Huawei – Rivers of blood pt. IV

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I am pretty sure Huawei lost money in handsets last year.

  • Huawei reported strong growth in revenues in 2016 but that growth cost it dearly as I think that the handset business lost money as it slashed prices and ramped up spending to gain market share.
  • FY 2016 revenues grew 32% to RMB523bn ($75.1bn) but gross margin fell 114bp to 40.3% and operating margin fell by 205bp to 9.1%.
  • Huawei entered 2016 in a buoyant mood confidently stating that it would become the Number 1 seller of smartphones within 5 years.
  • In line with that goal it massively ramped up spending and cut the prices of its devices in order to close the gap to the global No. 1 smartphone maker: Samsung.
  • Unfortunately, while it was focused on Samsung, Oppo and Vivo really turned on the juice at home, costing Huawei 190bp of local market share in H2 2016.
  • The net result was lower than expected global market share gains for the full year.
  • This was a problem, because Huawei had planned for higher volumes in 2016, meaning that its OPEX budget for the year was too high.
  • Consequently, I am pretty sure that the consumer business entered negative territory which has resulted in a much more measured approach to 2017.
  • RFM research indicates that the focus of 2017 is the generation of profit, which given that Samsung still meaningfully outsells Huawei in terms of volume will require much greater austerity when it comes to OPEX.
  • Huawei is now a comfortable No. 2 in Android but because Android devices are commoditised, that means that I still see it making margins of just 2-4% in the best instance.
  • In order to earn better margin, it must become the No. 1 in terms of volume and outsell its closest rival by a factor of more than 2 to 1.
  • It is this volume advantage that allows Samsung to earn 10-12% margins on Android devices which I think is sustainable for as long as it can maintain that volume advantage.
  • This advantage closed somewhat in Q4 16A but I suspect it will widen once again in Q1 17 as Samsung recovers from the Note 7 disaster.
  • Because of these economics, Huawei has got to do far more than just catch Samsung; it must outsell it by more than 2 to 1.
  • This will be very difficult to achieve which is why I think that Huawei is also working on differentiating its products through software and services.
  • If it can create a good user experience and services that users are prepared to pay something to have access to, then it should be able to make better than commodity margins.
  • However, this is easier said than done and I think that Huawei has a lot of work to do before it will be in this position.
  • This is why, I continue to believe that its best chance of success remains in China where a tie up with Baidu or Tencent could help it plug the service gap it currently has.
  • However, this won’t help in developed markets and here Huawei must do everything that it can to develop the appeal and attractiveness of its Honor brand.
  • This will be difficult given the dominance of the Google ecosystem in these markets but there are cracks in Google’s position that might just give Huawei a chance.
  • In the meantime, I remain unconvinced that Huawei does not have the stomach or the resources to wade through the rivers of red ink that it will take to knock Samsung off its perch.
  • Consequently, I see 2017 as a consolidation year for Huawei, holding share steady and focusing on a return to profit before it considers its next move.
  • I would continue to be wary of any of the Android handset makers whose outlook is increasingly difficult as the market for devices continues to slow.
  • Apple is the only handset maker I would touch at the moment.

Samsung – Still in the box

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Bezels break the box but Bixby stays inside.

