INTERNET: LeTV Answers Lenovo, Didi Challenges Uber

By newsdoug on May 26, 2015

Bottom line: Beijing should step in to mitigate the latest cutthroat competition in the smartphone and hired car services spaces, or risk seeing meltdowns that lead to chaos and job losses.

New battles broke out in 2 of China’s most hotly contested high-tech sectors last week, casting a spotlight on the aggressive and even potentially illegal tactics that Chinese companies sometimes use in their fierce rivalries and quest for market share.

One of those saw taxi app operator Didi Kuadi announce a major promotion offering aggressive subsidies for its hired car services. The other saw video high-flyer LeTV (Shenzhen: 300104) use equally aggressive tactics to launch its new line of smartphones, igniting a war of words after another prominent rival criticized its actions as “irrational”.
These kinds of aggressive and costly moves are all too common in China, where companies often pile into hot new industries and then fight bitterly for market share, creating highly destructive boom-bust cycles. Such cycles don’t really benefit anyone over the longer term, since they usually end with rapid consolidation that sees many companies close and only a few remain that are well-funded but not necessarily the most innovative.

Markets should ultimately determine who survives and who doesn’t in any industry, be it an emerging one like smartphones or a more traditional sector like textiles. But Beijing could and should play a stronger role by ensuring fair competition and pressing companies to abandon some of their overly aggressive practices. That could create smoother development and bring an end to these boom-bust cycles that often do as much harm as good for emerging sectors.

The first of last week’s scuffles came in the smartphone space, and began when Lenovo’s (HKEx: 992) well-regarded CEO Yang Yuanqing complained that unspecified rivals were making exaggerated claims and engaging in other irrational behavior to stir up the market. (previous post)

That remark was an apparent reference to LeTV, which earlier in the week launched its new line of smartphones using a business model that is costly but also effective at quickly winning new customers. That model sees LeTV sell its actual products at very low prices, and then add cheap or free extras like video service or data plans as part of the package. LeTV also very loudly proclaimed that it sold out its initial batch of 200,000 smartphones within 4 minutes after they went on sale last week.

LeTV’s charismatic CEO Jia Yueting recognized Yang’s reference to his company and quickly fired back, saying his aggressive business model was aimed at educating consumers in a new world where products were part of broader ecosystems. (Chinese article) He also criticized Yang for living in an outdated age where companies simply manufactured and sold products.

At nearly the same time as that heated exchange, Didi Kuaidi, which was recently formed by the merger of China’s 2 largest taxi apps, announced that it would pour 1 billion yuan ($160 million) into a promotion to offer subsidized rides to users of its hired car services. (Chinese article) It initially launched the plan in 12 Chinese cities, offering subsidies of up to 15 yuan per ride, taking aim at similar services from US rival Uber.

These kinds of actions are all too common in China’s emerging industries. Smartphone sensation Xiaomi often makes big sales claims like LeTV’s, even though many suspect those claims may be exaggerated. Beijing regulators rarely investigate such claims for accuracy, but last year Taiwan Fair Trade Commission fined Xiaomi in a high-profile case after determining the company exaggerated its sales claims in at least 3 instances.

Before their merger earlier this year, Kuaidi and Didi also engaged in a similar series of wars that offered highly subsidized service at huge cost to themselves. The pair could afford to engage in such bloody competition partly due to their backing by cash-rich Internet heavyweights Alibaba (NYSE: BABA) and Tencent (HKEx: 700), though observers said the unsustainability of their aggressive practices was ultimately a major factor behind their merger.

Similar bloody battles for dominance have become standard fare for China’s emerging industries, beginning with the TV industry back in the 1990s and more recently wreaking havoc in other sectors from group buying websites to solar panels makers. Such battles are highly destructive, often leading to billions of dollars in lost investment and thousands of lost jobs when companies go out of business.

To avoid this kind of cycle, Beijing could take a more proactive stance towards these sectors, stepping in to mitigate cases of predatory pricing and penalizing companies that make false and exaggerated claims. Such oversight would help to maintain fair competition, and allowing for more orderly development of these new markets where China has the potential to become a global leader.