Pinduoduo: sell goods to another 400 million Chinese

On March 19, 2020, Apple released the new iPad Pro 2020. The official starting price in China is RMB 6,229, which is about $876.

iPad Pro was snapped up by consumers in an online shopping app on the first day it went on sale in mainland China. In this online shopping app, the price of this iPad is $5649, which is about $794. That’s RMB 580 less than Apple’s official MSRP(Manufacturer Suggested Retail Price).

In recent years, this has become the norm in the Chinese market. There’s even a meme on a Chinese social networking site that argues that the e-commerce company should buy Apple to fix the but of “Apple devices are priced too high”.

This e-commerce company is Pinduoduo (commonly known as $PDD), the second-largest company in the Chinese e-commerce sector.

Who is Pinduoduo?

When it comes to Chinese e-commerce companies, people always think of Alibaba and his founder, Ma Yun. Yes, there’s no doubt that Alibaba is the number one in the Chinese e-commerce space.

When asked about China’s second-largest e-commerce company, many Chinese may subconsciously mention JD.com. JD isn’t as famous overseas as Alibaba, but in the past two years, you may have heard that his founder, Liu Qiangdong, was involved in a rape case.

In China, JD has until now also been considered the second-largest e-commerce site by consumers. In terms of product form, Alibaba is more like ebay.com and JD is like Amazon.com, but in terms of scale, Alibaba has the scale of Amazon and JD has the scale of ebay.

But in fact, a new e-commerce site founded in 2015 has taken JD’s place as the second-largest e-commerce site in China, and it is PDD.

PDD’s active user count surpassed JD in mid-2019, gross merchandise volume surpassed JD in October 2019, and the company’s market cap surpassed JD at year-end 2019. (via China Venture )

In the first quarter of 2020, PDD is the fourth largest Internet company in China by market capitalization, behind Alibaba, Tencent, and Meituan. But if you read the reviews of PDD in the Chinese world, you will find that the situation is very complicated.

On the one hand, many professionals believe that PDD is representative of a new e-commerce model. On the other hand, there are many more users who consider shopping at PDD to be a disgrace.

Such a split evaluation stems from PDD’s product form and early target users.

PDD’s app doesn’t look much different from Taobao and JD, but the shopping process isn’t quite the same.

It pioneered the social e-commerce model: consumers can get discounts by sending a link to their friends. When their buddies click on the link, sign up for a membership, or purchase the same item, the initial consumer will receive a big or small discount.

This allows a large number of transactions to be done not in PDD’s own app, but in WeChat. This difference made PDD to its success.

Back in 2015, when PDD opened for business, there was a general consensus among business analysts in China that the country’s e-commerce market was saturated. Although at the time, the number of e-commerce users in China was only 340 million, which means that there were still more than 1 billion users in China who were not using e-commerce.

E-commerce apps are different from other Internet apps. There has always been some technical difficulty for users to shop online.

For example, the user must have a bank card account tied to the app in order to pay, and the user must also fill in his or her exact shipping address in order to collect the goods. During the shopping process, users also need to communicate with customer service by typing.

These barriers make it difficult for the elderly, preschoolers, and those below digital literacy in China’s second-tier cities to use it.

But the social e-commerce model pioneered by PDD is different in that it allows transactions to take place in the chat of acquaintances.

In a typical scenario, a consumer who learnt how to shop in PDD, and then he will quickly teach all of his friends in order to get a discount. This is common in cities and villages below the second tier, where relationships are relatively more interpersonal.

As mentioned earlier, prior to 2015, most of China’s lower-educated population did not shop from e-commerce sites. However, lower-educated and lower-income people tend to be price-sensitive consumers and will spread shopping methods to get discounts for themselves.

Many PDD users have never downloaded PDD’s app until now and are browsing WeChat groups for links to products posted by their friends. They then add items to their shopping cart and share them to Wechat Moments and more WeChat groups to get discounts.

It’s spread like a pyramid scheme, but PDD doesn’t cheat users out of their money, it’s just a way for more people to learn to shop with it.

In March 2020, the number of e-commerce users in China rose to 710 million, and more than 60 percent of orders were “orders from social.” This means that the social e-commerce model has significantly expanded the base plate of the Chinese e-commerce market.

In this way, we can understand why there are two completely different evaluations of PDD.

For those who learned how to use e-commerce sites before 2015, they tend to be the middle class or elite in the city. For them, PDD is more like an app for the poor.

But for business analysts, once they understand the PDD model, they will realize that PDD is the real e-commerce company that fits the current situation in China.