  • While Samsung is bursting out of the box in pushing the limits of screen real estate, its voyage into the increasingly crucial user experience shows that it remains boxed in by smarter and better alternatives.
  • Samsung finally launched the Samsung Galaxy s8 / s8+ whose main features include:
    • First: A big improvement in screen real estate with the home button now being under the glass as well as improvements in colour, contrast and brightness.
    • Second: A digital assistant called Bixby (see here) that aims to be much more than an easy way to find stuff out (see below).
    • Third: Samsung Dex which allows the Galaxy s8 to work with an external monitor, mouse and keyboard to give a desktop like experience.
    • Samsung demonstrated very basic PowerPoint editing features confirming to me that the Galaxy s8 will be capable of running the stripped-down Office apps rather than the full fat versions.
    • I still think that without full fat Office, Photoshop etc, there is not much point in this functionality as content consumption has largely already moved off form factors that use a mouse and keyboard and onto touch.
  • The net result is that Samsung is continuing to almost entirely differentiate in hardware as this device is still first and foremost a Google ecosystem device.
  • This is just one area where Bixby will run into problems as it will be the best-in-class Google Assistant that sits on the home button meaning that Bixby has a fearsome competitor even on its own flagship device.
  • To counteract this, Bixby is trying to do things a little differently but careful assessment of what Samsung demonstrated shows a service that has very little intelligence at all.
  • Bixby is a very far cry from what Viv demonstrated would be possible with its assistant prior to the Samsung acquisition, making me suspect that Viv has not proved to be nearly as clever as promised.
  • Bixby is activated with a side key (to get around the problem of Google sitting on the home button) and aims to get stuff done rather than just finding stuff out.
  • Consequently, Samsung has taught Bixby a range of skills such as screen capture and image recognition and plugged that functionality into a select number of apps.
  • By keeping the number of apps that use it limited, Samsung limits the number of possibilities that has to program further highlighting that Bixby is probably incapable doing very much outside of the box.
  • This appears to be contrary to how Viv marketed its capabilities (see here) before it was owned by Samsung, again making me wonder about the true capability of Viv / Bixby.
  • Bixby offers a series of cards (left swipe from home screen) that adjust based on usage and the time of day as the system learns what apps and services the user uses most and when.
  • This is merely clever statistics but if this proves to be a useful tool, then Samsung will achieved some much needed differentiation outside of hardware.
  • Although I have suspicions about the lack of intelligence in Bixby, I cannot be 100% certain of this opinion until I have tested it to destruction.
  • The net result is a very nice looking device that Samsung has made huge efforts to show is both high quality and extremely safe.
  • Most importantly this device is also the first real test that Samsung has had since the Note 7 disaster which is why the s8 needs to sell very well, confounding the big fall in trust that Samsung has suffered over the last 6 months (see here).
  • I think that Samsung has produced the device that it needs to cement its recovery but now it comes down to consumers, a number of whom have already switched to iOS (see here).
  • With Samsung’s share price very close to its all time high, a lot of recovery is already priced in which is why I remain a little nervous.
  • Hence, I prefer Microsoft, Tencent or Baidu.

Tencent – Home circuit.

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I think investing in Tesla is about China, not overseas.

  • Tesla has announced that Tencent is investing $1.8bn in a 5% stake in the company that should bring in both badly needed capital as well as serving as a way to open doors in China.
  • Some commentators are of the opinion that this investment is part of Tencent’s plan to expand overseas, but I see this as a move to catch up with what is going on at home.
  • This fits nicely with Tesla’s ambitions in China which has had a pretty torrid time there since it launched in 2014.
  • RFM research clearly shows (see here) that Tencent is the dominant ecosystem in China with over 850m MaU and 77% coverage of the Digital Life Pie.
  • However, when it comes to automotive, I see it as being behind both of its major domestic rivals, Alibaba and Baidu.
  • Baidu has leadership in maps, leadership in autonomous driving and is already putting its services into cars with Baidu CarLife in conjunction with Harman.
  • Alibaba is also actively pursuing Chinese car makers to use its Yun OS software in their cars and already has a deal with SAIC.
  • On the other hand, Tencent has very little other than a small stake in Didi which is unlikely to help it much as both of the other BATmen are also shareholders.
  • This is why doing a deal with Tesla makes some strategic sense on both sides of the table.
  • Tesla gets a strong partner to help it fix the problems that it has had in terms of penetrating the Chinese market, while Tencent gets a potential route into both the automobile and autonomous driving with a major global player.
  • I view the automobile as another device alongside the smartphone, tablet, console, TV and so on for delivering Digital Life services to users.
  • Chinese cities have some of the longest commuting distances in the world (see here) meaning that the automobile is a place where those that drive spend a meaningful proportion of their day.
  • Much of the commuting is done on public transport which Tencent already has covered with its very strong presence on the smartphone.
  • Tencent will be a little more than a passive investor, being referred to as an advisor, which I take to mean helping out in China.
  • This is the latest of a series of moves that has seen Tencent address some of its weaknesses (see here and here and here) but the biggest one still remains.
  • I have long believed that integration is key to monetisation and see substantial upside in Tencent’s financials if it really embraces this notion.
  • However, I still see no evidence that Tencent is making any moves to integrate its Digital Life services into a single system where it can really understand the profiles of its users across all of its services.
  • As a result, its growth is likely to continue to come from selling games and media rather than from its ecosystem which I think limits its real long term upside.
  • Fortunately, the short-term picture remains pretty healthy and so there is still upside to be had without Tencent really developing its ecosystem, but the time is fast approaching when it will need to make that move.

