Major Chinese online retailers including Taobao and JD and emerging platforms like Xiaohongshu have said they saw positive metrics during China’s month-long 618 shopping festival, where low prices have taken center stage as merchants navigate the challenge of reduced consumer spending.

In an email, Alibaba sent to TechNode, the Taobao owner said it has seen “encouraging user engagement and growth” from merchants of all sizes.

Why it matters: The 618 shopping festival is the second largest online shopping event in China, with consumption levels during the event seen as a barometer of the country’s overall spending trends.

Details: Pinduoduo’s standout performance has turned it into a model for competitors, although the discount shopping app has become more aggressive recently as it looks to maintain its appeal. Before its main promotions began in late May, Pinduoduo quietly launched a system designed to automatically adjust prices within the range set by merchants, so that a product’s price drops if a competitor platform offers a lower price.

• At the same time, Taobao revamped its homepage to closely resemble that of Pinduoduo, its biggest rival. Changes include reducing the number of fixed channels, and highlighting algorithmically recommended items that it thinks users are likely to buy.
• In another key figure revealed by Alibaba, newly-added members of 88VIP, Taobao’s loyalty membership package, more than doubled in May compared to the previous month. The growth was fueled by additional value-added services such as access to unlimited free parcel returns. Taobao said more than 35 million users were recorded as part of the program in the first three months of 2024.
• JD, the platform that began the 618 shopping festival in celebration of its founding, this year partnered with Hunan TV for its evening gala three years after such last event was held. As part of the project, JD said it would hand out “heavyweight prizes” including resort stays and sports tickets to users who shopped on the app during the gala, which started at 8 p.m. on Monday. 
• Elsewhere, content-sharing platform Xiaohongshu reported triple orders on purchases made via its site compared with the same period last year.

Context: The main e-commerce players kicked off their 618 promotions in mid-May, but none have posted overall sales totals for the period.

China’s 618 shopping festival, the country’s mid-year online deals event, is coming to a close after a month-long campaign. This year’s 618 is the first major shopping event since China reopened in December, offering some insight into China’s current consumer sentiment. 

It’s also an interesting test for Chinese e-commerce giants Alibaba, JD, and Pinduoduo, all of whom have recently undergone management adjustments. Each company continues to face significant growth pressure in the face of fierce competition.

Alibaba, JD competing on lower prices with Pinduoduo

This year’s 618 festival encapsulates the escalating price war in China’s e-commerce industry. With the slowdown in economic growth, consumers are actively seeking cost-effective products. In response, multiple Chinese e-commerce platforms have followed Pinduoduo’s marketing strategy by offering higher discounts to attract buyers.

During the month-long mega promotion, Alibaba customers have received a discount of RMB 50 (about $7) for every RMB 300 spent across Tmall stores. In addition, Taobao has introduced an “RMB 10 billion subsidy” project, adopting a similar approach and bearing the same name as Pinduoduo’s signature campaign. Through this channel, products were directly sold at lower prices without the usually complicated coupon application.

JD, with former CFO Sandy Xu recently taking over as CEO, offered the most generous discounts compared to other platforms. Buyers have been able to get RMB 50 back for every RMB 299 spent. Prior to the festival, Trudy Dai, CEO of Alibaba’s newly independent Taobao Tmall Commerce Group, expressed the platforms’ commitment to making a “historical investment” in this year’s event, while JD announced its intention to undertake “industry-wide investment efforts” during the festival.

Pinduoduo, known for selling ultra-low prices goods, prominently displayed a slogan on its 618 promotion interface that roughly translates to “no need to compare with other platforms because we offer the lowest prices.” Pinduoduo has also been offering RMB 30 off for every RMB 200 spent.

“Encouraging consumption became the priority for the government, the market, and the e-commerce platforms in all aspects,” said Fabian Sinn, a managing partner at e-commerce marketing firm Genuine. “As a result, there were more subsidies and more affordable prices to attract consumers and stimulate the market’s economic recovery.”

Retail sales, as a key figure indicates consumer confidence, rose 12.7% in May, falling short of market expectations and down from 18.4% in April. The recovery in China’s consumption sector is not as strong as it appears.

The rise of Pinduoduo, which has steadily gained market share in an e-commerce industry once dominated by Taobao and JD, has combined with the emergence of live commerce platforms like Douyin and Kuaishou in recent years to have a significant impact on price-sensitive consumers. These consumers now consider the price differentials and after-sales services offered by various shopping outlets when making their purchasing decisions.

Copying from each other’s playbooks

In a heated competition, Chinese e-commerce platforms are copying strategies from each other. Rising content commerce platforms like Douyin and Kuaishou are copying from the majors, trying to offer more serious online shopping experiences like Taobao and JD on their apps, adding new dedicated shopping sections rather than directing people to shop while they are watching content like they used to. While majors like Alibaba and JD are trying to offer more video entertainment and content, making the shopping experience more casual in their apps. 

Douyin and Kuaishou, known for stimulating consumption via livestreaming and short videos, have focused on leveraging various promotional activities to drive sales through dedicated shopping channels called “marketplace,” where product listings can be displayed in columns. 

Wei Wenwen, president of Douyin’s e-commerce unit, recently highlighted at the TikTok sibling’s ecosystem conference that the GMV generated from the “marketplace” accounted for over 30% of its total sales in 2022.

Douyin and Kuaishou “have been steadily capturing more market share, despite offering similar products to other major platforms,” Jacob Cooke, CEO of WPIC, an e-commerce tech and marketing firm that helps foreign brands sell in China, told TechNode.

“People use these short-video apps for entertainment and knowledge acquisition,” added Cooke, “and the platforms have cleverly integrated e-commerce so that users are exposed to brands and products that relate to their interests, which has been a catalyst for impulse buying and consumer engagement.”

Mainstream shopping sites are adopting a content-driven approach as a defensive strategy to promote sales. The content-based browsing was repeatedly emphasized by Trudy Dai at the 618 Merchant Conference held on May 10. Dai promised that Taobao would provide a wide range of products, short videos, and livestreaming services to enhance user engagement.

Alibaba is investing heavily in its content ecosystem. The e-commerce giant announced at the Merchant Conference that over 50,000 new livestreaming hosts would make their debut during the annual mid-year discounts on Taobao and Tmall. 

Notably, on May 31, US tech giant Apple made its first foray into livestreaming on Tmall, an event that drew 1.28 million viewers. Football celebrity Messi also joined Taobao Live for nearly 20 minutes on June 14, as part of his Chinese trip schedule, which drew over 2.5 million viewers and even caused the stuttering of the livestream event when Messi came onto the scene.

JD Live is also leveraging top influencers to attract user transactions. Smartisan Technology founder Luo Yonghao, who previously had an exclusive partnership with Douyin, joined JD’s livestream on May 31 and helped sell goods for more than RMB 150 million.

PDD Holdings, owner of Pinduoduo and Temu, recently reported a 58% yearly increase in revenue for the first quarter of 2023. The company attributed the better-than-expectation performance to online retail recovery in China.

10 Billion Ecosystem Initiative

Along with the announcement of quarterly earnings, PDD also unveiled its latest major program, “10 Billion Ecosystem Initiative,” marking the company’s third initiative worth RMB 10 billion ($1.4 billion) following the “10 Billion Subsidy” and “10 Billion Agriculture” initiatives. The primary objective of this plan is to allocate additional resources to high-quality sellers, aiming to enhance the overall service efficiency and quality of the platform’s merchants.

This move aligns with the comments made by Chen Lei, PDD’s co-CEO, during the earnings conference call. He emphasized the company has been steadily shifting its strategic focus from pursuing rapid growth to emphasizing the quality of growth.

“Under our long-term strategies, we are continuously strengthening our supply chain capabilities and expanding the supply of high-quality merchandise. We will further increase our support for quality sellers by launching our 10 Billion Ecosystem Initiative and further improve the quality of our service while continuing to optimize our platform ecosystem.” Chen said.

Started as a platform for selling agricultural products, PDD is known for its stable and efficient supply chain. The company continues to uphold its policy of zero commission on agricultural products. As a result, agricultural merchants spends about only one-third to one-half on Pinduoduo than on other platforms. In early April, the company appointed co-founder Zhao Jiazhen as co-CEO. Zhao, with extensive experience in supply chains, focuses more on supply chain management and domestic business operations, while Chen Lei leads global expansions.

The co-CEO lineup highlights the company’s commitment to advancing supply chain expansion and optimization. During the early days of the company, Zhao played a key role in overall operations and supply chain development in the agricultural business. In 2020, he successfully led the Duoduo Maicai team in pioneering the community group-buying business model in Jiangxi province.

According to various reports, under Zhao’s leadership, PDD’s specialized teams will progressively explore 100 high-quality industrial hubs across at least 10 provinces in China this year.

A mature and robust supply chain relies on diverse and high-quality sources of goods. Pinduoduo’s new major initiative seeks to uphold the company’s position as a crucial source of goods in the e-commerce industry. The company promises this program not only involves providing financial support of billions of dollars to high-quality merchants, brands, and small and medium-sized enterprises but also assisting these merchants in expanding into international markets.

Extra subsidy for 618

Ahead of this year’s mid-year 618 shopping festival, PDD launched its 10 billion yuan subsidy program on April 6th, specifically targeting home appliances and consumer electronics. In addition to the existing subsidy, they will invest another to provide extra 10 billion yuan in subsidies for a wide range of digital home appliances, including smartphones, tablets, refrigerators, air conditioners, and others.

