The LeEco Lesson

LeEco’s US Entry and Exit Is One for the Business Books

In early 2015, we wrote about a company then called LeTV. The Chinese company, which produced content and made smartphones among other products, planned a mild entry into the US market. LeTV intended to cater to Chinese-speakers in the US, offering bundles of content and hardware. It was a niche but could have worked.

But somehow the company decided to bite off more than it could possibly ever chew. Reflecting its ambitions of expanding its product portfolio, LeTV changed its strategy as well as its name, becoming LeEco. Instead of a low-key entry to the US market, the company chose to storm in with content, phones, cars and bikes. It made a deal to buy the biggest TV brand in the US, Vizio, for $2 billion, and began purchasing valuable real estate in California as it prepared to house an army of experienced workers. To LeEco’s ambitious leadership, it seemed as if the party was just getting underway.

Unfortunately the hangover came quickly. LeEco is now laying off most of its US employees — more than 300 people will be affected — and reverting back to a strategy of catering to the Chinese community. Its Vizio deal fell through, it sold few phones, never sold bikes and, quite frankly, nobody seemed quite sure how to pronounce the company’s name.

Selling smartphones in the US market takes a great deal of refinement, and most of all, a large marketing budget, carrier support and brand awareness. Competitively priced devices in the open market offer a growing opportunity, but this requires time, patience, channel investment and a willingness to operate indefinitely at a low margin.

Disrupting the entrenched mobile business model was an ambitious plan for LeEco, but competing with Amazon and Netflix in content acquisition was another task entirely. Doing both consecutively seemed more than a bridge too far.

In October 2016, we noted that “the company has lofty goals, but LeEco is unlikely to post big numbers before it can establish its brand, a tough feat in a market dominated by Apple and Samsung” (see LeEco Braves the Ultimate Test). We’ll double down on that statement now.

Without an established brand and support from wireless carriers such as AT&T, Sprint, T-Mobile US and Verizon, hardware makers entering the US market have to set realistic goals, targeting prepaid users and international buyers who are looking for a device to take out of the country.

LeEco is providing free lessons to other device makers that may have had similar plans. Xiaomi, for example, has vowed to enter the US market, but it must be studying LeEco’s rather reckless strategy. Few people in the US have heard of LeEco. Xiaomi is in the same boat.

Well-funded device makers such as Google, Huawei, Motorola and ZTE struggle to make minute changes to the landscape for premium mobile devices and services. It would take drastic changes in US consumer behaviour for completely unknown smartphone brands to perform better. We do note that there are opportunities at lower price tiers. Blu Products, for example, has become a leading supplier of unlocked smartphones in the Americas including the US.

LeEco’s products can still be found in the US market, for example, through its Web site and Amazon, but there’s a feeling of emptiness knowing there is now a skeleton crew marketing and supporting the brand. With tempered ambitions, LeEco could stick around catering to a niche of a niche.

Market expansion and diversification isn’t impossible for Chinese companies, but LeEco’s story is a firm reminder of the basic business principle that markets retain fundamental differences and require a tailored approach. Despite recklessly building an unsustainable presence in the US, LeEco’s Chinese management dominated decision-making and sought to implement the same strategy that worked in its home market. It discovered to its cost that globalization isn’t the force that politicians would have us believe.