Didi – Jam today

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Its time Didi started trying to make money.

  • With the ride hailing market in China now wide open for it, Didi has no reason to go on burning billions of dollars for the sake of growth.
  • Consequently, I cannot see a good reason for Didi to raise $6bn as it should be looking to internal cash flow to fund its investments.
  • The one exception is to have a war chest for acquisitions in order to go global, but I think that it is better to buy expensive paper with equally expensive paper rather than cash.
  • In China and across the world, ride hailing has been a bottomless black hole into which Uber and many others have poured billions of dollars in order to establish a firm grip on the ride hailing market.
  • This is because like all network businesses (see here), barriers to entry are very low meaning that competition will be brutal unless one player becomes significantly larger than all of its rivals.
  • A company in this hallowed position then becomes to the “go-to” place for the service in question and it is then that real monetisation can begin.
  • The rule of thumb that I apply here is:
  • A company that relies on the network must have at least 60% market share or be at least double the size of its nearest rival to begin really making profit.
  • Any market with more than one player will be a bottomless hole of investment as each tries to undercut the other in order to reach the hallowed status of being the “go to” market place.
  • Once there, it will have become so sticky that customers will pay a little more to access the sellers and the sellers will be willing to do exactly the same.
  • This how a network business changes from being a bottomless pit and becomes a gold mine.
  • With Uber’s ignominious withdrawal from the Chinese market (see here), I think that Didi has already reached this status and so it should now be looking seriously at monetisation rather than growth at any price.
  • For Didi, a position in autonomous driving is likely to be as important as it is for Uber (see here), but I struggle to see how it needs $6bn for this.
  • Furthermore, RFM research and historical data strongly indicates that excellence in autonomous driving and artificial intelligence is a function of time spent and data collected rather than absolute numbers of dollars invested.
  • Consequently, even if it starts today, Didi is likely to be far behind Baidu which intends to have autonomous cars on the road next year.
  • At the end of the day, the price of ride hailing in China (and elsewhere) has to rise otherwise Didi, Uber and all of the other players will never be going concerns.
  • Hence, I think that Didi should be looking at strategies of phasing in the price rises that it needs to offer its existing shareholders a decent return rather than investing right, left and centre and promising jam tomorrow.
  • Dull as it sounds, Didi is in a position to start producing jam today.

Uber – Fatal disengagement.

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Google is 5,000x better than Uber at autonomous driving.