Major domestic and international brands such as Apple, Huawei, Honor, Xiaomi, Midea, Haier, Sony, TCL, Nintendo, Dyson, and Vivo have already participated in the program.

PDD will also collaborate with brands like Midea, Haier, Xiaomi, Vivo, Asus, TCL, and Hisense to launch a series of factory-direct products. Combining subsidies with direct sales to provide better discounts and benefits to consumers.

By promoting the direct connection between popular factory products and consumers through subsidies and direct sales, this approach benefits both the supply and demand sides. This initiative aims to offer consumers competitive prices and boost the manufacturing sector’s recovery.

Any company looking to up its e-commerce game in China this year needs to adapt to the changing landscape. The industry structure has transformed, with new players like Douyin and Pinduoduo shifting towards mature e-commerce models and WeChat Mini Programs breaking e-commerce transaction volume records. COVID-19 and shifting consumer behavior caused online retail consumption to surge to 27% of total retail consumption in 2022, up 2.5% from the previous year.

The new “Big Five” (Alibaba, JD, Pinduoduo, Douyin, WeChat) competitive landscape emerged rapidly. Below are some insights from a 650-page 2023 China Mega Report by ChoZan about the changing e-commerce landscape in the country.

The new e-commerce landscape in China

China’s e-commerce landscape is rapidly evolving with the emergence of the new “Big Five” players – Taobao, JD.com, Douyin/Kuaishou, Pinduoduo, and WeChat. Each platform has its own unique characteristics and strategies to attract and retain customers.

1. Taobao, owned by Alibaba, has achieved full coverage of product categories, with a focus on clothing and beauty products. It has been introducing external anchors, including popular Douyin influencers, to boost live-streaming e-commerce sales. Taobao has also been expanding into industries with low penetration rates such as fresh products and automobiles while accelerating new product innovation.
2. JD.com, on the other hand, has returned to its low-price strategy, rushing into the “100 billion yuan subsidy” war, targeting Pinduoduo, with the aim of winning users with low prices. JD.com’s core categories remain home appliances and 3C products, but it has been increasing its investment in fashion and beauty categories.
3. Douyin/Kuaishou, both originally focused on live-streaming e-commerce, has now transformed into a comprehensive interest-based e-commerce platform with the addition of digital shelf e-commerce. Digital shelf e-commerce refers to the online merchandising and retailing of products in a way that replicates the experience of browsing physical store shelves. Douyin is more suitable for selling new and unique products such as clothing, underwear, and smart home appliances and is the main platform for brand promotion and new product launches.
4. Pinduoduo’s long-term strategy is focused on the agricultural sector, and the brand strategy is divided into two directions – attracting mature brands through investment and upgrading factories, and establishing their own brands through white-label or farm brands. The platform has achieved rapid growth through digital electronics and will focus on clothing and agricultural product categories in the future.
5. WeChat, owned by Tencent, has entered the high-quality content ecosystem competition in short video through Video Accounts, utilising social/private traffic to boost e-commerce. WeChat encourages high-quality, interesting, and useful video content, and connects advertising promotions with creator monetization needs. Its ecosystem of official accounts, mini programs, and enterprise WeChat can be integrated with video accounts, promoting repeat purchases. WeChat’s video live-streaming e-commerce primarily focuses on consumer goods such as clothing, food, and cosmetics, with an average order value exceeding 200 yuan.

Consumers plan to continue to spend more on the top five e-commerce platforms

KPMG’s 2022 year-end survey revealed that consumers intend to increase their spending on the Big Five platforms due to their expanded product options and enhanced shopping experiences. About 60% of consumers plan to boost their consumption on Douyin, while Pinduoduo ranks as the top choice for low-income groups.

Consumers’ willingness to spend is based on several sources. They are more rational spenders today, but purpose-driven marketing is indeed effective for them since consumers’ concern for their health and the environment is high. Additionally, convenience is another factor crucial for brands to connect with their target audience. On top of that, the changing social habits and increasingly in-depth services mean brands need to be flexible in social platforms and offerings to attract more consumers.

Top 5 ways brands can respond to the changing e-commerce landscape in China in 2023

1. Adopting an overall e-commerce strategy and repositioning flagship stores on Douyin and Pinduoduo

E-commerce platforms need to adopt a comprehensive layout and reposition their flagship stores on Douyin and Pinduoduo. Douyin is focusing on developing its digital shelf e-commerce, while Pinduoduo is leveraging its advantage in high-frequency consumer goods categories to become a comprehensive platform that meets diverse needs. For brands, as the digital shelf e-commerce landscape becomes evenly matched, Douyin/Pinduoduo flagship stores will play an equally important role as their Tmall/JD flagship stores.

2. Building a stronger cross-platform synergy and seizing the opportunity to enhance bargaining power with e-commerce platforms

As e-commerce platforms become increasingly mature, the overlap of their consumer groups will inevitably continue to increase, making it more difficult to expand user increment. However, it is a good opportunity for brands to increase their bargaining chip with e-commerce platforms in terms of traffic, product promotion, and consumer data transparency. Stronger cross-platform collaboration between brand and e-commerce platforms is worth exploring on both sides, especially in category differentiation, pricing, and promotion.

3. Reducing the reliance on livestream e-commerce influencers and strengthening content co-creation

The role of e-commerce live streaming, especially influencer live streaming, in “transactions” will be further weakened. Most influencers may find that selling standard or common products are losing their appeal to the public. Influencer live streaming will reach a critical crossroads, and influencers will need to attract consumers through better content. Currently, “selling-only” influencers who lack content will lose their competitiveness and gradually be phased out. Patterns may emerge where common goods are sold more through digital shelf e-commerce and influencers will focus on more niche products with strong digital content potential like trendy goods.

4. Developing innovative supply chain solutions

Innovative supply chain solutions such as direct sourcing and supply chain financing can help brands reduce costs and improve efficiency. Brands need to optimize their organizational structure, develop cross-platform e-commerce capabilities, accumulate universal key capabilities to support multi-platform development, and lay a foundation for other e-commerce models with future development potential, such as instant retail.

5. Improving consumer experience through data analytics and personalized marketing

Brands need to use data analytics and personalized marketing to improve the consumer experience. It can help brands better understand consumer behavior and preferences, and provide tailored products and services to meet their needs. With the convergence of platform models, the profit levels of brand flagship stores on various platforms are expected to gradually converge. In order to improve efficiency, brands need to optimize their organizational structure, develop cross-platform e-commerce capabilities, accumulate universal key capabilities to support multi-platform development, and lay a foundation for other e-commerce models with future development potential, such as instant retail.

Conclusion

To succeed in 2023, brands must adapt to emerging e-commerce platforms and changing trends. New players are continuing to emerge and grab a share of the existing market. Each platform emphasizes different aspects of marketing, including product pricing, content, and product categories. Brands need to understand these nuances and tailor their e-commerce strategies accordingly to effectively engage with their target consumers and drive sales.

Before establishing a presence on e-commerce platforms, it is important to understand the target consumer group and their profiles.

Pinduoduo, one of China’s largest e-commerce companies, is hosting the third Smart Agriculture Competition on Chongming Island in Shanghai. The competition challenges four finalist teams to grow high-quality lettuce in 90 days without sunlight or soil.

Each team is comprised of agriculturalists, data scientists, and plant engineering scientists who will employ interdisciplinary technologies such as artificial intelligence and agricultural planting to cultivate Crunchy lettuce, a variety known for its crispy and sweet taste, within a closed container environment.

The winning team will be judged by their ability to produce higher yields of better lettuce while using lower energy consumption, earning them the championship title.

Planting lettuce via AI

Lettuce is one of the most popular and widely consumed green leafy vegetables. However, in China, the wholesale price of lettuce is significantly affected by seasons. Data from the Ministry of Commerce showed that lettuce prices are higher during the Spring Festival period and early autumn while a bit lower in summer.

From 2019 to 2021, the wholesale price of lettuce recorded the highest price of RMB 6.81 (about $1) per kilogram in November 2021, which is near twice the lowest price of RMB 3.62 during this period.

It generally costs between RMB 4 and RMB 8 to produce one kilogram of ordinary lettuce. Still, some plant factories will consume 10 degrees of electricity to produce a kilogram, which makes the cost goes up to RMB 20.

In contrast to traditional outdoor planting, the four outstanding teams are practicing “vertical farming,” which refers to simulating the growing environment of water, sunlight, and temperature required by agricultural plants via AI algorithms to improve crop growth land utilization.

CyberFarmer, a team of six members from a key laboratory of China Agricultural University, revealed their idea of fine-tuned management based on feedback obtained from real-time monitoring of lettuce growth conditions and then transforming the growing experience into a decision-making algorithm. This team won the AI category in the first Pinduoduo Smart Agricultural Competition.

“The future of facility agriculture should be a cross-disciplinary complex, which is supported by a large number of sensors and big data algorithms, thus changing the mainstream experience-based agricultural guidance at this stage,” said Xu Dan, the leader of LettUs Grow, one of the teams that entered the final round of the competition.

Megacities like Beijing and Shanghai have more developed agricultural and logistical infrastructure, but a variety of factors can still constrain vegetable supply. Vertical farming, which is favored by tech companies as well as venture capitalists in past years, could lead to a stable and sustainable food supply if it is eventually commercialized.

