LeEco Reaches the End of the Road: An Internet Concept and a Not-So-Clever Scam Trapped Hundreds of Thousands of People | 2017's Biggest Business Stories ②

As the year draws to a close, we're using ten articles to round up the year's most important business news — news that usually signals a shift in an industry, or is the result of one.

Growth and bubbles driven by enormous amounts of capital; the wealth and the problems piled up along the way; a policy direction nobody can predict — after more than 20 years of boom, the three of them became tangled together in this year's business world. There was no shortage of big stories, but look closely and business logic was not what decided which companies won and which lost. This is the second of our 2017 biggest business stories.

On the afternoon of December 14, 2017, Xu Yubai went to the Jiuxianqiao tribunal of Beijing's Chaoyang District Court to sue LeEco, hoping to get back the more than 500,000 yuan in production fees the company had owed him for over a year.

The courthouse is five kilometers from LeEco's headquarters, about the same distance as from Xu Yubai's own company. But he had never joined the crowd of creditors who began gathering outside LeEco's building early this year to demand payment; he only kept pressing his contact there. Now the year was ending. "A couple of days ago I asked around, and they said there was still no news," Xu said, "so I had no choice but to sue."

Xu took out the one-page template for a breach-of-contract complaint and filled it in with a clerk's help. The clerk looked over the contract and the original ID of the company's legal representative, kept the photocopies, and mentioned that quite a few people had come in over the past few months to sue LeEco.

The whole thing took a few minutes. The only part Xu had to think about was whose name to put down as the defendant. He'd seen the news that Jia Yueting had quit all his posts at LeEco, so he didn't write Jia's name; he looked up Liang Jun online and wrote that instead.

But Liang Jun had quit as CEO of LeTV two months earlier. And LeEco's real controller, Sun Hongbin — the man who had installed Liang Jun as CEO — had pledged every LeTV share he held to CITIC Trust for cash back in August.

As for LeEco's founder, Jia Yueting, after resigning from every position at LeTV in July, he left for the United States and never came back. The day before Xu filed his complaint, the Beijing No. 3 Intermediate People's Court put Jia Yueting on its blacklist of debtors who refuse to comply with court judgments — the second time in three days.

Jia Yueting no longer bothers to defend the scam. From employees to suppliers to shareholders and financial institutions, hundreds of thousands of people were pulled into it. The supplier bills that have become public alone show LeEco owes at least 2 billion yuan.

In mid-2015, when Xu Yubai first went to bid for video ad work at LeEco, he never imagined it would end like this.

Even then he worried about getting paid. The industry norm was 30 to 50% up front as a deposit; LeEco refused to pay a deposit at all, and insisted on paying within 60 days after a video was finished and passed inspection.

Xu said yes anyway. He was 32 that year. He had finished college in Beijing and stayed on, shooting video ads with partners for a few years before founding his own video ad production company in 2013. The little firm had eight employees and was planning to move into visual effects and CG animation in 2015, and Xu thought working with LeEco — which was pushing into several big markets at once — was a good chance to raise his company's profile.

At First, "Internet" Explained Everything

In 2015, LeEco looked capable of anything: making TVs and phones, building an electric car, buying into films, television and sports broadcasting rights. A former LeEco Holding employee who worked at the company's Beijing tower told us that in one heady month that year LeEco took on 750 new hires, with a flood of new businesses starting at once.

2015 was the year of "Internet Plus." At a time when the single word "internet" could explain anything and China's A-share market kept setting records, LeEco's story ran from internet TVs to internet phones to what it called "ecosystem chemical reactions," and the market value of its listed arm, LeTV, peaked at 150 billion yuan.

Investors' rising excitement also made LeEco's fundraising easy. LeSports and LeMobile closed rounds of 800 million and 3.6 billion yuan that year. Jack Ma, Wang Jianlin and Wang's internet-celebrity son all put money into LeSports. With the cash, LeSports went on to buy more than 250 sports broadcasting rights, covering soccer, basketball, tennis, volleyball, golf and marathons. LeVision Pictures took 340 million yuan from a group of movie stars.