In 2019, PDD launched a “10 billion subsidies” promotion, with PDD planning to spend more than 10 billion yuan on the promotion. This is one of the ways it is repairing its reputation among middle-class consumers.

This promotion is simple and crude and does not require any additional behavior from the user.

You only need to buy for a specific time to get the discount and without spamming your friends. In the previous example, PDD sold the new iPad Pro for 5,649 yuan, but Apple doesn’t make less revenue from PDD than others. 

The tens of “10 billion subsidies” goods tend to come from well-known brands, even luxury goods, that early PDD users did not buy.

The iPhone, iPad, Estée Lauder’s skincare, Hermes’ perfume, and LV’s bag have all been part of the “10 billion subsidies” promotion.

This has improved PDD’s word of mouth to some extent.

Why is PDD successful?

In 2015, the year that almost all Chinese business analysts were misjudged, China’s mainstream e-commerce platforms were all trying a new strategy called “Consumption Upgrading”.

This strategy argues that China’s manufacturing industry has taken on the main task of worldwide. In many areas, even the best of those brands are produced in China factories. (e.g., shoes, hats, clothing, small appliances, etc.)

But the reality is that Chinese consumers find it difficult to buy quality goods produced by factories in their own country. Because high-quality factories in China often do not have their own brands and only take OEM orders from overseas.

The only way Chinese consumers to buy products from these factories is to buy expensive products that have been exported and labeled with well-known brands and then re-imported.

One concrete way to the strategies is for e-commerce companies to place orders directly with these high-quality vendors and then label themselves as such. Since there is no brand premium for the trademarks of these e-commerce companies, people are able to buy these products, which are not originally sold in China at relatively low prices.

Contrary to this trend, PDD was initially thought to have implemented a “consumption downgrade” strategy. In the first few years, it was thought to sell more counterfeit products than Taobao.

Many of these early PDD merchants came from merchants who left Taobao after being sanctioned. (via A deep rehash of PDD’s rise)

As mentioned before, PDD was initially targeted at price-sensitive consumers below the second-tier cities in China. Such consumers have long relied on informal merchants in local offline markets. Most of these merchants are selling merchandise without any brand name and quality assurance.

PDD attracts the manufacturers of these products to settle in, and first attracts the corresponding consumers to become users with a low price strategy so that they can develop the habit of spending in PDD.

Unlike other e-commerce companies that emphasize branding, there are hardly any well-known brands seen on the early PDD. The brand name of many items is consistent with the factory name, but its early consumers didn’t complain about it. Because all along, this group of consumers have been buying such goods.

But as the number of users grew, PDD was able to gain negotiating power over these vendors, and PDD began to do what other e-commerce platforms do – “Consumption Upgrading”.

Beginning in 2017, PDD began working to improve the quality of the merchandise it sells. Unlike other e-commerce platforms, PDD can force vendors to change more.

It was at this time that many of the earliest e-commerce platforms (such as NetEase Yanxuan) that implemented the “Consumption Upgrading” strategy began to have problems.

Mostly, online shopping sites do not have solid control over the upstream suppliers, and they generally have no control over what a vendor should or should not produce.

Especially if it’s targeting those 300-400 million users in tier 1 and 2 cities, that control is even worse.

A vendor can sell goods to consumers through Taobao, JD, NetEase Yanxuan, Xiaomi Youpin, or any other shopping apps.

This means that middle-market-oriented e-commerce sites do not have the advantage of negotiating with upstream suppliers, which has become the reason for the failure of many e-commerce chases “Consumption Upgrading.”

But for a long time, PDD was the only online sales channel for consumers below second-tier cities. If a factory wants to sell goods to those consumers, PDD is their only option.

This has allowed PDD to adopt a new production and sales model. This model is described in detail in an article by PDD founder Huang Zheng, Turning Capitalism Upside Down.

In this model, the market can completely determine how production is produced, rather than the manufacturer producing it and then the brand marketing it and selling it to consumers.

In a traditional supply chain strip, there are five necessary links: Manufacturers – Brand holder – Distributors – Logistics Company – Consumers.

Take the sales process of an AA brand dress as an example:

1. The AA company orders from the manufacturer of the skirt.
2. The manufacturer produced the dresses as ordered.
3. The dresses were sent to different Distributors.
4. Distributors operate online stores and receive orders from consumers.
5. Logistics companies delivery skirts to consumers.

In this chain, Distributors means that an AA brand authorizes a company to sell its goods on an e-commerce platform.

