartz, the Nevada Treasurer, has questioned Jia’s plans for the electric-car plant there. He thinks the billionaire’s strategy of borrowing to finance so many new businesses so quickly is unsustainable. “This is all Fantasyland,” he said. "The best analogy is the Emperor’s New Clothes. There’s nothing there.”

Jia grew up in the northern Chinese province of Shanxi and got his start working at a local tax bureau. By 2004 he’d founded Leshi, whose popularity and subsequent public stock sale in 2010 generated the riches to finance dozens of other startups. Jia built a sprawling empire involved in everything from smartphones and electric cars to organic food and movie productions.

Despite his recent challenges, Leshi’s video business continues to grow rapidly as more Chinese watch television shows, movies and short clips online. Revenue is projected to soar 80 percent this year to 23.4 billion yuan, while net income climbs 37 percent to 783.3 million yuan ($114.2 million), according to estimates compiled by Bloomberg. Competition is heating up in the market as rivals such as search giant Baidu Inc. step up efforts to draw users.

The billionaire has been borrowing against his Leshi shares for years, increasing the number used as collateral as his ambitions have grown. That worked well as long as Leshi’s stock price rose because a block of shares pledged one year would be worth more than the loans the next year.

But as shares have dropped in recent months, the opposite happens: Jia’s collateral becomes worth less and may even fall below the value of his loans. That’s when banks typically require borrowers to come up with more collateral, repay loans or sell off assets.

In Jia’s case, he’d pledged 85 percent of his stake, or 587.2 million shares, as of December 2015, according to company filings. Those shares were worth about $5.4 billion at the time.
But since then, Leshi’s latest financial statements show the amount of shares pledged by Jia has fallen slightly to 571 million shares and the stock has tumbled 39.1 percent, meaning the stake is now worth about $3.0 billion.

Jia and Leshi have not disclosed the terms of his loans. LeEco said after its shares were suspended it was checking the sharp drop in its stock price and multiple reports that a majority of Jia’s shares had fallen below the value of his loans. The company’s statement didn’t address whether Jia is facing a margin call.

“To protect the interests of the company and the investors, the company suspended trading to check the relevant matters,” Leshi said in a statement. “At the same time, the company is currently planning a major event, which is expected to involve the integration of industry resources. This matter carries uncertainties.”

Jia has managed his way through downturns in the past. In September of last year, Leshi’s shares fell even lower than they are now and he avoided having to sell off assets or cut his borrowings. Leshi’s shares were also suspended from trading for six months beginning last December and began trading again without incident.

Jia is a potent fundraiser. In November, he announced a $600 million funding round to cover short-term cash needs. Two of the companies named in the statement then said they weren’t participating. LeEco later said some of the money is coming from executives at those businesses rather than the listed companies.

Meanwhile, signs of trouble are spreading throughout Jia’s empire. Most visible is Coolpad Group Ltd., a once-hot smartphone manufacturer where Jia is chairman and a LeEco affiliate owns 28 percent of the stock. Coolpad’s revenue tumbled in the last year as the company lost ground to local rivals. Its stock fell to the lowest since 2012 this week. LeEco’s cash flow problems may affect Coolpad even though it’s a separate public company, said Joseph Ho, an analyst at GF Securities (Hong Kong).

"I don’t see LeEco’s cash flow situations improving in the near term, and no matter what ambitions it might have, it won’t bring any positive boost to Coolpad," he said.

Coolpad didn’t respond to multiple requests for comment.

LeEco has its own smartphone business that is also struggling. That subsidiary’s market share in China peaked in June and has fallen from 5.9 percent to 3.3 percent in October, according to Counterpoint Research. Its global market share has dropped by nearly half in the same time.

LeEco’s cash crunch could hurt in another way -- its proposed $2 billion acquisition of American TV-maker Vizio. The deal was announced in July but has yet to close. LeEco declined to comment on whether it will now be able to complete the purchase.

That’s not the only acquisition that Jia has announced but not yet closed. In May, Leshi said it would pay 9.8 billion yuan for Le Vision Pictures, the movie distribution and production unit whose investors include some of China’s biggest screen stars and directors. The transaction, to be funded by cash and stock, won’t be completed this year, Leshi said in early November, citing "lower-than-expected" box office sales nationwide.

The fallout is spreading to the U.S. About a year ago, Nevada’s governor approved $335 million in tax breaks and other incentives to attract Jia’s electric-car company, Faraday Future, to North Las Vegas. The vision was that Faraday would build a $1 billion production line and bring 4,500 manufacturing jobs to the state. Twelve months later, little has been finished but the grading and foundation work.

The contractor for the project, AECOM Energy & Construction, notified Faraday in October it was more than $20 million behind in funding an escrow account – and would need to pay a further $25 million by the end of the month or face a possible suspension of construction, according to a letter seen by Bloomberg. The next month, AECOM stopped work on the plant. When approached by Bloomberg News for comment, the contractor issued a statement saying its client now planned to continue work in "early 2017." They did not talk about a lack of funds in the statement.

“Faraday Future had a terrific marketing campaign. People expected they might be a competitor to Tesla," said Damien Ma, associate director at the Paulson Institute in Chicago, who studies Chinese investments in the U.S. "But then the model they unveiled" at last year’s Consumer Electronics Show "was like a futuristic Batmobile – totally unrealistic for the general consumer."

The Faraday Future FFZero1 concept vehicle.

Photographer: Qilai Shen/Bloomberg

Faraday said this week that it plans to unveil its first commercial vehicle at CES in Las Vegas in January. “Stay in the loop w/ updates” from its newsletter, the company said on its official Twitter account.

As long as LeEco can pay a performance bond of up to $70 million, the state of Nevada has agreed to raise debt that will help pay for infrastructure such as water piping and power lines to the factory.

Nevada Treasurer Schwartz has grown skeptical of Jia’s plans and is reluctant to support it. He has called for the release of due diligence and financial planning documents from both Faraday Future and the state’s governor. If the company gets money from the state but fails to complete construction, Schwartz told Bloomberg News, taxpayers could be left out of pocket.

Eight months after boastful quotes about surpassing Apple’s innovation, Jia is striking a more modest tone. "Everyone knows Leshi is my life,” he said in Chinese during a November interview with Tencent media. “If Leshi dies, my wealth has no meaning and my life has no meaning."

— With assistance by Christina Larson, David Ramli, and Jing Yang De Morel

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