Rise and Fall of LeEco: Will it Survive?

Rise and Fall of LeEco: Will it Survive?
Case Code: BSTR544
Case Length: 19 Pages
Period: 2010-2017
Pub Date: 2018
Teaching Note: Available
 Price: Rs.400
Organization: LeEco
Industry: Technology & Communications
Countries: China
Themes: Financial Accounting & Reporting, Restructuring
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Abstract Case Intro 1 Case Intro 2 Excerpts

Abstract

LeEco, a leading Chinese conglomerate company, had ambitious plans to build a global ecosystem of products and take on bigwigs like Apple, Google, and Samsung. But the plans of Jia Yueting (Jia), founder of LeEco, to create a great ecosystem came crashing down as the company’s revenues slowed down even as expenses mounted, leading to liquidity issues and financial woes. The company ended up staring at a huge debt. LeEco, which had 15 subsidiaries and 68 affiliated partners, also had questionable related party transactions. With a plummeting share price, trading in its shares on the stock exchange was halted by the company. Amongst the gloom came a ray of hope with Jia being replaced by Sun Hongbin (Sun) as Chairman of Le Eco. Sun is a successful Chinese real estate baron who had invested considerably in LeEco and infused US$2.4 billion to bail it out. LeEco’s failure also resulted in the Chinese regulators scrutinizing shared ecosystem companies and asking them to make more disclosures and reduce related party transactions – steps which could have a major impact on Chinese tech companies.

The case brings out the scope of questionable accounting policies and earnings management in related party transactions in a shared ecosystem environment and the challenge that it poses to the regulators. The case also allows for a discussion on whether LeEco’s failure would have an impact on Chinese start-ups as well as on its tech companies. Finally, the case would allow for a constructive debate on what should Sun do to bring LeEco out of the muddle.

Issues

The case is structured to achieve the following teaching objectives:

  • To appreciate the criticality of execution in a strategy
  • To understand the challenges facing shared ecosystem firms
  • To critically analyze the changing capital structure of a firm and the problems of over-leveraging, especially when the growth does not catch up
  • To understand the complexities involved in rapid internationalization without a proper understanding of the market
  • To debate ways to deleverage and build back the brand image
  • To debate whether the Chinese regulator should worry and more closely scrutinize shared ecosystem firms

Contents

Keywords

Spreading too thin, Expansion Strategy, Strategic Execution, Liquidity Management, Corporate Governance, Financial Sustainability

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