Luckin Scandal Is Bad Timing for U.S.-Listed Chinese Companies

Say a new company promises to achieve a goal so ambitious it’s eluded a more established competitor for two decades. Say that goal is to sell lots of coffee in China, a nation of resolute and happy tea drinkers, and the competitor it promises to defeat is Starbucks Corp. The way it’s going to do so is by offering lower-priced coffee, primarily for takeout and delivery. Because there will be an app, the startup can call itself a tech company and boast about being a disruptive force. And because investors like apps and disruption, some won’t even notice that the coffee isn’t great.

Some venture capitalists lost interest after they sampled what the company, Luckin Coffee Inc., was selling. But within a year of its founding in 2017, one of the biggest VC firms in China, Joy Capital, as well as the Singapore sovereign wealth fund GIC, had put serious money behind Luckin, valuing it at $1 billion. Luckin opened 5,000 locations in Beijing, Shanghai, and other cities across China and last year reported sales of as much as $200 million a quarter. Its success drew in big international investors such as BlackRock Inc. and support from banks including Credit Suisse Group AG. Luckin went public in the U.S. in May 2019, raising $561 million. Company executives flooded the Nasdaq stock exchange stage on the big day; some wore barista aprons. Confetti fluttered past their smiling faces.