SMARTPHONES: LeEco Charts Coolpad Rescue Roadmap

Bottom line: LeEco’s rescue plan for Coolpad will fail due to stiff competition in China’s smartphone markets and overly ambitious targets for its own new line of smartphones.

LeEco ousts Coolpad CEO

Less than 2 months after becoming the largest stakeholder of Coolpad (HKEx: 2369), online video sensation LeEco (Shenzhen: 300104) is wasting no time in making major changes at the struggling smartphone maker. The most symbolic of those has LeEco’s dynamic founder Jia Yueting ousting Coolpad’s chairman and CEO and taking over the chairman’s position for himself. More substantially, LeEco is indicating it will become Coolpad’s largest customer going forward as part of its own plans to build an entertainment ecosystem around devices like Internet-connected smartphones, TVs and cars.

The series of moves is relatively expected for LeEco, which in July announced it would boost its Coolpad stake to about 29 percent from a previous 11 percent. (previous post) That move came as Coolpad’s core smartphone business faces growing pressure due to stiff competition in China. The company was an early leader in the space, but has failed to keep up with more aggressive rivals.

Signaling a new era has begun for the company, Coolpad said its Chairman and CEO Guo Deying will leave for unspecified health reasons. (company announcement; Chinese article) Jia Yueting will assume the chairman’s position, though there’s no word on who will assume the CEO title. I expect that job could go to someone from LeEco’s young smartphone division, with an announcement coming in the next month or two.

LeEco purchased its original 11 percent of Coolpad about a year ago, not long after it debuted its first smartphones as part of its entertainment ecosystem plans. That initial tie-up surprised many since Coolpad have previously signed a major smartphone tie-up with another partner, which later broke off the collaboration. That clash resulted not only in the loss of a major customer for Coolpad, but was also quite costly for the company.

New Procurement Deal

Concurrent with its takeover of the Coolpad board room, LeEco has just announced a major procurement deal from the company as part of its own smartphone ramp-up. Wording of the procurement announcement is quite vague, and the only concrete figure says LeEco will cap its annual procurement from Coolpad at 1.2 billion yuan ($180 million). (company announcement)

That figure is relatively large though not huge, amounting to nearly 10 percent of the HK$14.7 billion ($1.9 billion) that Coolpad posted in revenue for all of last year. In a post on his microblog, Jia is saying that LeEco is aiming to sell 100 million smartphones annually within the next 2 years.

That kind of talk is quite typical of Jia, who has exploded on China’s Internet scene over the last 2 years after disappearing for a few months when he was reportedly being treated for cancer. Since his reemergence, Jia has launched a wide range of initiatives, including not only smartphones but a range of video programming ventures and plans for a $1 billion new energy vehicle plant near Las Vegas. Most recently, he announced plans to buy American TV brand Vizio for $2 billion. (previous post)

To put things in perspective, China’s current smartphone leader, Huawei, broke the 100 million mark for sales last year. Huawei took several years to reach that milestone, and drew heavily on deep product development resources from its older telecoms equipment business to finally reach that milestone.

I have previously expressed serious doubts about LeEco, which has embarked on a multibillion-dollar fund raising drive by selling massive amounts of equity and debt as it embarks on its huge expansion drive. Coolpad isn’t known for its innovative smartphones, which is one of the main factors behind its rapid decline. There’s no indication that will change under Jia’s leadership, mostly because the company simply lacks the experience and R&D capabilities to produce more cutting-edge models. That will make it difficult for Jia to reach his ambitious sales target, meaning LeEco won’t be able to provide much relief for Coolpad’s rapidly declining sales.

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