There were warnings. Liu Shuwei, the Central University of Finance and Economics professor known for exposing the earnings fraud at Lantian Co., wrote that LeEco was buying sales at a loss it could not sustain, and that it was converting phone and TV sales at its unlisted businesses into service revenue at the listed company through bundles — buy a membership, get a free TV. Looking back, LeEco never got past those few tricks in rolling its story forward, and the business really was unsustainable.

But Xu wasn't following any of this at the time. Even if he had been, what he would most likely have seen was media commentators, analysts at financial firms and Zhihu's star users hitting back at Liu: her analysis was at the level of "an undergraduate intern," she "didn't understand the internet," she was "using traditional, antiquated, backward research methods to analyze and value an internet company."

At first the work went smoothly. The two sides had agreed on a 60-day payment cycle, but when LeEco moved fast it settled in a bit over ten days.

A LeEco project took a month or more, and being short of people, Xu largely stopped taking other jobs at the same time, unless he could finish them in a week or two.

Over the course of a year Xu did four or five projects for LeEco, half his company's revenue. The work covered shooting, editing, and animation and visual effects in post.

LeEco's Employees and Suppliers Sensed the Cash Squeeze in Early 2016, but Nobody Took It Seriously

By early 2016 Xu was noticing changes: the payments, a few hundred thousand yuan an order, started coming late. The money still came, a few days past the 60-day cycle, but his contact at LeEco could always get it for him in the end.

After a few more promotional films, he joined the bidding for a promo video for LeEco's drone, and realized the products had problems too.

The drone flew terribly, Xu recalled: "The moment it lifted off it was like the gas pedal was floored — you couldn't control it." In the end, to shoot a billboard, they taped the camera to the drone's base; otherwise the footage shook too much to use. Even so, the finished ad needed heavy post-production effects to cover the problems.

But however much LeEco's products cheated their buyers, to Xu the company was a steady source of income worth more than 2 million yuan in contracts a year, and his contact inside could still chase down his money.

Inside LeEco, people saw the problems earlier.

A former employee who joined in early 2016 to work on brand marketing remembers hearing colleagues talk about a possible cash problem as soon as he arrived, because after one product launch the company's communications and promotion budget was a tenth of what it had been.

His boss, Lin Yiwen, had been at LeEco since mid-2015, two reporting levels below Jia Yueting. Lin's impression of the company then was that it was hiring so fast there wasn't enough desk space, and that Jia waved through any proposal for a new business. Internally Jia called this "letting a hundred flowers bloom."

What Jia Yueting really took seriously was the slide deck. Before LeEco's car launch in April 2016, he rehearsed a 300-plus-slide presentation more than 20 times. It wasn't until he finally walked onstage, though, that Lin Yiwen saw Jia cry for the first time. "Maybe by the end of the speech up there he really had moved himself," Lin said.

For a company that sold concepts, building a car was a big deal. Starting with phones, LeEco rolled out one project after another, subsidizing sales to buy volume while already starting the next one. Cars were obviously the most expensive: 10 billion yuan was barely enough to get going.

LeTV's market value climbed with each new concept, from just over 3 billion yuan at its 2010 listing to 150 billion in 2015, and it was still close to 100 billion after the stock bubble burst in 2016. A private equity manager who saw LeSports' 2016 fundraising documents said Jia Yueting had promised at the time that LeSports would go public within three years, or else buy the shares back at 12% annual interest.

According to THS iFind, nine brokerages published 44 research notes on LeTV in 2015 and 2016. Apart from nine that were neutral or unrated, every one of them said buy. Not a single analyst told clients to sell. In June 2016, the summary of a report by Liao Xufa, an analyst at Goldman Sachs Gao Hua, Goldman's Chinese subsidiary, was one sentence: "LeTV: Not just China's Netflix — ecosystem advantage; added to Conviction Buy List."

When QDaily emailed at the end of this year, the firm replied that it no longer covered LeEco and that company policy meant it could not give an interview.

Sell-side analysts weren't the only ones happy to talk up the ecosystem story. Mutual funds, insurers and private equity firms were buying LeTV stock too. At the end of 2016, more than 150 funds held 3.5 billion yuan worth of it.

The turning point in LeEco's finances, as Lin Yiwen saw it, was the U.S. launch event.

