Troubled beverage chain Luckin fired CEO Qian Zhiya and COO Liu Jian from their positions last Tuesday after a month-long upheaval following its fraud admission in April. However, the market remains skeptical about the company’s dedication to change.
Despite the downfall of two senior executives, the man at the top is still the same. Chairman Charles Lu, or Lu Zhengyao, still holds control over the company after the leadership shuffle, although his name was removed from the company’s nominating and corporate governance committee.
To Luckin watchers, this suggests nothing essential has changed: the company Lu built is a reflection of his personality and his network of friends.
Though not as well-known as Alibaba’s Jack Ma or Tencent’s Pony Ma, Lu definitely belongs to China’s group of self-made billionaires with from-scratch business empires. The 51-year-old has three listed companies and one pre-IPO firm under his belt.
He’s an impatient man, given to cursing in public posts at rivals and at those who question his business models. He’s known for taking companies from foundation to IPO at breakneck speeds—18 months car-hailing Ucar, and 19 months for Luckin. He’s known for an obsessive focus on growth, constantly raising money and spending it on expansion.
When Luckin wanted to borrow more and grow more and it couldn’t show numbers to justify it, it turns out, it made them up.
From country boy to billionaire
Charles Lu, the youngest among five children, was born in Pingnan County in southern China’s Fujian province in 1969. With his father a craftsman and his mom a village cadre, Lu came from a comfortable small-town home.
After excelling in school, Lu enrolled in the University of Science and Technology in Beijing in 1987. It was quite a feat back then for a small town boy to get the chance to study in universities in Beijing, a resident of the same town told local media. After working for the government in Shijiazhuang, Hebei province for three years, Lu resigned to start his own business in 1994. Lu later told Chinese media one reason was that he wanted to wear fancier pants than the government dress code allowed.
Going into business
- 1995-2003: Lu earned his first pot of gold from two companies DITEL Technology, a firm that trades telecoms parts and systems and Beijing Huaxia, a top VoIP calling agent in China in the early 2000s.
- 2005: Lu founds UAA (Joint Automobile Club), which dealt with car service, car repairs, and insurance.
Going big with Car, Inc.
- 2007: Lu taps China’s booming car rental market with Car Inc., which receives RMB 1.2 billion (about $169 million) funding from Lenovo-backed Legend Capital in 2010.
- At Car Inc, Lu pioneered the aggressive cash-fueled expansion tactics that defined his later companies. Charles Lu spent half of the Legend funding on buying new cars, making the company the largest car rental company in China. He then lowered car rental prices by 30% to 50% to grab market share.
- Car, Inc goes public in Hong Kong in 2014, with shares surging nearly 29% on its debut from HK$8.5 (about $1.1) to HK$10.96 apiece. Car Inc. share prices hit record highs in May 2015, trading at nearly HK$ 20 apiece. In the following nine months, Lu and other investors cashed out $1.6 billion or 42% of the company’s total share. During the process, the company’s share price dropped to less than HK$8 and it further dipped to a bit over HK$ 2 after Luckin’s fraud was revealed.
- 2015: Charles Lu decided to open Ucar to tap China’s ride-hailing boom. Different from Didi that relies on private cars and crowd-sourced drivers, Ucar offers its services with an in-house fleet and licensed drivers. The company raised four rounds of over RMB 10 billion funding within ten months from including Warburg Pincus and, again, Legend Capital. Less than two years after its establishment, the company lists on China’s China’s National Equities Exchange in July 2016. One week after the IPO, Lu pledged all of his 90 million shares, or 11.9% of the company’s outstanding shares to a bank to raise RMB 500 million.
Going bigger with Luckin
- 2018: Lu invested in Luckin Coffee, a start-up built by one of Zhengyao’s ex-employees led by Qian Zhiya and Yang Fei, both of whom helped Lu in incubating the Ucar project. As board chairman, Lu Zhengyao owned 30.53% in Luckin, an investment fund owned by Lu’s sister owned 12.4%, and CEO Qian Zhiya owned 19.6%, according to Luckin’s initial prospectus.
- 2018: Lu took over car maker Baowo Auto Car to provide cars to Ucar and Car.Inc.
- May 2019: Luckin went public on Nasdaq to raise $651 million.
‘Trimming his nails’
Luckin’s newly appointed CEO Guo Jinyi is, like predecessor Qian Zhiya, a former executive with Car Inc., the car rental firm earlier backed by Lu. Most assume that Lu is the real decision-maker behind both of them.
In the April fraud admission, COO Liu Jian was held accountable for the fabrication. As the case drew increasing attention from the public, CEO Qian Zhiya, who lost significant voting rights in the company after a loan default, was also removed. Local media, who believe the rot goes all the way to the top, were not satisfied.
Firing Qian and Liu was as painful for Lu as trimming his nails, wrote one commentator.
A highly divisive figure
Lu got a controversial reputation since the companies he backed followed a strikingly similar growth path: entry to an emerging market with massive capital, snap market share quickly by providing subsidies and market campaigns, hype up market valuation for an IPO, and then quick financial exit by the founding team and early investors before the hype wears off.
Many of those who lost money—even peer entrepreneurs such as Li Xiang, founder of EV maker Lixiang—call him a snake oil salesman (in Chinese). They argue that Lu’s companies aren’t trying to earn money off customers, just to fleece investors in an updated version of China’s 2VC model.
Lu’s companies are accused of “harvesting” newbie investors through IPOs, most notably in the cases of Car Inc. and Ucar. People may argue there’s nothing wrong with founding teams cashing out IPOs, it’s a different case when the primary goal for an IPO is for them to cash out, which is commonly followed by a share plunge that hurts the interests of public investors.
Another trademark of Lu is his fundraising approach, which is usually referred to as “Wechat Moments” fundraising in a sense that he’s working with a closed loop network that includes his blood relatives, loyal employees as well as investors of his previous projects. These friends usually cash out early, with Lu.
But Charles Lu isn’t walking away from Luckin, or from Ucar yet, even as the companies appear to be collapsing. Luckin has claimed on various occasions that its stores are operating normally, and it still offers coupons to retain customers. The coffee chain opened 10 outlets a day in its home market in the second quarter as of May, bringing its total number of stores to 6,912, a report from Thinknum Alternative Data shows.
Apart from Luckin, Lu’s companies are all auto-related businesses. Baowo makes cars, it sells them to Car Inc., and Car, Inc. then rents them to Ucar. It would be a vertically integrated masterpiece if it had any customers.
Among the firms, Car Inc. and Ucar are recording losses with shares trading at low level. Meanwhile, Baowo is also struggling with debt. But Lu still appears to hope that he can save Luckin, and use it to save his other companies.
With Luckin, he’s trying to build a super app for high-frequency services to bring user traffic to its business ecosystem. Luckin was expected to bring traffic to Lu’s declining car empire.
If Lu’s business collapses, he’ll still be a wealthy man. But it appears that he is unable to give up on the image of himself as a peer of the titans.
The future for Lu’s business empire and himself may be determined the courts. Luckin is being sued on both sides of the Pacific. As the key figure behind the company, Lu, together with Luckin former COO Liujian, current CEO Guo Jinyi, are among the defendants in these lawsuits.