  • Although Google is suing Uber for the alleged theft of its Lidar (key autonomy sensor) design, it does not seem to have helped Uber much as it appears to be by far the worst at autonomous driving.
  • This is still the case when one includes the regular car companies that most people have written off as having very little to offer in the new world of digital and autonomous cars.
  • The best measure of an autonomous driving solution is how often the driver has to take over to correct shortcomings in the autonomous driving software.
  • Regulations in California require those that test in the state to submit this data but typically, they all submit it in different ways (see here).
  • There are also different types of disengagement such as when the car is going to hit something (critical) or when the safety driver feels uncomfortable (ordinary).
  • Furthermore, companies test their cars in different conditions meaning that the data can really only be used as indication.
  • However, the contrasts are so stark that I think that meaningful conclusions can be drawn about how advanced the autonomous driving solutions from different players really are.
  • In order of performance the data shows:
    • No. 1 Waymo (Google) is 8x better than the number 2 with 1 disengagement every 5,128 miles driven.
    • Waymo has also driven at least 155x more miles (635,868) in the last 12 months than anyone else, meaning that it has collected more training data than all the others put together.
    • No. 2 BMW with 1 disengagement every 638 miles driven (8x worse than Waymo) but it only drove 638 miles raising questions to the validity of this data.
    • No. 3 Nissan with 1 disengagement every 146 miles and a total of 4,099 miles driven.
    • No. 4 Tesla with 1 disengagement every 3 miles with 550 miles driven but almost all of these occurred in wet road conditions.
    • I think that Tesla deliberately went out to push its system to the limit as wet conditions are known to be far more difficult for autonomous systems.
    • Hence, I do not think that is necessarily an indication of Tesla’s real position in the pecking order.
    • No. 5 Mercedes with 1 disengagement every 2 miles driven with 673 miles driven in total.
    • No. 6 Uber with 1 disengagement every 1 mile driven with a total of 20,354 miles in total.
    • Uber has just suspended its autonomous testing following a serious crash in Arizona despite the fact that it appears that the Uber vehicle was not responsible for the incident.
    • Uber has also been banned from testing in California for failing to register with the DMV.
  • This is yet another indication that the key to artificial intelligence (the heart of all autonomous driving systems) currently is the amount of time that one has been working on the algorithms as well as the amount of data collected (see here).
  • I am certain that this is why Waymo is the best because it began working on autonomous driving in 2009 (far earlier than anyone else) and in the last 2 years has driven more than 150x more miles than anyone else.
  • The fact that Uber, by quite some margin, ranks last is potentially a serious problem in the long-term.
  • This is because if the car companies have their own self driving technology (or use Google) then Uber may find itself being a middleman that is no longer required.
  • Uber currently has the advantage because it has already established itself as the market place for drivers and passengers to transact and these types of positions are extremely hard to disrupt once created.
  • This is why Uber commands the $70bn valuation that it does but unless it gets a handle on autonomous driving, this market place may become obsolete when humans stop driving cars.
  • I still think that the technology will become mature long before the market is ready to adopt it (see here) meaning that Uber should be able to pick-up a viable solution at an attractive price once 2020 deadlines are missed and funding runs out.
  • Despite this view, this is a key risk for Uber and one I would be uncomfortable with especially if I had put some money into the company at $62.5bn.

Google & Facebook – Trouble in paradise.

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Facebook will be hit much harder than Google.