On October 19, 2016, LeEco unveiled new phones, TVs, VR gear, a bicycle and a car in the United States, with Jia Yueting onstage himself. To prepare, LeEco's various companies sent several hundred people to the U.S., so many from one company that the American embassy refused visas to some of them. Each person who went got about US$170 a day for transport and meals — those two lines alone came to more than US$100,000 a day.

But after coming back from this extravagant launch, Lin Yiwen's department had nothing to do. The big promotional budget it had expected never arrived.

A man who interviewed for a logistics job with LeEco's TV business in central China told us he interviewed in September 2016 and was told verbally by his interviewer that he had the job, though the internal approval process would take a month. Less than two weeks later the interviewer called to say the department had been dissolved and he himself had been let go; there was no point waiting.

Xu Yubai felt LeEco's finances getting worse at the same time. After October his invoices were paid more slowly, and just about every supplier around him ran into it. LeEco stopped signing annual framework contracts with them and signed one contract per job instead. Films it could have outsourced or shot itself, it now shot itself.

On November 6, 2016, Jia Yueting published an open letter admitting the company was burning cash too fast — the car project had gone through more than 10 billion yuan of its own money — and that its cash flow could break.

By December 2016 LeEco's cash crisis was public, and the LeEco employees Xu Yubai knew well told him plainly that money was tight. He took the job anyway, and his company fronted more than 200,000 yuan in upfront costs.

That job is what turned Xu Yubai into one of LeEco's creditors.

Sun Hongbin Arrived, but LeEco Was Already at the End

Even in early 2017, Xu Yubai still wasn't especially worried about the 500,000-plus yuan he was owed. In March he told QDaily he thought LeEco was being fairly honest, that it would tell you where the company's money stood. "If they wanted to cheat you," he said, "they wouldn't tell you anything at all."

What Xu and the outside world didn't know was that in the second half of 2016, while Jia Yueting was raising money everywhere and getting company executives to pledge their shares for cash to lend the company, he had quietly pulled out the 3.4 billion yuan he had lent it himself. Financial statements published a few months later showed that LeTV alone — the part of the business that looked healthiest on paper — had 5.2 billion yuan of debt falling due in 2017. That 5.2 billion was only what it owed financial institutions; it did not include the money owed to suppliers.

The other reason Xu wasn't more worried was that Sunac had arrived. In January 2017, Sunac brought LeEco 15 billion yuan. Sunac's founder and chairman, Sun Hongbin, split the money among the three businesses he personally thought were worth something: LeTV, LeTV Zhixin and LeVision Pictures.

It was a risky bet on the bottom, in the hope that these businesses would later be worth more than the money put in. Sun Hongbin said at the announcement that Sunac's own executives, the finance chief included, had all opposed the deal. He wasn't entirely easy about Jia Yueting either: one condition of the investment was that Sunac would install a finance manager and a supervisor at LeEco, capping spending at the car and phone businesses.

With the cash in hand, LeEco quickly resumed trading. Sun Hongbin was far from the only investor buying the dip: after trading resumed LeTV gained 8,387 new shareholders, and by the time the shares were suspended again in April, for good, it had 180,000 shareholders.

But the bad news never stopped. The founder of LeEco's car business left. LeSports lost the broadcasts of every marquee competition it had because it hadn't paid the rights fees. The founder of affiliate Yidao Yongche said publicly that LeEco had diverted 1.3 billion yuan of borrowed money into the car project. Another affiliate was sued over unpaid loans.

Around the Lunar New Year, suppliers pitched tents on the ground floor of LeEco's tower to keep demanding payment. Phoenix Finance reported that some had been camped there for more than a month and had spent over 10,000 yuan on hotels and living costs, and still nobody from LeEco had come down to deal with them.

"You could really feel how much heavier the security was at the card readers. LeEco never used to have those subway-style gates, and once the trouble started they went up overnight. Nothing else ever moved that fast," Lin Yiwen said.

Meanwhile LeEco kept cutting staff, which it called "personnel optimization." It also fell behind on wages. Lin Yiwen was caught by that once before he left mid-year, and his social insurance payments lapsed for a month before being made up.

