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.

 

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