However, vertical farming in containers currently requires excessive energy consumption. In this competition, the energy consumption for regulating each environmental element will be reflected in the numbers on water and electricity meters. The most important criterion is to reduce energy consumption as much as possible while maintaining lettuce yield and quality.

The Shanghai Jiao Tong University team said their goal is to find the ideal conditions for plant growth while increasing production by more than 40% and reducing energy consumption by over 25% compared to conventional plant factories.

Pinduoduo’s agricultural efforts

Pinduoduo has hosted the Smart Agriculture Competition since 2020, hoping to drive innovation and sustainability in China’s agricultural sector. The winning team has to prove that the management model they developed is commercially viable.

An intelligent decision strategy for growing strawberries, created by teams from past competitions has already been successfully applied to actual agricultural production in China’s southwestern Yunnan province.

According to published reports, a farmer in Yunnan achieved an RMB 30,000 to 40,000 yield increase per season and saved nearly RMB 4,000 in fertilizer costs through an artificial intelligence farming system developed by the team. In the northern province of Liaoning, a person can manage 7-8 barns while doubling the yield with the help of the system.

Over the years, the Shanghai-based firm has continued to invest heavily in agriculture – one of the most fundamental sectors of the country’s economy.

Agriculture touches everyone’s life, yet it is still low in digitization. Therefore, the company’s effort to digitize this sector may bring itself more opportunities. The company also sees it as a way to give back to society by empowering agriculture with digital technology and artificial intelligence in the long run.

Duoduo Video, a vertical short video offering from Chinese e-commerce company Pinduoduo has reportedly recorded comparable watch time statistics to Tencent’s WeChat Channels, sparking a sudden uptick in attention from Chinese tech media. Local media outlet 36Kr said in a Wednesday report that the video section on Pinduoduo’s shopping app is seeing users spending about 30 minutes a day watching, a number that puts it roughly on a par with tech giant Tencent’s similar platform. 

Why it matters: Pinduoduo’s use of short vertical videos is another example of Chinese online retailers’ increasing competition with content platforms such as Kuaishou and ByteDance’s Douyin, as the latter two ramp up in-app shopping functions. Alibaba’s Taobao shopping app also has an embedded content section called Guangguang, using a combination of photos, articles, and videos to attract more users. 

Details: Pinduoduo added the short video section to its app in February 2022, according to a report from Chinese media outlet Jiemian. Pinduoduo incentivizes users to watch more videos by giving out cash rewards, which users can withdraw directly to other digital wallets.

• In a recent test, TechNode found Pinduoduo gives out significant cash rewards to newer users. Our reporter, a new user of the section, earned RMB 10 (about $1.5) after watching less than one minute of short videos. But the app only allowed the user to withdraw a small fraction of the earned reward (up to RMB 0.6) and encouraged them to log on more frequently to increase the withdrawal amount. 
• Duoduo Video is now led by a person who worked for Douyin before joining Pinduoduo in around 2021, the 36Kr report said. Pinduoduo is committed to investing in the business, not expecting commercial results in the short term, the report said, citing a source close to Pinduoduo.

Context: As China enters a relatively slower growth period, competition among the country’s top tech companies is heating up, with more cross-sector rivalry. For example, ByteDance’s Douyin, the equivalent of TikTok in China, has recently increased its investment in offering on-demand services, a core business offering of the life services giant Meituan. 

• Known for offering generous discounts and ultra-low prices, Pinduoduo saw great growth last year, with revenue up 65.1% year-on-year to RMB 35.5 million in the third quarter of 2022. But the company is facing more challenges from established online retailers such as JD and Alibaba. JD is set to launch a subsidy program worth billions of RMB and applicable to almost all items sold on its platform. Pinduoduo launched a subsidy program in 2019. 
• Taobao Deals, Taobao’s budget shopping platform, is set to form 50 offline service spots in industrial cities across China to help boost supply of quality products in nearly 900 categories, local media outlet 21Jingji reported on Feb. 27.

As internet companies in China transition to less heady development in light of stricter regulations, new approaches that are green, low-carbon, and equitable are in the driving seat. Agriculture, a key industry less sprinkled with tech stardust than others, is now accumulating resources from real estate, internet, and venture capital investors.

Online shopping company Pinduoduo is already heavily invested in agritech. In August 2021, it established a “10 Billion Agriculture Initiative” to support groundbreaking research in the industry. Alibaba and JD.com also have ambitious plans in agricultural technology and are increasingly involved in the agricultural industry chain. Douyin, TikTok’s Chinese sibling, encourages farmers across the country to livestream the sale of agricultural products.

Compared with other advanced economies, agriculture in China is mainly still a small farm business. There is plenty of room to improve agriculture’s grasp of marketization, technology, and economies of scale. But what is really behind the enthusiasm of China’s internet giants to enter the industry?

Policy orientated: rural revitalization

While many industries are approaching competitive saturation in China, farming is still a “blue ocean” open to innovation. Long returns on investment and low levels of centralization in the industry may put investors off, but agriculture is a promising industry that chimes with the country’s theme of “common prosperity,” as well as on national targets on carbon peaking and neutrality. With diverse players ranging from global companies to privately owned small businesses and self-employed workers, agriculture is suitable for broad participation.

In 2022, the Ministry of Agriculture and Rural Affairs proposed, in light of a campaign to promote rural revitalization, a focus on building a number of key industry chains and model counties that would showcase advanced production of staple foods and specialty goods. These are all part of the long-term plan for China to modernize its vast rural areas.

Professor Li Ganghua, a doctoral supervisor at Nanjing Agricultural University, has presided over and participated in many national-level projects. In his opinion, the country has two priorities in agriculture: food security and a clean ecology. Agriculture may well give long-term and slow returns, but each crop has its own characteristics. Rice, which is controlled by the state, is a universal crop with stable prices and yields. High-tech vegetable growing is a labor-intensive industry in which yields have increased several times over the past decade while prices have fluctuated widely, impacted by numerous factors.

Apart from aligning themselves with the Chinese government’s development goal, Chinese tech giants are also looking into agriculture for potential untapped growth. Gao Kangping, editor-in-chief of the agricultural service and news platform VCearth.com, believes that in addition to fulfilling social responsibilities, internet companies entering farming are motivated by technology spillover and market development. “Technology in major companies is relatively mature and digital technology is ready to help farm products and rural scenarios, both in hardware and services,” Gao says. “First- and second-tier markets are saturated, but rural market penetration remains low, and there is a lot of space for development. Getting into the industry early will likely bring benefits.”

Leveraging e-commerce to assist farmers

E-commerce promotional events are the mode most used by internet giants to support agricultural sales, and they’ve brought billions of consumers to participating farmers, driving prosperity.

E-commerce shopping festivals in June (6.18 festival) and November (Singles Day festival) support farmers and small enterprises in achieving multi-dimensional benefits. Last year’s Singles Day shopping festival saw JD.com launch a drive to promote 300,000 high-quality agricultural specialties from 2,000 localities and industrial zones across the country. Alibaba’s Tmall issued a “buying one more agricultural product” initiative, urging sellers to put an agricultural product on the shelf of every livestream. Pinduoduo directed online traffic to high-tech agricultural products, subsidizing some of them as part of its 10 Billion Agriculture Initiative.

Besides national shopping festivals, the platforms have also launched farming-specific events. September’s China Farmers Harvest Festival was the first such event established at the national level specifically for farmers. E-commerce companies now all have their own versions of promotional events to support farmers, such as JD.com’s Shopping Festival of Agricultural Specialties, Douyin’s Rich Field Harvest Season, Alibaba’s Hot Land Harvest Season, and Pinduoduo’s Golden Autumn Consumer Season (all our translations). This has enabled each to play to its core strengths, and help sell more farm products and grow the industry.

VCearth’s editor-in-chief Gao Kangping is optimistic that the strategy will work. “Creating festivals is how internet companies gather online traffic and marketing resources and use them efficiently. This is good for brands, platforms, and farmers.”

Medium-term strategies

As listed companies, China’s internet giants need to make money for their shareholders. Participating in agriculture is not only a question of social responsibilities but also one of returns. The capital markets will have serious doubts if long-term financial prospects are bleak.

In a recent conference call, a Credit Suisse analyst asked about the impact of the company’s agricultural development strategy on Pinduoduo’s financial statements and the latest developments of the 10 Billion Agricultural Initiative. Chairman and CEO Chen Lei told the bank that agriculture was part of the company’s long-term strategy, and although it was still in its infancy, “we already see a lot of areas to create value.” The company plans to improve product circulation efficiency through technology and help bring more agricultural research products to the market.

Internet giants have a medium-term strategy for the industry, editor Gao says. He explains that their logic and market plans are relatively certain for the next five to ten years, although the measures firms plan to take differ according to the product, service, and capabilities of each company. “In general, they follow their core industry and engage in a moderate extension of the industrial chain.”

Gao thinks internet companies have “three main advantages,” based on his interactions with Alibaba, Tencent, JD, Pinduoduo and other firms making agriculture moves. First, organizational management. As a talent-intensive industry, organization, goal achievement, and execution are much better than in traditional agricultural companies. Second, most internet companies have user numbers in the billions when combining their various products, as well as the technology to solve complex problems. With more understanding of traditional agriculture, these large companies will make for powerful players in the sector. Third, they have the resources — brands, traffic, channels, and capital — that can be leveraged to agriculture’s advantage when needed.