Sun Hongbin's attitude was changing too, in public.

In May he stripped Jia Yueting of the general manager's job and replaced him with Liang Jun, previously of LeTV Zhixin. At Sunac's results briefing that same month, Sun said LeEco should "sell what needs selling and partner where it needs partners," and used the Chinese Super League as his example: "Last year that cost 1.35 billion yuan and brought in 50 million — a 1.3 billion loss. That's insane."

On July 4, Jia Yueting stepped down as LeEco Holding's legal representative and flew to the United States that same day.

At LeTV's shareholder meeting in mid-July, Sun Hongbin told reporters on the spot: "The debt at the listed company is no different from what we found in due diligence. The problem is mainly old Jia. He dithers, won't sell what has to be sold, won't commit. A few days ago at a shareholder meeting he was still saying we can't give up a single one of the seven sub-ecosystems. Goddamn it — at a time like this and he still can't give up one of them. If you could make even one of them work, that would be something."

That month, every LeEco phone came off the company's website. But according to QDaily's reporting at the time, LeEco's repair shops had already spent months waiting for parts that never came: LeTV Zhixin, the subsidiary responsible, had gone on selling its remaining phone stock knowing it could not honor the warranties.

By August, Sunac had pledged all of its LeTV shares to CITIC Trust for cash. Sun Hongbin has never since said how much of that money went to keeping LeEco running and how much went back to Sunac.

After that there was only bad news. Liang Jun quit and left in under six months. Stripped of the businesses that were doing badly, and without related-party transactions to dress up the books, LeTV turned out not to be a profitable business on its own either, losing 636 million yuan in the first half of the year.

In November, Sunac lent LeEco 2 billion yuan for working capital and took assets LeTV held, including LeTV Zhixin and LeCloud, as security. If LeTV cannot repay, those assets go to Sunac. Under China's bankruptcy law, secured creditors rank ahead of employee wages, social insurance, taxes and ordinary claims, contract payments among them.

The Shenzhen Stock Exchange saw that Sunac's move could hollow out the listed company, and three days after the loan was announced it sent a letter of inquiry giving LeTV three days to explain why the security and loan terms were reasonable. A month later, LeTV still has not replied.

Jia Yueting stopped honoring his promise — made in the second half of 2016 — to put the proceeds of his LeTV share sales into running the company. But the China Securities Regulatory Commission did not write to press him to keep it until December 7, by which point Jia was no longer in China and it had been more than a year since the crisis became public.

LeTV was once the biggest stock on the Shenzhen exchange's ChiNext board, so its collapse will drag the whole board down with it. If there is one thing Chinese regulators hate, it is probably violent swings. Xiao Gang, the former head of the securities commission, was decisive about stripping excess leverage out of China's stock market, but two circuit-breaker halts could not stop the crash; he stepped down before his term was up and vanished from public view.

From the second half of the year on, Jia Yueting began to look like a character in an absurdist play. He would say "I will see my responsibilities through to the end" in the morning and announce that afternoon that he was quitting every position at LeEco. He sued someone for defamation in the United States and then lost because he didn't show up. LeEco's twice-repeated line that "Jia Yueting is coming back to China next week" became a joke.

For the people caught in LeEco's collapse, none of it is funny. Right now 180,000 people hold LeTV stock, and their money has been locked up by the trading halt for more than six months. According to the latest estimates from fund companies that hold the shares, once trading resumes the stock will fall by the daily limit at least 13 days in a row, losing 83% of its value. The suppliers owed money are beyond counting, and the debts that have become public alone come to more than 2 billion yuan.

Xu Yubai, whose company has few people, never once went to demand payment in person. In his own words: "I'm a bit lazy, and also because [mid-year] was exactly when I was busiest — I had to get the work I already had out the door. I can't get the money back for now, but the company still has to find a way to keep going."

Xu just kept asking people at LeEco over WeChat. The contact he was switched to in recent months didn't know their earlier work, so he couldn't get any news about the debt. He went from asking every two or three days to every week or two, and then to once a month.

Xu's hope of getting the money is fading, but he still won't accept it. If LeEco offered him 10 or 20% to settle, he says he wouldn't take it: "Either don't give me a single cent, or pay it all back at once. Not one cent less."