  • Although it is Google that is taking most of the heat in the current boycott of its digital display advertising, it is Facebook that is likely to be hit hardest by this problem.
  • A series of global firms have pulled their advertising from YouTube is response to finding their advertisement placed in videos which are deemed to be offensive or contain extremist content.
  • This is not a new problem but has come to a head after a series of lapses on the part of YouTube have gone viral raising the ire of companies who would appear to endorsing such content.
  • The net result is that a number of multinational companies (more likely to follow) have pulled their advertising from YouTube until they are confident that Google is able to ensure that their logos and advertising only appears along aside acceptable content.
  • This is a difficult problem because YouTube is adding 400 hours of content to its website every minute and thousands of websites are added to its network on a daily basis.
  • This makes monitoring content on a proactive basis extremely difficult which is why a meaningful number of lapses have come to light.
  • Fortunately for Google, I think that the impact of this issue will be limited and short-lived as:
    • First: this issue only affects YouTube and display advertising which RFM estimates makes up just 12% of gross revenues.
    • Hence, even if this were to fall to zero, the vast majority of Google’s business would be unaffected.
    • Second: Google is the best equipped to deal with this problem compared to any of its competitors.
    • The amount of content that has to be checked on a daily basis is so vast that it can only realistically be carried out by a machine.
    • This means that AI is needed to scan uploaded content and new websites and flag any that are suspected to contain content that Google customers are likely to consider objectionable.
    • Google has the best AI available when it comes to image and video recognition as well as sentence and text recognition.
  • Hence, I think that Google should be able to fix this problem in a comparatively short period of time.
  • However, I do not have the same degree of confidence when it comes to Facebook which already has this problem but has yet to suffer a loss of businesses as a result of it.
  • I think that when this does happen at Facebook, it will be a much more serious problem as this type of advertising is a much larger part of its revenue and I do not think that Facebook has the AI to fix it.
  • RFM research (see here) has found that Facebook is far behind its global peers when it comes to AI, mainly as a result of having not worked in the field for very long.
  • This means that while it is sitting on the world’s second largest treasure trove of data, it is unable to understand what most of it is and is therefore unable to weed out content that is objectionable to its customers.
  • I think that this will take a very long time to fix compared to Google and so when this issue hits Facebook, it will hit it harder and it is likely to last longer.
  • This is just another reason for me to remain pretty cautious on Facebook which I think will see much lower than expected growth this year which is likely to take a toll on the short-term valuation.
  • I also think that Google remains fully valued and would prefer the shares of Microsoft, Tencent, Baidu and Apple for long-term value based investors.

Tencent – Brute force.

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Tencent has time as most gaming AIs are relatively simple.

  • Tencent is finally jumping into artificial intelligence (AI) and I think that it is fortunate in that it is not very difficult to create good algorithms for the vast majority of the games that Tencent offers.
  • Tencent has created AI Lab which now has more than 250 employees whose task it is be to create algorithms that create more sophisticated game opponents as well as chat bots for companies that use WeChat and QQ to talk to their customers.
  • The general impression of AI seems to be that as soon as one has created an AI group, superb, hyper-intelligent algorithms will come rolling out of the door but in reality, this is very far from the truth.
  • RFM research has found (see here) that single biggest determinate of AI excellence to date is time and those that have been doing it the longest tend to have the best AI.
  • This is why RFM has found that it is the search engines thatare the most advanced even though some of the biggest brains in the field are employed elsewhere.
  • With Tencent just getting into this field, I think it will be a very long time before it will be in a position to roll out algorithms that are capable of making its services meaningfully more intelligent.
  • In the long run this will be crucial to maintaining its dominance in the Digital Life segments where it is present as I think competition will become much tougher as the market matures.
  • The good news is that it is unlikely to prove very difficult to create algorithms that are more than good enough to play the games that it offers to a very high standard.
  • This is because most games are either based on hand eye co-ordination or can be solved by an algorithm using a brute-force approach.
  • Brute force involves evaluating every possible outcome from a given position and choosing the best one.
  • With today’s improvements in memory and processing power, this is not very difficult to achieve.
  • The highest profile exception is Go which has so many possible combinations that brute force becomes impossible.
  • This is why DeepMind’s AlphaGo was such a breakthrough, as it uses AI to work out which options should be searched much like a human would.
  • Tencent has produced an AI Go player called Jueyi which has been able to play to a very high standard but I think that the design has been copied from AlphaGo.
  • AI is a co-operative field and DeepMind has published most of its methodology and results for the creation of AlphaGo in the scientific magazine Nature.
  • Consequently, I do not view this as a good example of Tencent coming up with an innovation of its own and I think we will not be seeing hyper-intelligent AIs appearing in Tencent’s services anytime soon.
  • However, I think that Tencent has time as its core markets are still seeing steady growth and it should be reasonably easy to improve the AI opponents in its core segment: gaming.
  • I still like Tencent as there remains substantial upside should it really begin to monetise the ecosystem that it has created but it has a very long way to go before it can be considered a force in AI.