Pinduoduo is one of the most heavily invested and committed internet companies in the agricultural field. This is demonstrated by chairman and CEO Chen Lei’s focus when answering questions at finance meetings. He constantly reminds observers that agriculture is a major part of the platform’s long-term strategy. Some foreign investors already see Pinduoduo as an agriculture-tech enterprise. As for Alibaba and JD.com, their investment in agriculture is in the balance, along with social responsibility issues such as supporting the real economy and carbon neutrality.

Technology companies that get involved in agriculture tend to set up similar initiatives. They help with e-commerce, empower supply chains, engage in technological research and development, and carry out personnel training. As they delve deeper into the agricultural industry chain, they work more extensively with local governments, agricultural universities, and international food and agriculture organizations.

In addition, companies have distinctive projects based on their own business advantages, such as Pinduoduo’s new brand plan, Alibaba’s Red Soil Plan, Douyin’s Rich Domain Plan, and JD.com’s March to Rich Plan.

JD.com launched its March to Rich Plan in October 2020, with the aim of establishing a modernized circulation system with a smart supply chain, to encourage high-quality agricultural products and upgrade consumption habits. The plan vowed to drive RMB 1 trillion output value in rural areas in China in three years. As of August 2022, more than RMB 620 billion worth of goods were sold. Millions of farmers benefited as their income shot up. The plan even developed brands in cooperation with local authorities. For example, JD worked with the local government in Suqian in eastern China’s Jiangsu province to incubate the Suqian king crab brand, which was featured on the annual Spring Festival Gala TV show, becoming an overnight hit.

Known for its low prices, Pinduoduo is now also getting a name in agriculture. It reaches deep into the source of the agricultural supply chain, helping sell more agricultural products, while meeting consumer needs. Moreover, it has gotten investors interested. Pinduoduo launched its new brand plan in 2018 to help small companies meet demand via the platform at low cost. Pinduoduo also helped cultivate new brands in step with producers. The company has said it will carry on with this model, expanding to more regions, and incubating up to 500 brands across the agricultural supply chain.

In May 2021, Alibaba upgraded its poverty relief fund to the Red Soil Plan for revitalizing rural areas in terms of technology, industry, and talent. In its 2021 ESG Report, Chairman and CEO Daniel Zhang explained how Alibaba’s investment and exploration would help rural development. Talent development and capacity building were to be a core focus. Alibaba planned to station senior digital managers across the countryside, relieving “pain points” that restricted local development by linking local needs with company resources in a way that “reflects our in-depth thinking and full preparation for the complexity and long-term nature of rural revitalization.”

One expert from Wageningen University, who declined to use their name on the record, explained how they saw the role of agricultural talent in rural revitalization and how China differed from foreign agricultural economies. “When studying in the Netherlands, the most impressive thing to me was the number and quality of farmers. They came to study techniques to solve industrial problems related to their family’s greenhouse, for example.”

Digitizing farming

China’s internet giants are exploring ways to use the platform mindset to change traditional models and enter the upstream of the agricultural industry chain, participating in agricultural production and operations, quality control, and the supply chain. Professor Li Ganghua believes that companies entering the agricultural domain each have their own advantages. “The more assets a company has, the more willing it is to participate from production onwards, so that product quality can be better controlled.”

Organized by China Agricultural University and Pinduoduo, the Duoduo Smart Agriculture Competition has benefited from the guidance of the United Nations Food and Agriculture Organization (FAO). The competition gives young researchers a platform to showcase their talents and improve standardization and digitization in the agricultural process. Similarly, Tencent and Wageningen University launched an Autonomous Greenhouses International Challenge, in which teams use AI and Internet of Things (IoT) technology to plant cherry tomatoes remotely.

The unnamed Wageningen University expert focuses on crop growth models and greenhouse automation. They said “the interest of internet companies lies in digital agriculture or unmanned cultivation. Essentially, it is to use machines to farm, make and implement decisions. External companies can empower agricultural practitioners in training machine learning and big data analysis.”

Alibaba’s digital agriculture initiatives have focused on plant cultivation. In 2019, Alibaba integrated the agricultural units of Taobao, Tmall, Hema, Cainiao, and Alibaba Cloud to establish a Digital Agriculture Division. In 2020, it released a Digital Rural Operating System. According to the Alibaba 2022 ESG Report, together with the Chinese Academy of Agricultural Sciences Institute of Crop Sciences (ICS), Alibaba launched a 3T Smart Cultivation platform, digitizing the cultivation process.

Gao Kangping points to digital farming as the most advanced field for agricultural innovation, with smart cultivation and management having reached all parts of the process, giving rise to many applications and best practices. Data collection and processing were two pain points. The application of agricultural sensors and IoT applications remains low, so it is hard to collect systematic, high-quality data. The second area needing improvement is data application and business modeling. Digital agriculture has the most value when applied to reducing costs and increasing efficiency, but this is difficult to quantify, resulting in a lack of stable models and sustainable profitability.

PDD Holdings’ Temu made a big splash with its first-ever Super Bowl commercial on Feb. 12, “Shop Like a Billionaire.” The ad, which aired during the first and third quarters of the game, showcased Temu’s mission to help consumers to live their best lives by offering quality goods at affordable prices. The upbeat jingle in the commercial, with the lyrics “I’m shopping like a billionaire,” emphasized Temu’s focus on making shopping accessible to everyone.

A Temu spokesman explained the decision to run the commercial on arguably the biggest stage in US advertising: “It’s our first time, and we are thrilled to be part of the 2023 Big Game lineup to share Temu’s mission of quality at affordable prices. Through the largest stage possible, we want to share with our consumers that they can shop with a sense of freedom because of the price we offer. ‘Shop Like a Billionaire’ is no longer a dream because of Temu.”

The Super Bowl is one of the biggest events in the United States, not just in terms of sports but also as a cultural touchstone. Each year, millions of viewers tune in to watch the game, and the advertisements that air during the event are some of the most highly anticipated and discussed. The Super Bowl is thus an opportunity for companies to reach a massive audience and make a big impact.

To celebrate its Super Bowl debut, Temu is also holding a $10 million “Shake & Cheer” giveaway to show appreciation for its customers and reach out to potential new customers, the first of its kind in the industry.

The Super Bowl debut and $10 million giveaway took place a week after Temu announced its expansion into Canada, with shipping set to begin this month. This will bring its quality, affordable goods to a new market and marks another significant milestone.

The story of Temu has been one of rapid expansion and scaling up. Since its introduction last September by PDD Holdings, Temu has broken records in expanding product offerings (at last count, it had 29 major categories and more than 250 subcategories of merchandise), onboarding merchants, and attracting consumers to download and use its app. Temu has been the top daily downloaded app on major US app stores since late 2022.

Unlike other startups, Temu is backed by a multinational company with abundant funding. Temu’s parent organization, the Nasdaq-listed PDD Holdings Inc., is also behind another successful e-commerce startup, Pinduoduo, growing it from an online fruit distributor to one of the major e-commerce platforms. PDD Holdings’ extensive network of merchants and shipping partners has helped Temu to jumpstart its business in the US and attract quality sellers to list their products on the platform, a crucial first step to attracting customers.

What lies ahead for Temu now that it has advertised at the Super Bowl? The attention from the high-profile event is likely to drive more consumers to try the platform.

Finding new revenue streams outside China became urgent for major Chinese online retailers as Covid control measures and a turbulent domestic regulatory environment hurt economic growth and consumer confidence in the country.

Shein, which started as a small cross-border wedding dress supplier, turned into a unicorn worth $100 billion by April 2022, demonstrating a successful path for other shopping platforms trying to sell outside of China. 

Chinese overseas-focused online shopping apps were a bright spot in a year otherwise characterized by high inflation and weak demand in the world’s major economies. 

Fast fashion giant Shein maintained strong growth despite sustainability, imitation, and labor rights controversies, while the more established Alibaba saw its turnover decline in Europe despite narrowed losses in Southeast Asia. Pinduoduo-backed Temu, seemingly out of nowhere in September, shot to the top of the US app downloading chart by the end of 2022. ByteDance-owned TikTok tried to navigate the same successful path as its sister app Douyin in e-commerce, but with less impressive results in the UK.

Here’s what you need to know about the overseas adventures of Shein, Temu, TikTok Shop, and Alibaba in 2022.

Shein

Shein was the most popular fast-fashion brand worldwide in 2022, according to research conducted by price comparison site money.co.uk, which shows that Shein experienced tremendous global growth over the year. The company reportedly surpassed its full-year 2021 sales of $15.7 billion just midway through 2022 and was expected to have made sales of $24 billion by the end of the year.

In April, Shein received a $100 billion valuation from General Atlantic, Tiger Global Management, and Sequoia Capital China, but as one person who declined to invest in Shein at a roughly 30% discount told Financial Times, the firm may well have been overvalued.

The company’s continued problems over environmental and sustainability issues overshadowed its initial preparations for a possible IPO in the US as soon as 2024, as investors increasingly bet on companies that are more responsible in those areas. Shein became increasingly vocal in its commitment to environmental, social, and governance efforts, planning to eliminate a quarter of emissions by 2030 and pledging $15 million to improve factory standards.