The 500,000 yuan barely registers on LeEco's enormous list of debts, and it won't put Xu's company out of business, but it has made plenty of trouble in his life: when a relative back home fell ill he couldn't come up with money to help, and people find it odd that after years of building a career and running a company in Beijing, he can't produce even a few tens of thousands of yuan in cash.

Jia Yueting, in the United States, no longer responds to news about LeEco. Now and then he posts on his WeChat official account and his Weibo about building electric cars in America. The last time he addressed LeEco's debts was in November this year, when he "deeply apologized" to the company and its investors.

(At the interviewees' request, Xu Yubai and Lin Yiwen are pseudonyms.)

Why It Made the List

LeEco used nothing more than fairly simple financial tricks, but it stayed close to China's internet industry through its wild growth — close to the hunger for growth, and to one concept after another. People, greedy in varying degrees, gave up their own principles, and even as they were being cheated they actively helped roll LeEco bigger and bigger.

As the boom in internet concepts ended, Jia Yueting, bound by no business principle or bottom line at all, simply walked out of the game, and by 2017 the scam had essentially run its course.

Timeline

A timeline of how the LeEco scam came apart

2016.11.6

Jia Yueting sends an internal letter to all staff admitting the company is short of money and announcing an end to cash-burning expansion.

2016.11.9

LeTV holds an investor meeting. Jia Yueting says LeTV's profits will grow quickly in 2017, and that LeEco Holding's whole ecosystem has "everything ready except the money."

2016.11.11

Bloomberg reports that LeEco Holding's Yidao Yongche is having trouble raising money. Yidao says the report is inaccurate and its fundraising is going smoothly; soon afterward Yidao's founder says publicly that the money it raised was diverted.

2016.12.5

LeSports admits it has hit a wall of "sluggish growth" and will cut 10% of its staff, about 100 people.

2016.12.7

LeTV announces a trading halt, saying the shares fell more than 7% the day before and it has decided to suspend trading and investigate itself. Media are already reporting that the LeTV shares Jia Yueting pledged could be forcibly liquidated.

2016.12.14

LeTV announces it will bring in a strategic investor and resume trading within ten days.

2016.12.22

LeTV announces it is conducting due diligence on bringing in a strategic investor; trading stays halted.

2016.12.26

LeEco has no hope of completing its purchase of the American TV maker Vizio this year, saying the Chinese government has not approved it. Four months later it terminates the deal, citing foreign-exchange controls.

2016.12.28

LeSports is 200 million yuan behind on Premier League rights fees owed to Xinying Sports, and is warned its feed will be cut off if it doesn't pay. The two sides reach a temporary truce.

2017.1.6

LeEco's phone business owes its supplier Haosheng Electronics about 51.7 million yuan; Haosheng files for arbitration with the Shanghai International Economic and Trade Arbitration Commission.

2017.1.15

LeEco announces 16.8 billion yuan of strategic financing, 15 billion of it from Sunac, which becomes LeTV's second-largest shareholder. Jia Yueting says the money will settle LeEco's cash problems once and for all.

2017.2.28

Reuters reports that the Asian Football Confederation has ended its broadcasting contract with LeSports because LeEco failed to pay the rights fees. Within 24 hours, LeSports denies it, the AFC confirms the contract is over, and LeSports finally admits the rights deal has ended.

2017.3.1

LeTV's third-largest shareholder, Xingen Fund, sells 600 million yuan of LeTV stock on this day. In January, Xingen had said it would not sell in the near term.

2017.4.14

LeTV halts trading, saying it is planning a major asset restructuring. The shares have not traded since.

2017.4.17

Out of cash, LeEco sells assets wherever it can; on this day it says it will sell its U.S. headquarters building.

2017.4.18

Yidao Yongche founder Zhou Hang says LeEco diverted 1.3 billion yuan of Yidao's money into the car project. LeEco explains that it mortgaged the LeEco building, borrowed 1.4 billion yuan in Yidao's name, took 1.3 billion of it for itself and left 100 million for Yidao.

2017.4.20

LeTV's annual report shows 5.2 billion yuan of debt falling due within a year, and yet the company has paid 3.4 billion yuan back to Jia Yueting and his sister.