Google – Cookie crumbles

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I see no solution to Google’s problems in Android O.

  • Google has released a developer preview of the upcoming Android Oreo (Android 8.0) software, but I can’t see anything here that will help solve either the endemic fragmentation or Google’s chronic inability to update its own ecosystem devices (non-Pixel).
  • The preview of Android O headlines with a series of tweaks that provide incremental improvements to the user experience as well as API upgrades to enable developers to write better apps.
  • A few of these upgrades include:
    • Notifications: tweaks to make notifications easier and more consistent to manage.
    • Autofill framework: includes browser like autofill for commonly used data such as name and email.
    • Picture in Picture mode which is already available on Android TV will now be available to phones as well.
    • Adaptive Icons which can change their appearance depending upon which device they are being displayed.
  • These are all well and good and represent steady improvements in the user experience, but they do nothing to solve the two big issues that continue to hamper the Android user experience thereby keeping usage lower and users less loyal when compared to iOS.
  • These are:
    • First endemic fragmentation: There are thousands of different implementations of Android which behave differently and result in variations in the user experience.
    • RFM research indicates that this variation creates user frustration, lower usage and lower loyalty.
    • Second software distribution: Google has no control over the updates that are applied to the devices that run its ecosystem on Android.
    • This means that it takes up to four years for new software to fully penetrate its user base.
    • This gives rivals plenty of time to copy Google’s innovations and put them into their devices long before Google’s own innovations reach the hands of users.
  • I have long believed that both of these problems are largely responsible (more than demographics) for the much lower usage experienced by Android devices in general.
  • Google’s Android revenues are dependent on usage and I think that these issues are substantially limiting Google’s monetisation potential on Android.
  • This is why I have long held the opinion that Google must take Android fully proprietary to fix these problems and begin to realise its full potential when it comes to monetisation (see here)
  • I am still hopeful that we will see announcements that quietly take Android in this direction at Google i/o this year but the indication from this preview is that i/o 2017 could be yet another year of ignoring the elephant in the room.
  • I remain pretty cautious on Google, preferring instead Microsoft, Baidu and Tencent.

Samsung – Edge dancer pt. II

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I think Bixby will struggle against Google Assistant.

  • Samsung has launched its offensive on the digital assistant market but I think it will still be dancing around the edge of the main act on the Galaxy s8: Google Assistant.
  • Samsung has announced that its new digital assistant, Bixby will be present on the Samsung Galaxy 8 with its own dedicated key on the side of the device.
  • Bixby promises to offer:
    • First, completeness: This promises to give users complete control of enabled apps rather than the few tasks offered by other assistants.
    • Second contextual awareness: Samsung is promising that Bixby will be aware of the context within which it has been triggered, making it more relevant and useful.
    • I suspect that it will do this using the hooks in Android that Google wrote to enable Google Assistant to do the same thing.
    • Third natural language recognition: Bixby should be able to understand complex, multi-part questions as well as prompt the user to clarify the pieces that it does not understand.
  • These features are very similar to those promised by Viv, the artificial intelligence company that Samsung purchased in October 2016 which is clearly the source of this product.
  • If Bixby can truly fulfil the promises that it is making, then it will almost certainly will be better than Google Assistant.
  • However, I think that this is a very big ask given that RFM research has found that AI excellence to date has been a factor of time and data volume.
  • Viv was founded in 2012 and has no data from commercial products while Google has been crunching data for 20 years and has orders of magnitude more data than its nearest rival.
  • Consequently, I think that compared to this highly ambitious billing, Bixby is going to fall very far short of the promises that it has made.
  • Furthermore, Samsung’s delivery of Bixby is going to be hobbled by the 2014 agreement that it made with Google where it agreed not to compete in the ecosystem (see here).
  • This is why I suspect that Bixby has been relegated to a button on the side of the device whereas it will be Google Assistant that is sitting on the all-important home button.
  • As a result I think on the smartphone, Bixby will lose out to Google Assistant but on other devices it has some chance.
  • Samsung has a good portfolio of other electronic devices, which combined with its SmartThings offering, could allow Bixby to offer intelligent and intuitive control of other Samsung devices.
  • This could help Samsung to encourage greater ownership of Samsung devices across its range but again this will depend on how good Bixby really is.
  • Over 20% of all Google mobile searches are already done using voice meaning that many users are already conditioned to pressing the home button and asking as well as being used to Google’s quality of service.
  • Consequently, I think that the odds are heavily stacked against Samsung having much success with Bixby but as long as it can continue to outsell Huawei by more than 2 phones to 1, the profitability of its handset business should remain intact.
  • I still pretty cautious on Samsung as I am not convinced that the full fall-out from the Note 7 disaster has been felt in terms of market share, which is what makes the Galaxy s8 launch so important.
  • I prefer Baidu, Tencent and Microsoft.