Every day, Shein posts thousands of new items for sale and relies on third-party suppliers in China for its low clothing prices. However, the company has faced controversies over appropriating designs from independent and emerging fashion designers. Shein or its Hong Kong-based parent company Zoetop Business Co., have been named in at least 50 federal lawsuits in the past three years, according to a June report by the Wall Street Journal.

In other moves, Shein opened pop-up stores in multiple major cities worldwide in 2022. Local media reported seeing long queues, Shein fans chasing particular items, and limited shopping time due to limited stock. But Shein said it “remains digital-first,” a Shein spokesperson told TechNode.

The buzz around Shein shows no signs of abating in 2023, and the company seems to be expanding its business model, reportedly exploring a marketplace platform that would enable other merchants to sell directly to customers, in a move to compete more directly with e-commerce giants like Amazon and Alibaba-owned AliExpress.

Temu

Less than four months after its launch, Temu, the cross-border e-commerce platform owned by Pinduoduo, has already shown strong appeal with its big discounts and generous coupons, and for most of the past two months, it has been the most downloaded app in the US. 

Temu’s sales growth rate cannot be underestimated. In October, its average daily sales generated more than $1.5 million, reportedly slightly below internal expectations. Temu reached a peak weekly GMV of over $40 million around Black Friday, with sales topping $10 million in the first week of November, according to data provider Sandalwood.

Temu came to the US with super-low prices when the country’s consumers were facing high inflation. Temu’s China-focused sister app, Pinduoduo, has long relied on low prices to quickly capture market share from established retailers like Alibaba and JD. The platform didn’t respond to TechNode’s question on whether its ultra-low prices were sustainable. While gaining fast popularity, Temu is also facing customer complaints about long delivery times, incorrect orders, and “unresponsive” customer services, according to a report by the Time magazine.

Pinduoduo debuted its 10 billion subsidy campaign – in which the company subsidizes high-volume items down to a competitive price compared to other platforms – during 2019’s June 18 online shopping festival, China’s second-largest annual e-commerce event. The initiative became Pinduoduo’s signature and a regular program after it proved to drive user growth.

This significant subsidy is recorded as “sales and marketing expenses” in its financial reports and has remained above RMB 10 billion per quarter since 2021, reaching RMB 14.05 billion, or 40% of total revenue, in the third quarter of 2022.

The marketing-for-growth strategy has resulted in continued user growth for Pinduoduo, with the company achieving an annual profit for the first time in 2021, six years after its founding.

TikTok Shop

In 2022, TikTok expanded its e-commerce business in Southeast Asia, initially finding success in the region, but facing setbacks in Europe.

According to a report by Chinese online media outlet LatePost, TikTok made more than $1 billion in total sales in the first half of 2022 — equivalent to more than half of the RMB 12 billion GMV goal the company set for its e-commerce business this year.

The sales growth achieved by TikTok was mainly driven by its Southeast Asian markets, especially Indonesia — the largest e-commerce market and economy in the region. TikTok Shop already had tens of thousands of sellers in the country, most of whom were micro, small, and medium-sized enterprises, by November 2022, said Desey Muharlina Bungsu, fashion and category lead of TikTok Shop Indonesia, at a TikTok Shop event in November.

The reception in the UK, its first market in the West, was quite the opposite. Different work cultures, as well as market conditions, exacerbated TikTok Shop’s woes. The Financial Times said TikTok Shop had “struggled to gain traction” in the country, reporting that influencers had dropped out of the scheme.

TikTok’s e-commerce business hit $200 million in monthly GMV in the Indonesian market, while only $24 million in the UK, LatePost reported.

Consumers were more receptive to live commerce in Southeast Asia, which helped TikTok find success in the region, with a survey conducted by market research firm Ipsos revealing that 71% of Indonesian consumers had accessed live commerce events, and 56% had made purchases during such events.

However, Shopee and Alibaba-owned Lazada still dominate most e-commerce markets across Southeast Asia. In Malaysia, Shopee holds 71% of the region’s overall e-commerce web traffic, followed by Lazada at 18% and PGMall at 9%, tech news site Tech Wire Asia said.

TikTok Shop made a quiet test debut in the US in November 2022. The short video platform’s ambitions to push e-commerce business in the US market appeared cautious and low-profile, with no officially confirmed full rollout, and only brands or merchants with an invitation code can sign up.

Meanwhile, it remains to be seen how well American consumers embrace the new shopping feature that enables merchants, brands, and influencers to showcase and sell products directly via in-feed videos.

Alibaba

The Chinese e-commerce giant’s overall performance in international commerce retail in 2022 was muted, with revenues in the first three quarters essentially flat compared to the same period a year earlier, up just 1.6% to RMB 31.15 billion.

According to details revealed in the company’s earnings report for the first three quarters of 2022, Trendy, Alibaba’s shopping platform in Turkey, recorded the most significant growth among all other international retail units, maintaining a growth rate of more than 40% in each of the three quarters. A precise order volume was not disclosed.

In the quarter ending September 2022, Southeast Asia-focused Lazada’s order growth posted its first year-over-year decline in orders in two years, which Alibaba said was largely affected by a lifting of Covid-19 restrictions that lured consumers back to offline channels. The platform saw exponential growth in the January to March period in 2021 as the initial Covid wave forced many people to shop online. Despite a slowdown in growth, Lazada managed to narrow the loss per order by 25% compared to last year.

Alibaba-owned AliExpress recently gained notable success in South Korea, with the app ranked first in terms of downloads in the shopping section in the country’s app store, according to Chinese media outlet The Economic Observer, citing mobile data analytics provider App Annie.

A person in charge of the platform’s Korean market told the media that AliExpress currently has nearly 3 million monthly active users, which covers around 10% of the country’s e-commerce users.

But the tech giant said it faces challenges in Europe amid supply chain and logistics issues resulting from the ongoing Russia-Ukraine conflict. Moreover, the EU’s removal of tax exemptions for cross-border packages under 22 euros also hurt AliExpress’s orders.

Although the Chinese e-commerce giant has been in Europe for more than a decade, AliExpress has captured only a small market share in the region, with 4% in Western Europe at 4% (compared to Amazon’s 20%) while holding 5% in Eastern Europe in 2021, according to Reuters.

PDD Holdings, the owner of the Pinduoduo and Temu e-commerce platforms, reported higher revenue in the third quarter and said it will increase spending on research and development to enhance its core capabilities. The Nasdaq-listed company reported total quarterly revenues of RMB 35.5 billion ($4.99 billion), up 65% from last year, while operating profit was RMB 10.4 billion.

“We need to continue to deepen our value creation, increase our R&D investment to help further improve the supply chain efficiency,” Chen Lei, Chairman and CEO of PDD, said during a Monday earnings call.

In the earnings call, Chen was asked about the progress of Temu — the US online marketplace launched in September. Based in Boston, Temu has sought to differentiate itself in the US e-commerce industry as a destination for value-savvy consumers.

With Temu, the group will “start from the fundamental needs of consumers and apply the operations and supply chain know-how that we have gained over the years, and strive to create our own unique value,” Chen said.

“We also understand the need to constantly experiment and expect the process to be full of challenges. We will be patient and work toward creating long-term value for consumers and our partners,” he added.

Temu advertises that it can offer prices closer to the cost of production because of its access to manufacturers keen to bypass traditional stores and market directly to consumers. Many of these factories produce merchandise to specification for global brand names, while others offer their designs to be relabeled and sold by global brand names.

“Temu has entered the North America market, and it will continue to leverage the operation and supply chain know-how it has accumulated over the past few years to provide long-term value for users,” Goldman Sachs analysts wrote in a research note.

PDD Holdings pioneered the use of the “team purchase” — in which consumers can band together to purchase items at a lower price — to quickly and directly connect demand and supply. The group also incubated nearly 1,000 factory brands since its founding in 2015.

“We have leveraged digital technology to shorten the product development cycle and help manufacturers create products that closely match market needs. This can help manufacturers to build their brands,” Chen said.

Temu may be able to carve out a niche for itself in the competitive US e-commerce industry if it can offer new value-for-money brands to consumers. But it would first have to overcome the lack of brand recognition and earn consumers’ trust as a legitimate and trustworthy e-commerce site.

Online sales during Black Friday, the biggest shopping day in the US, climbed 2.3% to $9.12 billion, Adobe Analytics said on Nov. 26. Consumers mainly spent on electronics, smart-home items, and audio equipment, while toys and sporting goods also performed well. The National Retail Federation, an industry trade group, is forecasting a jump of 6% to 8% over the $890 billion consumers spent online and in stores in November and December of 2021.

To grab a slice of this retail pie, Temu would have to offer something new and better than what’s available in the market. Winning consumers’ trust in the US could open the door for forays into other markets.

“We are still in the early stage of exploration, and we have many areas to improve in terms of the services we provide,” Chen said of the group’s expansion into North America. “The process of learning and optimizing will take time, but I’m certain the experience we gain along the way will be very valuable for our company and our team.”

Pinduoduo’s overseas e-commerce platform Temu has surpassed $1.5 million in average daily gross merchandise value (GMV) after its launching in September, Chinese media outlet 36Kr reported on Thursday. Although the figure fell slightly short of internal expectations, the company remains confident of catching up with or even overtaking rival Shein in the next five years, the report said.

Why it matters: Temu’s goal of reaching total sales of $30 billion in five years highlights its ambition to challenge Chinese overseas fashion retailer Shein. Shein took 14 years to achieve the sales number. 