2017.4.25

Aston Martin ends its electric car partnership with LeEco, saying LeEco never sent the money.

2017.5.21

Jia Yueting resigns as LeTV's general manager. LeEco is no longer "surnamed Jia."

2017.5.24

LeEco's U.S. arm confirms it is cutting 70% of its staff.

2017.6.6

A supplier sues LeEco over 60 million yuan in unpaid advertising fees.

2017.7.3

The Chinese Super League cuts off LeSports' feed. From that day, the FA Cup, the Super Cup, the national team's games and other competitions are no longer shown on LeSports.

2017.7.4

1.2 billion yuan of assets belonging to Jia Yueting and his wife are frozen. Jia also stops being LeEco Holding's legal representative. That day he goes to Los Angeles.

2017.7.5

Jia Yueting fails to meet legal obligations including share buybacks and debt guarantees; all the LeTV shares he holds, worth 16 billion yuan, are frozen.

2017.7.6

In the morning Jia Yueting writes on his personal official account that "I will see my responsibilities through to the end." That afternoon he announces he is quitting every position at LeTV, then leaves for the United States.

2017.7.13

Every phone on LeEco's website is either "out of stock" or "temporarily delisted," and after-sales repairs stop. This is the day people start saying Jia Yueting is coming back to China next week.

2017.7.17

Sun Hongbin attends LeTV's shareholder meeting; Jia Yueting is absent. Sun says LeEco "does have some difficulties" but also that "money isn't the problem." A month later Sunac pledges all its LeTV shares for cash.

2017.7.21

Sun Hongbin is elected chairman of LeTV.

2017.8.18

LeTV's legal representative changes to Liang Jun, appointed by Sunac.

2017.8.29

LeTV loses 636 million yuan in the first half of the year, but has repaid ahead of schedule the loans from Jia Yuefang and her brother Jia Yueting. Earlier this year Jia Yueting had said of Sunac's money, "I won't keep a single cent of the 10 billion for myself."

2017.9.1

Sunac releases its 2017 interim report; its LeEco investment has already produced a 1.5 billion yuan write-down. At the briefing, Sun Hongbin says, "Jia Yueting is one of the very few people in China with real entrepreneurial spirit, and that is very rare."

2017.9.15

Jia Yueting is photographed in Hong Kong. People start saying again that he's coming back to China next week.

2017.9.20

LeTV's sponsoring institution publishes an investigation finding that Jia Yueting has broken four commitments, among them lending the proceeds of his share sales to LeTV interest-free. By now such reports have no power over him at all.

2017.9.28

LeTV renames itself New LeTV.

2017.10.10

Six months into its trading halt, LeTV applies to extend it another three months because it cannot finish the restructuring in time. The securities commission's rule is that halts should not exceed three months.

2017.10.12

A shareholder sues LeVision Pictures after being refused access to the books.

2017.10.14

LeTV announces it expects to lose more than 1.6 billion yuan in the first nine months of the year.

2017.10.24

Liang Jun, who only took over as LeTV's CEO on May 21 this year, has submitted his resignation.

2017.10.30

LeTV publishes its third-quarter report: a 1.6 billion yuan loss for the first nine months. In response, funds cut their valuation of LeTV stock by another 30%, pricing in 13 limit-down days for the shares within the year.

2017.10.31

Several former members of the securities commission's listing review committee are placed under investigation, reportedly in connection with LeTV's IPO. LeTV says it has nothing to do with the matter.

2017.11.13

In a LeTV announcement, Jia Yueting and Jia Yuefang say they have no money to lend the company, and deeply apologize to the listed company and its investors.

2017.12.13

For failing to pay his debts, Jia Yueting is put on the blacklist of non-complying debtors twice in three days and barred from luxury spending.

2017.12.18

LeTV is dropped from the constituent lists of the Shenzhen Component Index, the SZSE 100 and the ChiNext Index.

2017.12.19

Liu Shuqing, head of internal control at Sunac China's financial management center, becomes LeTV's CEO and general manager.

Cover image/Feng.com, Douban; the wide cover image is a still from White Deer Plain.