 

LeEco – Electric millstone.

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I think, LeEco must exit automotive to survive.

  • It looks very much like LeEco is giving up its grand plans for a 12,000 employee eco-headquarters in return for hard cash in order to give the ecosystem strategy time to succeed.
  • Despite these radical actions, I still think that LeEco’s only chance is to give up its automotive ambitions and focus on its core business: the ecosystem.
  • LeEco has recently raised $2.2bn (see here) which I calculated would leave $622m free to support the fledgling ecosystem of products and services.
  • However, the sale of the 48 acres it purchased from Yahoo to Genzon Group, the Chinese real estate developer this increases my estimate of free cash for investment to $1.132bn.
  • This is because to reach the $622, I took off $250 for purchasing the land but this outflow is now an inflow of $260m, improving cash flow by $510m.
  • This will give the company time to develop its offering but I remain concerned that its automotive ambitions remain a major problem.
  • LeEco’s automotive strategy is centred on an electric vehicle start-up called Faraday Future in which its founder is the major backer.
  • It broke ground on a huge 3m square-foot factory in Nevada in April 2016 but because contractors have not been paid, work has since ground to a halt.
  • Furthermore, Faraday Future has now reduced the size of the planned factory by 80% to 600,000 square-feet, cut the number of models from seven to two and delayed the factory opening by at least 1 year.
  • Faraday Future’s problems do not end there as senior management turnover has been high in the last 9 months and there could be as much as $300m in unpaid bills.
  • As Apple (see here) and even Tesla have found, building cars is a difficult business that requires a lot of time and very deep pockets.
  • I am pretty certain that Faraday Future has none of these things making its chances of long-term solvency very slim.
  • This is why I think that LeEco’s best interests will be served by not having this millstone hanging around its neck.
  • Faraday Future clearly needs hundreds of millions of dollars of new investment which LeEco simply cannot afford if it is to have any chance at delivering on its ecosystem ambitions.
  • These ambitions begin with a media consumption strategy that needs both heavy investment in terms of content and attention to detail when it comes to software and the user experience.
  • Furthermore, management needs to be focused on delivering on these ambitions rather than being distracted by building self-driving cars.
  • RFM research has found that currently, the user experience in the automobile has no effect on the user’s decision on where to live his Digital Life and therefore building a car to deliver one’s ecosystem makes no sense at all.
  • This combined with the difficulties, cost and poor profitability of automobiles, is why I think that Apple backed off (see here).
  • Hence, I think that for LeEco to have the best chance of succeeding, it needs to extract itself from Faraday Future and forget about self-driving cars.
  • Building a thriving ecosystem is difficult enough and throwing in cash constraints and management distractions can only make it next to impossible.