(Yicai Global) April 20 -- The bitter row between China's internet giant LeEco Holdings Co. and its ride-hailing subsidiary Yidao Yongche highlights the cash crunch the two companies now confront.
The holding company may decide to divest the ride-hailing business in the end, an insider told Yicai Global.
"I still have more than CNY5,000 in the [Yidao] account," Yidao cab driver Li complained to our reporter on April 18. He is just one of the many drivers who gathered at the company's Shanghai office that day. Two claimed that they still had about 60,000 yuan each sitting in their Yidao accounts.
The funding problem at Yidao Yongche is nothing new, but its founder, Zhou Hang, is the one on the brink of collapse this time. "LeEco misused CNY1.3 billion of Yidao Yongche's funds," he alleged in an April 17 statement, adding that he strongly appeals to the platform's actual controllers now -- LeEco and Jia Yueting -- to properly handle the platform's funding problem from the perspective of social responsibility.
Biting the hand that feeds
The parent company responded saying that it had invested almost CNY4 billion and many other resources to develop Yidao Yongche, describing Zhou as a man who bites the hand that feeds him, an allusion to the Aesop's Fable of the Farmer and the Viper.
The falling-out between the two companies begs the questions: 1) Why did Zhou Hang attack his own company; 2) How can drivers and users' interests be protected; and 3) what will LeEco do about it, given its own cash flow problems?
LeEco might want to find a new owner for Yidao, and "Funding and finding a new investor are equally important," a source connected with the internet company suggested.
Paying with an IOU
"As far as I know, Yidao is indeed experiencing funding issues, which were directly attributable to the fact that LeEco diverted CNY1.3 billion of the platform's funds," Zhou said, adding that, "The problems with LeEco that are known to all have inevitably affected the platform."
After Zhou made the statement on Monday, groups of Yidao's drivers and customers gathered at the company's Shanghai office and its headquarters at China Technology Trading Tower, Zhongguancun, Beijing, demanding a refund of the money in their accounts.
Yidao Yongche gave them IOUs.
"An IOU is useless. The manager can't be reached, and they asked us to find him in Beijing!" a driver in Shanghai showed us the IOU bearing his name, account number and amount of funds in his account.
The same thing also happened to Yidao drivers in Beijing. They were also given a 'payment notice' with a promise that they can withdraw money from their accounts, but with the proviso that the fund transfers will take 16 business days.
"If you are lucky, you may get the money back by year's end, but it will be gone afterward," several drivers said to Yicai Global.
Yidao's customers also got the shaft. "It's practically impossible to get a cab, and the fares are very expensive, three to four times higher than before," a white-collar worker in Shanghai complained, "The other day it cost me more than 70 yuan for a cab ride that was only five or six kilometers."
Ms. Wang is a user in Beijing. She said that there was still over 3,000 yuan in her account, but she could not use the money or take it out.
"I managed to get a cab on Yidao, but the driver called me and asked me to cancel the order, and pay him in cash, because he can't withdraw the money if it's paid into his Yidao account," a Beijing user surnamed Liu griped.
"Of course, it's hard to find a cab, everyone has quit because it's impossible to get the money in the account," a driver surnamed Li told our reporter, saying that many of Yidao's drivers have gone to other e-hailing apps.
Funding Shortage is Contagious
Why is Zhou Hang coming down so hard on his own company? It is because it has long been in deep over the cash crisis, and Zhou's statement implies the funding problem at Yidao Yongche is LeEco's fault, but other companies are still interested in investing in it.
Yidao Yongche was the first mover in the ride-hailing market, but its market share has always trailed those of Didi Chuxing and Shenzhen, owned by China Auto Renting Co. It remained low until LeEco bought a 70 percent stake in the company for USD700 million in October 2015, followed by hefty subsidies offered to users and drivers.
In April 2016, five months after LeEco's investment, its daily orders topped 600,000, and soared to over one million in June.
Back then, both Zhou and LeEco Chairman Jia Yueting were overwhelmed by the early fulfillment of the 'three-million targets' -- a million orders and a million new drivers and cars every day.
As it turned out, though, this strong growth was merely the result of 'money burning.' The 700 million dollars LeEco provided mostly went to subsidies. The problem is the dotcom firm had more than enough money to fund the subsidies, but that is no longer the case now.
"Yidao wanted to get funding through financing, but it's a tough job because nobody can guarantee its performance. In theory, LeEco as the parent company should help it out, but the company is only a liability that burns money, so it may end up being divested," Zhang Yi, chief executive of Imedia Consultation Group, told Yicai global.
Yidao Yongche May Find a New Owner
"Mounting pressure from major competitors and serious setback in the Le Supercar project have been eating away at the strategic value of Yidao Yongche as an asset. The company may have become a 'peripheral asset.' So, we shouldn't exclude the possible of it being spun off by LeEco in the end. After all, its brand and user-driver system still have some value," opined Shen Yibing, investment director at financial services firm PnRVC.
"LeEco should also realize by now that it was too aggressive with the acquisition of Yidao, and that there're problems with its operations, so it might find a new owner for Yidao. Financing and finding the new owner are equally important," said the source close to the company, noting that the high-profile acquisition was strategically correct, but the timing was wrong. "Apparently, it came too early, and LeEco's cash flow was still not strong enough to sustain its development. Branching out into the ride-hailing business has proven to be a drag on it. Today, Yidao Yongche has become a 'white elephant' for the parent company."
Yidao's next owner?
Didi and Shenzhou are the biggest players in the field, and they might be interested in taking over the company to obtain high-end user resources and increase their business volume. However, Yidao's mounting debts and high price make the deal much less tempting.
Didi now has the biggest share of the Chinese e-hailing market after acquiring Kuadi and Uber China. Therefore, it may not be motivated to spend a lot of money on a buy-in of Yidao Yongche.
In the case of Shenzhen, being the new owner will help it compete with Didi on the ride-hailing market, but the question is if it can clean up the mess after acquiring the indebted business?
"Acquiring Yidao's customers through a buy-in doesn't make much sense for Shenzhen. It can achieve the same goal by offering subsidies to users, but an acquisition also involves taking over massive debts to drivers and customers. Besides, Yidao's valuation is also an important consideration. As for LeEco, selling Yidao Yongche is a tough task, because nobody would be interested if it's overpriced. It's not easy for any company," Zhang Yi noted.
But Zhou Hang obviously thinks otherwise. "Some organizations have always been confident and sincerely interested in investing in Yidao Yongche," he stated.
The company has long been trapped in a cash crisis and debt disputes, and Zhou may have ulterior motives in making the statement.
The media reported recently that Zhou Hang would join Shunwei Capital as an investment partner. The founder and chairman of the venture capital firm happens to be Lei Jun, chairman and chief executive of Xiaomi Technology Co., an old 'enemy' of LeEco.
However, a manager at Shunwei Capital told Yicai Global, "Zhou Hang hasn't joined the company, and nothing has been confirmed so far."
The row between Zhou Hang and Jia Yueting has been publicly exposed. None of them have claimed responsibility for the problems at Yidao Yongche, or proposed a solution to it, leaving drivers and customers in the depths of despair over inaccessible money in their accounts.
"Time is passing. The longer the wait, the less valuable Yidao will be, and the less attractive it becomes to potential investors. It'll be harder for users and drivers to recover their losses, and the same is true for LeEco. There'll be greater damages to the LeTV brand if a solution can't be found soon," Shen warned.