Assessed Blog 4 Capital structure-The company of Xiaomi and Letv

Assessed Blog 4 Capital structure-The technology company of Xiaomi and Letv

Through the previous learning in class or research in specific industry like banking area ,it is crucial for a company to highlight the importance of your shareholder’s wealth and create a health corporate cultural.Meanwhile,a suitable capital structure is the fundamental part of the enterprise,a suitable proportion between debt and equity according to the different situation appears particularly important.In this blog, l will compare two technology company which start their business in smart phones and TV respectively in China to evaluate the importance of an health capital structure.

Letv is a company which start their business in TV industry,then the company grow quickly and expand in many different areas,like cars,entertainment,smart phones.It has create a unique operate model which is called”business ecological chain”But to be honest,l think it is just a name,it reveals the arrogant and overspend of Letv invest in different industry in China.Subsequently,the company face the problem of lack of money,then it borrow money from banks by place its shares as mortgage.

Obviously,such a company over-spend their capital in pursue expand larger and invest in different industry without due dilligence will decrease both shareholder and public confidence,moreover,with the lack of both quality and technology in their TV industry recent years. After a rocket in its market share,it bottoming out seriously,the market share is not worth than before.The company has face serious problems in just five years.The debt in company is a big issue,the strategy of pursuing highlight industry blindly has already led a high gearing of the company.With the trigger of downfall of their market share,it has face severe pressure both inside the company and outside the public,the loaner want their money back,supplier found no confidence in Letv.The capital chain rupture has happened.

What’s worse,Letv has been found by regulators for raising capital illegally,things happened in 2015 by emerging a popular method of raising capital called “peer to peer”which is new way to raise capital without bank,but person to person.In 2017,It has been found that Letv has raising the lender’s money for paying back their debt.when the news came out,the share plummet.And Letv face the serious situation of bankrupting.    

On the contrary,Xiaomi is a privately owned Chinese electronic company headquartered in Beijing.The CEO of this company is called Jun Lei.The company start its business and attract lots of customer in China with a series of smart phones which possess extremely lower price and high price-quality ratios.The feature of Xiaomi’s smart phone business which is they don’t have the local store,all their smart phones are sold online,it save them a lot device and management cost.Furthermore,they have advanced technology in phones,but the price is lower beyond your image.For instance,the evaluation of cost in Xiaomi’s forth generation smart phone is about 2000 RMB,but the market price is only 1999!!You maybe surprised,it means the company are doing the business which make them loss money,but the truth is they still gain a lot profit,the reason is Xiaomi was doing some futures trading with their accessories,so the cost of the phone is not worth than the current value.

With the extraordinary successful in smart phones area,Xiaomi was step further in electronic furniture and TV industry still with competence price.Furthermore,it also step in global market,in India,where revenues exceeded $1bn last year and doubled sales of smartphones from 3m to about 6.5m. Xiaomi touted the numbers as evidence that it “truly became an international company”Different from Letv,although Xiaomo has also expand quickly in their market ,but they still put their main business in developing advanced smart phones,the other product line is just the subsidiary.And they do cautious in control their capital structure,in order to avoid the situation like Letv,the CEO has announced recently “We must slow down and earnestly learn from our mistakes. Prevention is better than having to fix things later.” According to the FT,Xiaomi has prepared to slow down its step in international market,the leaving of Hugo Barra(the ex-android executive and take responsibility in India market of Xiaomi)can be proved that.Moreover,Xiaomi did not use a lot debt to push their market growth,it is not even listing on the market,so to prevent the problems like Letv early which is a good decision.

     

l have think about the optimal point based on the trade-off model.l believe there is no fixed one for a industry,even a company.The optimal point is change every time,it is flexible.Company should learn to adjust your capital structure according to changeable economic environment,like Xiaomi,when they found it was a time in starting their smartphones business in China,they try to increase their gearing to meet the better chance appear in the electronic market,as the same,when the situation is serious than before,they take measure to adjust their debt to decrease the risk in this period.If the company want to live longer,they can’t just thinking about expand and step into business based on the popularity,they also need to understand themselves,taking a appropriate capital structure.