Details: Temu aims to reach $300-500 million in GMV by year-end, according to 36Kr, citing sources familiar with the matter. The company is also targeting total value of products sold in $3 billion in 2023.

• There are currently around 30,000 merchants on Temu, with 300,000 to 400,000 items being sold in 24 top-level categories. The report cited a Temu employee as saying that the platform is accelerating its attempts to attract more merchants and expanding into more items.
• According to SensorTower, Temu ranked first for downloads in the shopping section of Apple’s App Store in the US on Oct. 17, followed by Amazon Shopping, Shein, Walmart and Fetch Rewards. It currently ranks fifth in the US Apple App Store.
• Instagram and Facebook are Temu’s main customer acquisition channels, with 36Kr reporting that the two platforms both account for 30% of Temu’s traffic. Shein’s cost of customer acquisition on Facebook was around $35 in the first half of 2022, while Temu’s cost was 30% to 40% higher, 36Kr stated.

Context: Pinduoduo’s Temu is regarded as a competitor to Shein, which created a successful business model by selling fast fashion clothing at ultra-low prices through a flexible supply chain. 

• Temu offered substantial discounts to attract new users upon its launch, including 30% off on customers’ first three purchases, free shipping, and even a 40% discount for both people if someone shares a link with a friend. These initiatives have resulted in Temu’s current average loss per order hitting $30, making it difficult to achieve a profit in the short term.
• Temu is also investing heavily in marketing. With an advertising budget of RMB 1 billion ($140 million) in September, Temu’s returns are modest when measured by its average daily GMV. The company has reportedly earmarked more than RMB 7 billion to help push the Temu brand next year.
• While Shein achieved half of its $30 billion annual sales target in the first half of the year, the company’s net profit margin for the period was slightly lower than last year’s 6%. For reference, Uniqlo’s parent company Fast Retailing Co posted a net profit margin of 12.37% in the fiscal year 2022, similar to Zara owner Inditex Group’s figure of 12.1% in the February-July period this year.

Chinese e-commerce company Pinduoduo reported RMB 31.44 billion ($4.69 billion) in revenue in second-quarter earnings, a 36% growth from last year, and far exceeded the expected average of $4.1 billion, compiled by Yahoo Finance. 

The Nasdaq-listed company also saw an impressive 268% growth in its quarterly net income, bringing in RMB 8.9 billion.

Why it matters: The company attributed its good performance to “consumption recovery” in recent months as China refrained from extended and widespread lockdowns. During the earnings call, Pinduoduo said revenue growth came from increases in online marketing services and transaction services and that the growth in profitability is due to a few “short-term” and “one-off” external factors that may not repeat in the future. 

• Known for offering bargaining prices, Pinduoduo has managed to report better-than-expected earnings this quarter compared to its rivals, reflecting a more careful consumer spending sentiment in the current economic environment.

Details: Pinduoduo’s almost three-fold increase in net income in the second quarter is mainly due to the improvement of gross margin and some short-term factors. “So, for the past quarter alone, our profitability was mainly attributable to several external factors, mostly short-term or one-off in nature,” said Vice President Liu Jun.

• Meanwhile, Pinduoduo’s total operating expenses as a percentage of revenue decreased to 47% this quarter, down from 57% in the same period last year. Liu Jun pointed out that many short-term factors, such as project delays and lower business activities, caused such a decrease. “So it is unlikely to continue,” he said.
• It was reported previously that Pinduoduo plans to launch a cross-border e-commerce platform in September, which will first target the United States. “Overseas business is one of the opportunities that we see, we believe that it is a direction that is worth trying out for us,” Lei Chen, chairman and CEO of Pinduoduo, said in the earnings call, adding that the company will not simply repeat what others have done in this field.
• The company’s merchandise sales continued to contract, decreasing 97% from RMB 1.96 billion to RMB 50.7 million. The contraction of the merchandise business, which requires the company to shoulder most of the cost, has improved its gross margin.
• Shares of Pinduoduo surged after the company posted strong results, rising nearly 15% by the stock’s close.

Context: Compared to the two leading Chinese e-commerce giants, Pinduoduo handled the pandemic resurgence relatively well. Alibaba and JD recorded flat revenue and 5.4% growth year-on-year, respectively, in the second quarter, and both had their slowest growth rates in history.

• The Shanghai-based Pinduoduo was one of the few e-commerce companies that managed to continue offering its services during Shanghai’s Covid lockdown from March to June. Its community group-buy service Kuaituantuan played a vital role for Shanghai residents in solving lockdown food shortages. 

Pindudouo is reportedly planning to launch a cross-border platform designed to connect Chinese and overseas suppliers with global customers as the Chinese e-commerce giant expands its approach to take on rival Shein.

Why it matters: The move highlights a growing trend of Chinese technology companies considering going global, partly accelerated by China’s regulatory crackdown on the tech sector as well as intense competition and weakening consumption in the domestic market.

Details: Pinduoduo is currently seeking sellers for its new cross-border online marketplace, which the company aims to make available first in the US in September, Chinese media outlet LatePost reported on Wednesday, citing people familiar with the matter.

• The online retailer is offering registration and referral fee waivers for small and medium-sized merchants in a bid to attract them to sell on its platform, the report said. It is also providing various fulfillment services such as picking products, packing orders, and arranging shipments once the goods are transported to its warehouses in China.
• Aiming to differentiate itself from Shein, which primarily focuses on fast fashion, beauty, and lifestyle products, Pinduoduo’s new platform will be more of a general marketplace for low-priced household products and other daily necessities, where the company has experience and a competitive advantage.
• Pinduoduo has set up a team of 80 employees in the southern city of Panyu, where Shein is headquartered, and chief operating officer Gu Pingping is leading the project, according to the report.
• Pinduoduo did not respond to TechNode’s request for comment on Thursday. 

Context: Shein’s success selling clothing products at super-cheap prices has prompted more Chinese tech firms to follow its model, while existing major players are ratcheting up efforts to maintain their lead in the market.

• Alibaba was considering the expansion of its Southeast Asian arm, Lazada, into the European market to boost overseas growth, Reuters reported in April.
• JD.com partnered with Canadian e-commerce company Shopify in January to allow Chinese merchants to sell products to consumers on the latter’s platform, TechCrunch reported.
• TikTok parent company Bytedance launched a standalone shopping app called “Fanno” late last year in several European countries, including France, Germany, and Britain, SCMP reported.
• Driven by interest in its summer sales, Shein became the most downloaded e-commerce app in the US with 6.8 million downloads during the second quarter of 2022, surpassing those of Amazon for the first time.
• Pinduoduo’s active buyer accounts increased 10% to 868.7 million last year, lower than analysts’ expectations of 883.3 million, according to a Bloomberg report.

Pinduoduo is seeking offline retailers to join its platform as the e-commerce titan tries to expand into on-demand retail businesses, local media outlet Beijing Business Today reported on Monday.

Why it matters: As a latecomer to the game, Pinduoduo enters a crowded sector that already includes established incumbents such as Meituan, Ele.me, and JD Daojia.

• Shanghai’s Covid outbreak since March has prompted companies to rethink the importance of last-mile delivery capabilities, which is a weak point for Pinduoduo and is plaguing many major online grocers to deliver on time during the outbreak. At the usual time, on-demand retailers offer 30-minute or one-hour delivery as a standard service, but such promises became unsustainable during lockdowns.

READ MORE: The Big Sell | Will Shanghai lockdown change the game for community group buying?

Details: Pinduoduo is recruiting local offline retailers, front-end warehouse operators, wholesalers, and couriers in China’s first-tier cities of Shanghai, Beijing, and Shenzhen.

• For starters, the platform will focus on fruits, especially more perishable ones like watermelon and durian, a poster obtained by Beijing Business Daily reads. On-demand retail for more product categories such as gifts, flowers, and cakes is also being tested, the report added.
• Pinduoduo expects potential fruit retail partners to have the delivery capabilities to fulfill intra-city orders they receive through the e-commerce app within 24 hours. The delivery timeline is currently expanded to 48 hours during the pilot period.
• In other words, the platform will not take care of delivery for offline retailers like its rivals Meituan and Ele.me. Pinduoduo will only serve as a central platform for the retailing partners to access users. Pinduoduo claimed to have 868.7 million annual active users in 2021.
• Pinduoduo assured retailers in the poster that the delivery won’t be challenging to handle because they will divide the market into small delivery areas to the level of city districts and counties to make the business feasible for retailers.
• Pinduoduo didn’t respond to TechNode inquiries on the matter when contacted Wednesday afternoon.

Context: Pinduoduo has been adopting an asset-light approach to e-commerce since its establishment in 2015. While pushing to help more farmers access a wider market, the company has gradually moved to invest in logistics, warehouses, and other infrastructure since 2020.

• In February, Pinduoduo tested a pickup service to receive and send parcels on users’ behalf through partnerships with major couriers to expand its delivery capabilities. But the service was soon suspended because the firm hadn’t filed for a license to run a delivery business in China.
• The market scale of China’s on-demand retail market is expected to reach RMB 900 billion ($140 billion) by 2024, data from research agency iResearch shows.
• Nearly all of the major e-commerce companies have tapped into the market. The annual transacting users on Meituan’s on-demand retail service Instashoping reached around 230 million in 2021. Last year, JD launched a one-hour delivery service in partnership with Dada Group, the company behind JD Daojia and backed by JD and Walmart. Alibaba operates a range of services in the sector from Tmall Supermarket to Ele.me and Taoxianda. And in January, ByteDances’s Douyin piloted a logistics service called Yinzunda.

