‘Ponzy Scheme’: Experts Share Opinions on the Luckin Coffee Scandal

Luckin Coffee bell ringing ceremony at Nasdaq (Source: Nasdaq)

China’s so-called answer to Starbucks, Luckin Coffee, is in deep trouble. Having faked its revenue numbers, Luckin became a laughing stock of a unicorn, with analysts on both sides of the pond contemplating over what outcomes this situation will have on a larger scale for Chinese businesses abroad. There’s already a vast body of work published on this topic and in order not to burden you with yet another condemning opinion piece on the Luckin debacle, we decided to ask several experts with very different backgrounds to see what they think of this peculiar situation.

Steven White – Professor of innovation, entrepreneurship and strategy at Tsinghua University

Luckin, I believe, represents 2 cautionary tales. First, the willingness to report fraudulent numbers even as a listed company, enabled/permitted by lax regulatory oversight by the USA’s SEC of foreign headquartered companies. If you watch the documentary China Hustle about the flood of listings of Chinese SME firms in the USA, that shows how neither the Big 4 accounting firms who supposedly “audit” the firms’ financial reports (but they only use data that the company gives them, no independent investigation, and usually outsourced to another accounting firm in China), nor the SEC (they don’t have jurisdiction to investigate outside of the USA) provide any real oversight. Second, and equally important, is the willingness of investors (pre- and post-IPO) to buy into a story without a critical analysis of a firm’s business model. 

To me, Luckin represents the cynical but accurate and, for some, extremely lucrative business model in which the “company” is the “product”, and the “market” are investors. The business model of “the more you sell the more you lose”, not from investment but because of negative gross margins, is not sustainable, and Luckin and others like them don’t provide any concrete ideas for how they could become profitable. Create a good story, create buzz, create the impression of massive growth/take-off, and let “fear of missing out” bring the VCs and later investors banging on your door to let them get a piece. Who needs a “path to profitability plan”? Ponzy scheme, with the later investors holding junk (or much-reduced value) shares when strategic and financial reality hit.  

Remember the 15 shared bike companies that were operating at the peak a few years ago? WeWork? This is not just a Chinese phenomenon, of course, but perhaps the FOMO factor is stronger in China and there is less critical analysis of or willingness to speak out against unicorns? Luckin could survive this particular scandal, but at this point, I don’t see how they can survive longer-term without finding a path to profitability.

Matteo Giovannini – Senior Finance Manager at ICBC Leasing

Luckin coffee’s scandal, unfortunately, represents just the tip of the iceberg since this is a case of high-profile accounting fraud of a company competing for leadership in China with a giant like Starbucks. The core of this scandal is that most of the high-rising Chinese companies don’t rely on solid business models and transparent financial auditing. This scandal will probably have an impact on the reputation of Chinese companies abroad. 

Raggy Lau – Founder & CEO at STERRY, growth marketing expert

I personally think the situation may only affect Chinese companies that are currently listed or planning to list abroad, specifically ones that deal with the U.S. Securities and Exchange Commission. The day-to-day operations of Chinese businesses that are currently operating abroad or plan to operate in the future should not be affected by this situation.

In my opinion, Luckin Coffee will be able to survive this scandal. Although this scandal has definitely hurt their sales, I expect they will close down unprofitable stores in the near future to increase their cash flow. This should enable them to stay afloat during this difficult time.

Lin Liu – Head Of Business Development at SlushChina, tech and business writer

The Luckin coffee scandal deals a heavy blow to global investors’ trust in Chinese companies. Once Chinese companies are labeled as “fraud”, seeking financing in the global capital market will be more difficult and the financial and time costs will also increase because of lack of trust. Some companies are said to have postponed their IPO plans because of the Luckin coffee scandal. This would mean fewer exit channels for Chinese companies overall but maybe more opportunities for financial advisors within China. 

Looking at this from a positive angle, China’s entrepreneurs and investors will hopefully learn lessons from the burst of Luckin’s 1.5-year IPO bubble and pay more attention to creating value in the long term.