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VIDEO: LeEco Turns Off Vizio Deal, Cuts US Staff

Bottom line: LeEco's scrapping of its Vizio purchase may be due to currency controls, but should be welcome by the company as a cash conserving move, and could presage a withdrawal of its investment in electric car maker Faraday Future.

LeEco scraps Vizio purchase

The first major pullback for cash-challenged LeEco (Shenzhen: 300104) is coming in the US, where the company is confirming the abandonment of its $2 billion agreement to buy no-name TV maker Vizio. At the same time, unconfirmed reports citing knowledgeable insiders are saying the company is cutting one-third of its headcount in the US. It's not really clear if this pair of items are related, though both are certainly cost-cutting moves in a market where costs are quite high.

The next big move perhaps will see LeEco abandon its backing for Faraday Future, the electric car-making venture that's building a $1 billion plant near Las Vegas. That deal is a bit more futuristic than the Vizio TV deal that's now being abandoned, and is probably a bigger pet project of LeEco founder Jia Yueting. But the reality is that the company needs to conserve cash, and also that China's foreign exchange regulator is making life difficult for anyone who wants to move money out of the country.

All that said, let's look at the larger of the two headlines, which says that LeEco has abandoned its $2 billion deal to buy Vizio due to "regulatory headwinds." (English article) LeEco declined to comment on the nature of those headwinds, but added it has reached a new agreement with Vizio to incorporate some of its software into the US company's TVs.

In terms of the regulatory headwinds, I seriously doubt they are coming from the US, as this particular deal is quite uncontroversial in terms of technology or access to sensitive user data. Instead, China watchers will know that reports emerged last month that the Vizio deal was on life support (previous post), and that the main culprit being blamed was China's recent clampdown on the movement of money outside the country to support the weakening home currency, the yuan.

In that case I jokingly said that LeEco was getting a lifeline from Beijing, since it had a convenient excuse to abandon the Vizio deal without blaming its own financial difficulties. I still believe that's the case, and this collapse comes as a huge relief for the company, regardless of whom is to blame. But I also believe that the privately held Vizio was counting heavily on a cash infusion from LeEco, and now that company's own future could require some major adjustments if it's forced to survive on its own.

Sales Shortfall

Next there's the layoff report, which says LeEco is cutting one-third of its US headcount after failing to meet its targets for the market. (English article) The reports, which cite an unnamed insider, say LeEco had hoped to generate an ambitious $100 million last year after a splashy debut in October, but only managed to generate $15 million.

LeEco actually unofficially launched in the US even earlier, rolling out a local version of its LeMall website in October 2015. (previous post) A quick look on the Internet shows that site is still active, including a pricey flat-screen smart TV that sells for $5,500. I suspect that site isn't getting too much traffic these days, if it was ever getting any to start with.

LeEco certainly isn't the only company to experience a rough time in the US. Internet giant Tencent (HKEx: 700), which is one of my most respected Chinese high-tech names, made its own clumsy attempt to bring its hugely popular WeChat messaging service to the US around two years ago. That effort ended in a huge failure, underscoring the hugely competitive state of affairs in the market.

Earlier reports also indicated that LeEco was abandoning or at least scaling back plans for a big Silicon Valley campus, after the company purchased a big piece of land formerly owned by Yahoo (Nasdaq: YHOO). LeEco later said it never intended to exclusively use the campus for itself, and it was always meant to be a group effort with other companies participating. But the bottom line is that it could hardly afford the millions of dollars that would be necessary to build out such a campus, and millions more to staff and operate it.

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