In locked-down Shanghai, Zhang Chen was standing by her community gate, waiting to pick up apples to be delivered to her apartment compound. She reveled in her luck at striking the apple deal because fruit had become a rare treat in the metropolis locked down since late March in response to a new Covid-19 outbreak. The city authorities prioritize delivering essential foods like rice and vegetables to the city’s 25 million residents. 

A neighbor who bought 15 kilograms of apples through a community group’s bulk buy last week was willing to split the order with her, saving Zhang days of waiting in this challenging time. 

Some Shanghainese have been locked in their homes since early March, when the city was only doing partial lockdowns. Shanghai began a two-stage city-wide lockdown on March 28 and promised to reopen by April 5, which never happened. The lockdown has been extended, and as of the time of writing, most of the city is still under lockdown. The unexpected long locking period has left many residents unprepared and scrambling to find food and supplies.  

At 10 in the evening, the little square in front of Zhang’s community gate was crowded with other people like her, either collecting their deliveries or waiting for their food to arrive. Meanwhile, more residents were clinging to their phones at home, waiting for their group buying heads to tip them off the arrival of their purchases. Delivery times have become unpredictable as truck drivers are asked to show negative Covid test results certificates to deliver goods across the city.

Zhang’s phone rang. Her neighbor called to confirm her identity because they were only connected on WeChat and had never met before. It turned out the neighbor was a casually-dressed woman standing right next to her. After collecting a big box of apples, the pair split the apples by counting out half for each because no one had a scale. Neither woman cared about who got slightly more weight in these unprecedented conditions. 

“I already bought some apples last week. But they disappear so quickly because I have a big family to support. My parents are under lockdown with us to take care of the kids,” Zhang said.

For millions stuck in Shanghai like Zhang, purchasing daily necessities has become a hassle over the month as they have been forced to stay home. During the lockdowns, reliable delivery platforms have become lifelines for people living in the financial hub, China’s second-largest city with a 25 million population. 

As other online grocery delivery services struggle to keep up with the city’s spiking online orders, community group buying has revived, thanks to its flexibility. But analysts say that a regional resurgence of the service won’t turn the tide for the cooling sector.

It’s a ‘last-mile’ problem

Shanghai’s current food shortage problem is more about how to deliver food to residents rather than a lack of national food reserves, according to the city authorities. 

Shanghai’s deputy mayor Chen Tong said at an April 7 press conference that the city had sufficient food reserves to feed locked-in residents for the foreseeable future.  Chen pointed out that the current problem lies in the lack of last-mile delivery forces, the couriers who complete the last leg of a delivery process. 

“The battle against the epidemic has affected the quality of life for Shanghai residents. There are cases when food supplies can’t be delivered to residents’ homes. We are trying our best to address the problem,” he said.

As part of the municipality’s pandemic fighting initiative, all major grocery delivery companies, like Meituan, Alibaba’s Freshippo, and Dingdong Maicai, are attempting to keep up with the rocketing online demand across categories from vegetables and rice to fruits. 

Different business models, different solutions

China’s decade-old grocery delivery industry consists of players operating under various business models. For example, self-operated platforms like Dingdong Maicai and huge grocery retailer marketplaces such as JD Daojia and Meituan.

The various business models mean the platforms are confronting locked-down circumstances differently.

The sudden surge in orders soon overloaded nearly all mainstream grocery delivery platforms, including Alibaba’s Freshippo and Ele.me, Meituan, Dingdong Maicai, JD, and MissFresh.

These services usually rely on powerful teams for a promised 30-minute delivery for individual customers, but operations have become strained this time when the labor shortage is a critical issue.

Many users of services like Dingdong set their alarm clocks for early morning to scramble for the limited number of orders couriers can deliver that day. For example, Zhang Menglin, a mother of a six-year-old, tried for a few days only to find the websites and apps repeatedly crashed due to soaring demand. After an experience similar to Zhang’s, TehNode reporter Ward Zhou resorted to using an app that repeatedly clicks the “buy” button, thus upping his chances of placing an order.

Instead of giving away hefty cash donations for disaster alleviation, Chinese tech majors have resorted to a more practical approach to address Shanghai’s delivery labor shortage: providing more hands. 

Grocery platforms and supermarket chains, including Ele.me, JD, Dingdong Maicai, and Yonghui pledged in early April to move more than 6,000 staff to the Shanghai by April 11 while also leveraging autonomous delivery vehicles, according to a rough count by local media outlet Awtmt. 

Of the total, the Alibaba-affiliated services Ele.me, RT-Mart, Freshippo, and Cainiao account for a combined 3,000 workers, mainly filling delivery and sorting positions. 

Meituan launched urgent deliveries and vowed to move at least 1,000 delivery workers to the city after its vice president Mao Fanglie made a rare public appearance at Shanghai’s April 7 government briefing. 

Pinduoduo, WeChat benefit from community group-buying surge 

In normal times, community group-buying platforms operate by selling products in bulk through group heads, typically stay-at-home mothers or local store owners who collect orders from residents in nearby housing compounds. The platform’s couriers drop off products at community stores or the compounds’ gates for consumers to pick up overnight. 

This model has emerged as a more reliable food source for millions of people in Shanghai, compared with the above-mentioned platforms catering to individuals. On the one hand, the models’ bulk sale approach allows grocery apps to make the best use of their available delivery forces. On the other hand, customers are much more tolerant of the less predictable delivery times. 

“I have given up on grocery delivery apps like Dingdong after multiple failed tries and depend solely on community groups buying my food now,” said Wang Jia, a 40-year-old Shanghainese. 

After being locked down for three weeks in Shanghai, the reporter of this article tried to order bread from JD on April 9. Instead of its standard same-day delivery, the retailer’s app showed the bread would arrive in two weeks. In frustration, the reporter turned to her neighborhood’s group buying head, which delivered two loaves of bread in two days. She was thrilled and grateful to get bread for her six-year-old daughter’s breakfast sandwich. 

Besides the veteran group heads already in the business before the outbreak, novices are becoming group-buying leaders, both to meet their own needs and to help neighbors. 

Given that most group heads communicate and promote their products through various WeChat groups, WeChat-based mini-programs gained popularity among group-buying participants.  They are Pinduoduo’s community group buying service Kuaituantuan, Tencent’s e-commerce feature Weidian, and WeChat Jielong.

Platforms like Freshippo and Carrefour have moved to a wholesale model too, requiring a minimum price or number of orders to support delivery. That’s similar to the community group buying model, except that unpaid volunteers, who are locked-down residents themselves,  are functioning in the group heads’ intermediary role. E-commerce platform Pinduoduo also rolled out wholesale services in the city, encouraging individuals to resell the goods to their neighbors.

A comeback for community group buying?

The inflow of venture capital and internet giants plays a bigger role than real consumer demands in driving the rise and fall of the community group-buying industry.

—Zhang Yi, consulting CEO and chief analyst at iiMedia Research

However, looking beyond its current boom in Shanghai, the dust had already settled for China’s grocery community group-buying vertical after a crazy ride in the past two years. High regulatory fines and cash-burning battles put the sector on the brakes. As the market tide ebbs, the once red-hot sector has become an area where tech giants have enacted deep headcount counts amid industry-wide layoffs. 

Covid-driven demand will become an opportunity for the broader online grocery shopping industry, and the trend will live on after this wave of epidemics subsides. But it won’t be a game-changer for the failing community group-buying vertical, according to Echo Gong, a Shanghai-based analyst with global research agency Coresight. 

Data from market intelligence agency Emarket shows that online food and vegetable sales reached an annual growth rate of 61.4% in 2020 when the coronavirus hit China the hardest. The growth rate slowed down to 24.6% in 2021, but the sector nonetheless was still growing. “Shanghai’s epidemic will reinforce the use of online grocery shopping for certain groups, such as the elderly who didn’t use the platforms before,” Gong told TechNode.

But it’s a different case for the community group-buy vertical. “Most of the group leaders who initiated group-buy are motivated to help each other during difficult times. Most of the parties engaged in the group-buys now, either group heads, volunteers, vegetable suppliers, or catering services providers, are not profit-driven. After the pandemic, it will be difficult to keep them motivated without incentives,” she said.

Long-term drivers: VC, tech giants

“The inflow of venture capital and internet giants plays a bigger role than real consumer demands in driving the rise and fall of the community group-buying industry,” said Zhang Yi, consulting CEO and chief analyst at iiMedia Research, echoing Gong’s opinion. 

Shanghai’s Covid outbreak highlighted the importance of last-mile delivery capabilities. Zhang said he’s bullish on companies with mature inter-city delivery forces like Meituan and JD, as well as Freshippo, all of which have strong offline presences.

“At the end of the day, the industry threshold and winning factor for a platform is the ability to ship products to customers in an efficient and timely manner,” said Zhang.

JD becomes the latest Chinese tech majors to begin wide-scale layoffs. Jingxi, the e-commerce giant’s bargain commerce and community group buy business unit, is seeing a cut of 10% to 15%, Chinese media outlet 36Kr reported Tuesday, citing unnamed sources familiar with the matter.