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This is very common in China, as every e-commerce platform has complex sales, discounting, and operational rules and few branded companies are directly involved in the operation of online stores.

But it also means that AA Brand does not have direct control over production and sales. This makes it possible to make blind decisions.

And in the model of PDD, the chain has only three links: Manufacturer – logistics company – consumers.

In its early days, PDD worked with a large number of factories that never made online sales. These factories generally didn’t register their brands for the first time until they started selling goods on PDD.

PDD will train these factories, show them how to sell goods online, listen to consumers, and analyze sales data to adjust the pace of production.

In the process, PDD is continuously improving its quality standards.

Since no retail channel has ever brought so many orders to these manufactories, they are happy to improve their production quality for the PDD regulations. In some reports, PDD will even help factories improve their supply chains by introducing new product lines.

This is unthinkable for other e-commerce companies.

Colin Huang Zheng, the man who created PDD

Huang Zheng founded PDD in 2015, but before that, his life story was also legendary.

One day in 2002, Huang Zheng, who was still a college student, returned to his dormitory to surf the Internet after class. On MSN, a stranger added Huang Zheng friend to ask him about computer technology.

He agreed to help, and after the problem was solved, the other party claimed to be Ding Lei, the founder of the Chinese Internet Portal NetEase, and Huang thought he had met a fraud. But unexpectedly, a later move by Ding Lei changed Huang’s fate.

In 2003, upon learning that Huang was going to the University of Wisconsin for his master’s degree, Ding Lei introduced him to a friend who had just moved to the United States.

This uninformed man had not yet realized that he had met the mentor in his life, Duan Yongping. The bigwig behind the scenes who later influenced the Chinese smartphone market has given Huang substantial help in his entrepreneurship, investments, and life.

Also see Duan’s story : This man(Duan Yongping) created BBK, OPPO, VIVO, OnePlus and more

After graduation, Huang joined Google after consulting with Duan Yongping, and after two years of work, Google went public, and as an early employee of Google, he gained a lot of wealth.

In 2006, Duan Yongping bought the opportunity to have lunch with Warren Edward Buffett for $620,000, a meal that would have taken one person with him, Huang. It was this meal that made Huang realize the power of simplicity and common sense.

The experience of working at Google has not only brought him material wealth but also allowed him to gain many ideas. In Huang’s 2016 article, My First Job, he reviewed his experience at Google this way.

Google is in some ways quite like China before the reform and opening up, for example, the “working class” status is high, and the company emphasizes ideology. So when ideologies clash, Google also reacts beyond the average commercial company.  

Google also has some similarities with China after reform and opening up, encouraging grassroots innovation, and daring to try. At the same time, the company is highly centralized in terms of core power. It has the institutional advantage of concentrating its efforts on significant events.  

In a way, it is this way of thinking, combining Eastern and Western cultures, that has enabled him to create PDD because it is a product that uses the most advanced technology to serve the most economically disadvantaged group.

Before Huang Zheng, Chinese Internet entrepreneurs tended to ignore this segment of the population because it was considered to be users with no commercial value.

In an interview with the media, Huang revealed that he was inspired by his mother to create PDD. Huang Zheng is 40 years old, and his parents’ generation of Chinese people have developed frugal spending habits because they have experienced the general poverty stage in China.

When Huang Zheng was young, he often wore second-hand clothes from his mother’s colleagues. Years later, even though his hometown of Hangzhou has become the ninth city in China’s GDP rank, and Huang’s family has reaped much wealth. But Huang’s mother would still bargain for 1 yuan( about $0.14) when buying food and daily necessities.

This made Huang realize that although the income level of many Chinese people has improved greatly in the last 40 years, they still attach great importance to cost-effective when buying some goods, especially in the areas of daily necessities, fruits and small furniture.

PDD has never changed its original goal, and although the quality of the goods it sells has improved in the last two years, you can still get a lot of over-the-top bargains here. Such as, perfume under 5 yuan( about $0.7), slippers under 10 yuan( about $1.41), 40 rolls of toilet paper under 20 yuan with free shipping, etc.

Of course, PDD is now more than limited to these low prices, and you can buy almost anything you can get in Taobao and JD from it.

It is worth mentioning that JD has not only an e-commerce business but also a large piece of financial and logistics market. Alibaba, on the other hand, is a direct competitor of Tencent, which owns almost all of the Internet business.

Though after overtaking JD, PDD began to challenge Alibaba. But it’s still a straightforward business, and at this stage, PDD is still only an e-commerce business.

Huang’s journey as an entrepreneur is just beginning.

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