Chinese tech giant LeEco, the backer of American electric car startup Faraday Future, is running low on cash, its CEO and founder Jia Yueting has revealed.
In a letter to employees, obtained by Bloomberg, Yueting said the company’s recent expansion, in particular into auto manufacturing, has been too fast and has eaten too much capital.
“We blindly sped ahead, and our cash demand ballooned,” Yueting said in the letter. “We got over-extended in our global strategy. At the same time, our capital and resources were in fact limited.”
He revealed that LeEco’s car division has already spent 10.0 billion yuan (approximately $1.475 billion) in early development. Part of these funds have gone into Faraday Future, which is developing at least one electric car plus a plant in Nevada. In October, it was revealed that Faraday Future was behind in payments to the construction firm responsible for building the Nevada plant, which has a cost of $1 billion.
At the groundbreaking for Faraday Future's production facility in North Las Vegas (April 13, 2016)
LeEco has also just launched its phone and television business in the United States and promised $2 billion to acquire Californian electronics producer Vizio. Most of its funds so have been generated by loans acquired by pledging LeEco’s stock as collateral, but the stock price has been on the decline, dropping almost a third since the start of 2016. Not surprisingly, Yueting said in the letter that capital hasn’t been able to keep up with the company’s expansion.
In response, Yueting has reduced his income to just 1 yuan and is slowing the company’s expansion. LeEco will also introduce cost-cutting programs, reduce incentives and focus on growing existing businesses rather than expansion.
Auto manufacturing is notorious for its high capital consumption and low returns, something tech firms looking to make electric cars are starting to discover. Apple [NSDQ:AAPL] in October was in the headlines due to reports that it had canned its own car project and is focused on self-driving technology instead. And Tesla [NSDQ:TSLA], even with its first mover advantage, still faces significant financial struggles. Then, of course, there is the spectacular failure of Fisker Automotive.
Worryingly, the low interest rate environment and resultant desperation for yield among investors has led to around half a dozen other electric car startups, including even a new Fisker. No doubt there will be more failures ahead.