Pinduoduo: A Closer Look at the Enigmatic Giant

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As troublesome as TikTok’s trends are, the app’s greatest danger lies not in any specific content but in its general addictive nature.

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One challenge, known as devious licks, encourages kids to vandalize property, while the blackout challenge, in which kids purposefully choke themselves with household items, has even led to several deaths, including a little girl a few days ago.

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Pinduoduo: A Closer Look at the Enigmatic Giant

Pinduoduo is not your typical company, there's something mysterious about it. The way it operates is shrouded in secrecy and it's hard to wrap your head around how it runs.

But here's the thing, despite all the enigma surrounding it, PDD has managed to capture over 20% of the market share in a very short time. Its numbers are astounding, and they've completely reimagined what was once thought possible in the world of retail logistics.

What's more, Pinduoduo is taking the world by storm with its incredibly cheap and fun approach to shopping. But there are still some lingering questions about the company's founding, structure, and investor interactions. Some investors might see these as red flags.

Pinduoduo is essentially an online marketplace, and it has pioneered being an online dollar store, having all different types of goods, no brands, and all cheap prices.

It's grown by just bringing these cheap prices to consumers who can't afford branded and other goods. Back in 2020, during the height of the mini internet bubble, they had a market cap of nearly $200bn, which they are at again today.

Pinduoduo has come into focus now with the launch of its overseas app, Temu. They expanded into this overseas venture in September 22. And now they've expanded into almost 50 countries globally, essentially leveraging domestic light manufacturing to sell all sorts of things to the rest of the world.

Navigating the Shroud of Secrecy

There's no denying that Pinduoduo and Temu are selling huge amounts of merchandise to huge numbers of people around the world. The problem is, given the lack of information about the company, anyone on the outside can claim to properly understand it.

They don't court Wall Street equity analysts like the other Chinese e-commerce giants do. 56 Wall Street analysts cover PDD Holdings as a stock, and 53 of them recommend that their clients buy it. They think it's great. The weird thing is, they don't really have very much information to go on.

PDD is known to be minimally communicative as far as the business is concerned. They've yet to break out any kind of financial detail on, for example, Temu versus the domestic business.

Nobody can tell you how big PDD's marketplace is. Two years ago it was worth almost $400bn in what we call GMV, gross merchandise value. And using some reasonable assumptions you can get a pretty, let's say, ridiculous range of estimates.

Is PDD as big as Amazon, or is it as big as Amazon plus Walmart? And if you want to get really carried away, you can kind of take some of the numbers which they publish and haven't explained, run that forward, and hey, maybe PDD is actually as large as the Italian economy.

Decoding the Business Model

Pinduoduo is essentially an online marketplace where anyone can go sell goods to Chinese shoppers, and they've differentiated themselves by taking a lower cut of each sale, and also not building out any of the logistics infrastructure that JD and Alibaba have. So they're an asset-light e-commerce marketplace, all online.

PDD domestically basically outsources the fulfilment to the industry of express delivery guys. It's all very well using third parties day to day when everything's fine. But what about Singles Day, when huge numbers of people across China are sending packages? How has PDD managed the user experience? If you look at staffing levels, it had about 13,000 staff.

That is so much smaller than Alibaba, which has hundreds of thousands. Amazon, by the way, has 1.5mn people working for it. If PDD has been able to grow to this enormous size without having its own logistics, without having control, then I think a lot of business schools are going to have to rewrite some textbooks.

So back in 2020, in the years before then, they were sometimes spending more on sales and marketing than their total revenue. So they went all in on advertising subsidies to learn users, and they've proven at least within China, that they can keep those users once that advertising spending starts to decline as a proportion of their business. The question is, will that same model work with Temu, and will it work with American shoppers and European shoppers?

The Impact of Temu

PDD domestically, it's very, very cash-generative. And that, on some level, is funding the growth of Temu, at least in the first instance.

Temu is most likely going to get to somewhere in the range of $17bn of gross merchandise value, roughly a third of Shein, which has been around for a lot longer and is the other main cross-border e-commerce platform.

Shein is a Chinese-founded fast fashion company that shipped cheap clothes directly from Chinese factories to shoppers in the West.

It does feel like the combination of Temu and then others like Shein and TikTok Shop are fronting this charge to expand globally, and to sell essentially all across the world. And it will, in our view, have an impact on some of the global incumbents.

It's early days in Temu's story, but the reason why this company is potentially very important is because they could potentially be replicating Shein's growth story in fast fashion in the online marketplace. If it can replicate the speed of Shein's growth through its combination of fun, cheap and easy shopping, then it could potentially be as disruptive a force for the online marketplace for players like Amazon as Shein has been in fast fashion.

The low prices on Temu are essentially a function of two things. One is the fact that compared to peers like Amazon, Temu is currently charging a much lower take rate than what we hear merchants are having to pay on, say, Amazon. The second thing which PDD has done prolifically in the domestic market is something that they call C2M, Customer To Manufacturer, where the platform aggregates consumer feedback and data from the platform, from sales, from other sources, and tells the producer to iterate the product in different ways.

One of the ways that they do this is often the platform will tell the merchant to design something to a slightly cheaper spec so that it's a little bit lower quality, but significantly lower in terms of production cost.

The products that Western consumers are buying on platforms, for example, Amazon, the high cost of them has a lot to do with the fact that they need to create a brand. They spend a lot on marketing. They do consumer surveys to try and figure out what we want. All of this costs money and is baked into the price of the product.

Temu has stripped that away. They've basically said, OK, we're going to go straight to the manufacturer, use algorithms to predict what shoppers want online, cut out all of this brand creation, fee, and cost structure, and ship these goods directly from the factories to shoppers in the west.

Now that the volumes are much higher, discussions are going on between merchants and Temu about supplying Temu, not just from the manufacturing base in Guangzhou and surroundings, but also to supply the platform from inventory that's already in the US, where the merchant has already taken on the inventory risk of the long-haul leg. And that's served one purpose, which is to allow Temu to sell more expensive items, to sell heavier items, which if you're sending things via brown-paper envelope, via air, is more difficult.

China hawks in the US are certainly not happy that US consumers are becoming more and more reliant on these platforms, but the question is whether or not they can actually do anything about it.

There's obviously the potential for geopolitics to influence the business. One of the more visible things is the de minimis provision in the US, which allows parcels to go into the US without paying tax if it's under $800 in value.

Temu takes advantage of this according to a US Congressional committee. This committee is also looking into where Temu sources its goods in China, so there's some impetus to look at whether Temu is getting any of its goods from Xinjiang and whether that is getting into the US illegally.

The story of Temu is really a story of how dominant Chinese manufacturing continues to be. We've seen geopolitical tensions between the US and China, but despite all of those trends, you've seen these companies shipping Chinese manufacturing almost directly to consumers in the West. That is a testament to the continued strength of the Chinese manufacturing base.

At least within China, Pinduoduo has proven that its business model does work, according to their financial statements. The question is whether they're going to be able to recreate this with Temu abroad.

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Disclaimer: The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual.