A bubble? The stellar growth of China's e-commerce upstart Pinduoduo

At $114bn, its market value is above HSBC – but questions remain about business model and if it will ever be profitable

It is a company that is just about to turn five years old but is valued more highly than the oil giant Shell, or HSBC, one of the largest banks in the world.

Pinduoduo is the latest behemoth produced by China’s tech machine, an online shopping site that specialises in extraordinary discounts on everything from tissues to Teslas. And its market value has more than doubled in recent months to $114bn (£87bn).

Its success has turned its founder, Colin Huang Zheng, a 40-year-old former Googler, into China’s third-richest person.

Explaining his vision for the company before its flotation on the US Nasdaq two years ago, Huang said Pinduoduo was a mixture of “Costco and Disneyland” that combined bargain products with entertainment.

What sets Pinduoduo apart from China’s other e-commerce giants, such as Alibaba and JD.com, is that it uses social media. Buyers put details of products on sites like WeChat – China’s answer to WhatsApp with 1.2 billion users – to get friends and family to buy as a group. The bigger the group, the bigger the discounts available.

The Pinduoduo app.
Pinduoduo has nearly 700 million active users. Photograph: Imaginechina Limited/Alamy

The result has supercharged Pinduoduo’s growth. It now has 683 million active users and 50m orders a day.

In just its fifth year Pinduoduo reported almost $4.5bn in revenues in the year to the end of March – almost half that of eBay, which reported $10.8bn in revenues last year.

On Friday it unveiled a 67% increase in revenues to a better-than-expected $1.8bn for the most recent three months. Operating losses rose by 10% after its costs rose and the shares slipped slightly.

But this has come after investor enthusiasm pushed the share price up about 275% in the last year, fuelled by a significant surge in businesses during the pandemic lockdown as consumers headed online.

Huang, who earned a masters in the US, is Pinduoduo’s largest shareholder, with a 29.4% stake worth almost $34bn on paper.

But not everyone is impressed with the company’s business model.

When Pinduoduo shoppers managed to pick up bargain-priced Tesla cars through a group-buying event on the site, the US electric carmaker at first refused to supply the vehicles. Tesla only sells direct to buyers through its website, cutting out dealers and middlemen.

The buyers did eventually get their cars, but the clash put a spotlight on the way Pinduoduo regularly offers customers cash subsidies in order to offer the discounts, which it then records as sales and marketing fees. As a result the company has never even come close to making a profit. In fact, these fees often outstrip quarterly revenues.

Pinduoduo listing ceremony in July 2018 in Shanghai, China
A mix of ‘Costco and Disneyland’ – Pinduoduo debuts on the Nasdaq. Photograph: VCG/Visual China Group/Getty Images

Jamie MacEwan, an analyst at Enders, says: “Pinduoduo’s discount model has powered its impressive growth story. The company has achieved massive user growth in the last two years, which it has prioritised over profits.”

Many tech companies, from Amazon to Netflix, have put growth before profits and investors continue to be happy with what they are seeing. Pinduoduo has pulled in $5bn from investors in four separate rounds of fundraising, including its flotation.

The company’s second-biggest shareholder is the Chinese web giant Tencent, which has a 16.5% stake and also has investments in companies including Universal Music, Spotify and Snapchat. Tencent also owns WeChat, which Pinduoduo exploits heavily to bring in sales.

Another backer is the US venture capital firm Sequoia Capital, which has supported tech success stories including WhatsApp and Instagram, and is the fourth biggest investor with a 7% stake.

Pinduoduo makes most of its money from advertising and promotions by its more than 5 million sellers. They account for almost 90% of revenues, with sales fees low, given the wafer thin margins most sellers operate on.

Unlike Amazon, Pinduoduo has no warehouses of stock, products are shipped directly from the seller, who also has to cover shipping costs.

Pinduoduo has successfully tapped the super-budget end of the consumer market but its reputation has suffered from large numbers of counterfeit products being posted on the site, as well as customers complaining about issues such as delivery.

As a result the company is now also trying to cultivate an image as a destination for more premium products, gaining high-profile coverage for events such as the Tesla sale and offering big discounts on products from brands like Apple.

Some analysts have questioned whether Pinduoduo’s model is essentially a bubble and whether it will ever be sustainably profitable.

“The group-buying model will work in the long term,” says Xiaofeng Wang, a Singapore-based analyst with Forrester. “But to go long, Pinduoduo needs to earn consumers’ trust with quality products and deliver a good shopping experience. Pinduoduo still has work to do, deep discounting is not enough. That’s why Pinduoduo is trying to upgrade itself to sell more premium items and attract more premium consumers.”

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And best practice corporate governance at Pinduoduo leaves something to be desired. Huang, who controls 80.7% of the voting power, is chairman and signs off the company’s results, because it has not had a chief financial officer since last April.

Huang also has a penchant for idiosyncratic letters to shareholders, the most recent accompanying the company’s annual results in April.

In it he shared a long philosophical view on coronavirus – including references to Einstein, Newton and the first law of thermodynamics – signing off with his view on the future of Pinduoduo.

“The journey has only started,” he wrote. “This is our carpe diem. This is our c’est la vie.

• This article was amended on 27 August 2020 to reflect the latest data in Pinduoduo’s annual report. An earlier version said that Huang holds a a 43% stake in Pinduoduo making him worth almost $50bn; that he has 88% voting power and holds the title CEO. In fact, he holds a 29.4% stake which makes him worth $34bn, has 80.7% voting power and has relinquished the CEO title.


Mark Sweney

The GuardianTramp

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