Why it matters: JD’s layoff reflects the ongoing economic downturn in China and a waning interest in the country’s community group buy sector. 

• Jingxi was JD’s effort to get into the bargain commerce market that has traditionally been dominated by Pinduoduo. After the success of Pinduoduo, major e-commerce players  Alibaba, Meituan and JD have launched their own competing products. 
• Launched on Jan. 1, 2021, JD’s Jingxi Pinpin failed to compete with other rivals. In 4, the platform had just 8 million daily orders, only one-fifth of Pinduoduo’s Duoduo Maicai. 

Details: JD’s layoff will affect at least 400 to 600 staff in the Jingxin unit, according to sources quoted by 36Kr. Jingxi employs about 4,000 staff.

• Jingxi consists four main teams: Jingxi focuses on bargain deals, Jingxi Pinpin on community group buy, Jingxida on logistics, and Xintonglu on enterprise businesses.  The reported layoff is mainly focused on Jingxi Pinpin. JD’s other core business units, like customer electronics and retail e-commerce, are largely safe from the cuts.
• JD’s 2021 financial reports noted that losses from new businesses, including Jingxi, expanded by 160% quarterly to RMB 3.2 million ($505,921) in Q4 of 2021.

Context: JD joins a growing list of Chinese tech giants cutting staff to stay competitive in an economic slowdown. Since late last year, Alibaba, Baidu, ByteDance, Kuaishou, and Tencent have all begun to lay off people. 

• Alibaba has started to make major cuts in its local food and grocery delivery business this year. 
• Last week, Tencent was reported to be cutting 20% of its workforce. 
• Baidu has also begun a series of layoffs, with the first round beginning in last December, affecting employees in the company’s gaming, streaming, education, and mobile environment sectors. In January, Baidu further downsized 10-15%, Chinese media reported.

Despite their various fields and interests, members of the TechNode community agree: The theme for China tech 2021 was regulations. 

Sometimes the regulations came in waves. Sometimes the rules were new, sometimes just newly enforced. There were so many rules that, like a chronic state of pandemic alertness, regulation fatigue set in by year’s end.

There were industry-rattling rules, like the bans on crypto mining and trading in May, soon followed by the data security review that forced Didi’s US delisting. And while we were still digesting that, there was the sweeping ban on the most profitable edtech services. Mostly, though, there were fines. Tech giants like Alibaba, Meituan, and Pinduoduo faced fines large (for anti-competitive practices) and small (for illegal information releases).  

Next came the drastic limits imposed on minors’ playing hours, which could gnaw into game-makers’ profits and dent the world’s largest population of players. Meanwhile, even tech companies never previously enmeshed with virtual or augmented worlds claimed to be ready to soar into the metaverse in 2022. Already making great—frankly, surprising—advances in 2021 were several homegrown silicon chip designers and a handful of the slew of electric carmakers.

In the wake of news of tragic employee deaths and abusive working conditions, the grueling hours demanded by Big Tech got renewed official and unofficial attention in 2021 as well. It turns out that requiring employees to work six days a week, from 9 a.m. to 9 p.m–the so-called 996 workweek–violates labor laws, according to a statement the Supreme People’s Court issued in August. 

Some of the biggest companies quickly declared that they were abolishing weekend work. 

So are tech workers shouldering a lighter workload now? Is Big Tech assuming a kinder, more humane face?  TechNode’s friends and contributors are once again united and …. skeptical. On the upside, at least the ten richest tech moguls, notably PInduoduo founder Colin Huang, got whacked in their pocketbooks this year. 

Wishing you a 2022 minus 996. 

This year’s most surprising development was Didi’s forced delisting, justified by vague references to national security. It’s still unclear on what basis the Cyberspace Administration of China (CAC) believes foreign listings may result in: (1) Chinese firms transferring onshore data overseas or (2) Chinese firms being compelled to hand over data to foreign entities. My best guess is CAC believes there’s a possibility sensitive data may be requested as part of an investigation under the US Foreign Corrupt Practices Act. Whether well-founded or ill-founded, this fear has led to an overhaul of foreign listings.  

—Michael Norris, research and strategy lead, AgencyChina

The regulatory crackdown is a big one, although a long time coming. I think at this point we have become a bit desensitized to the news. I remember just how shocking the Ant Group fiasco was last year. Everyone was talking about it. Now, with everything going on in gaming, education, content, livestreaming, fintech, crypto and more, it seems like a drop in the bucket. During the latest crypto crackdown, I was surprised to see just how much mining was done in government facilities, or under government supervision, despite the May announcement to shut down the industry. 

—Eliza Gkritsi, Asia mining reporter, CoinDesk

In the semiconductor space, it is how strong industry has aligned with the government. In almost every WeChat group I am in, engineers seem to be one hundred percent behind China’s self-sufficiency goals. Whereas before they may have gone along with such drives begrudgingly, there now seems to be a true desire to work together to achieve these goals. One example where this has been a success to some extent is the silicon IP (intellectual property) space where China—through self-development, tech transfer and other means—has become much more self-reliant in CPU, interface, and GPU IP.

—Stewart Randall, director of operations, Intralink

What do you fear or hope for in 2022?

I expect China’s commercial space industry to achieve more encouraging results in 2022. As novelist Liu Cixin wrote in “The Three-Body Problem”: “The future of mankind is either to move towards interstellar civilization, or to indulge in the virtual world of VR all the year round.” Although metaverse hype swept the global tech industry in 2021, it was also fascinating that we witnessed the successful launch of NASA’s James Webb Space Telescope this past Christmas Day. Personally, I hope Chinese space companies accelerate the steps of mankind to spread themselves beyond earth.

—Lu Guanghao, director, Befor Capital

I hope industry players can work together to create a unified standard for intelligent driving functionalities when it comes to the names, definitions, and driving scenarios, among other things. In the past year, we have seen self-driving companies and electric vehicle makers hyped up automated driving technologies as a unique selling point of their products and services due to the surging demand from customers. 

However, it takes users a great amount of additional time and effort to familiarize themselves with different vehicle systems. Also, as the technology is advancing, there are no industry-wide rules and safety requirements governing the development of automated driving capabilities. 

—Liu Guoqing, founder and CEO of automotive software developer Minieye

My hope for 2022 is that our collective understanding of China’s regulatory activities steps up a gear. In 2021, too many were suckered by the temptation to ascribe a single, all-encompassing narrative to China’s regulatory thrusts. Early uncritical anchoring to a particular analytical frame left market participants blindsided by regulation that didn’t fit neatly within their mental model. If we are to have an analytical frame equipped to consider and make prudent investment decisions within the shifting sands of China’s regulatory landscape—particularly its views on competition and market irregularities—we must do better than “Well, it’s all about taking down Alibaba” or “Well, it’s all about taming the private sector” or “Well, it’s all about semiconductors” or “Well, it’s all about reducing inequality.”

—Michael Norris, research and strategy lead, AgencyChina

US efforts to decouple China from the global economy are meant to weaken and isolate China’s technology sectors to some extent, but technology really does not follow any political boundaries. For Chinese enterprises, a key initiative would be to better utilize the research and development resources from the rest of the world and be more engaged in the global innovation community. 

Meanwhile, China will grow more innovative and more resilient in its long-term development of advanced technologies and the future looks very rosy for those startups in frontier sectors in the next several years. With the launch of the Beijing Stock Exchange in November, innovative Chinese startups will have more access to raise capital at home, while more Chinese-born scientists are expected to bring their expertise home from abroad. 

—Lu Shengyun, former partner with Simon-Kucher & Partners

I fear VCs that have been surprisingly patient to date will want to see returns on their semiconductor investments here in China towards the end of 2022. A chip takes 18 months to two years to design and get to market, so if they are not seeing returns–if these chips do not sell, miss deadlines, or struggle with performance or with bugs–then we could see some semiconductor startups fail. There is a lot of competition out there: over 20,000 chip-related companies and now over 2,800 chip design companies in China. Many companies are on thin margins, if any at all.

—Stewart Randall, director of operations, Intralink

Are Chinese tech giants becoming more humane workplaces? Or more socially responsible neighbors?

As we approach the one-year anniversary of the tragic deaths of two Pinduoduo employees in the same week, I don’t believe China’s tech giants have turned the page on excessive work hours. The collaborative “Worker Lives Matter” spreadsheet, originally published in October, suggests that overwork is commonplace and confirms Pinduoduo employees have the most grueling work hours among the tech giants.

—Michael Norris, research and strategy lead, AgencyChina

They certainly want to make it look that way, but to what extent it is an accurate depiction of reality, I don’t know. I am worried that better work-life balance might actually translate into layoffs. 

—Eliza Gkritsi, Asia mining reporter, CoinDesk

Although the “996” work schedule has been banned, it does not seem that the workload on employees has been reduced. Therefore, this particular policy has meant a reduced salary (as no longer paid double on Sundays), and yet a similar total number of working hours. Hopefully, this is simply the “adjustment period” and the companies will adapt to a non-overtime work culture. But for now, there has not been a great shift. 

—Capucine Cogne, China tech-watcher in Chengdu

As we’ve seen, the Chinese government brought two big policy shifts in the country’s tech space over the past year: strengthened policy support to build its own core technology, as well as the tightened regulation against internet giants. I believe “tech for good” will be the main theme in the industry for a while in the future.

—Lu Guanghao, director, Befor Capital

Chinese tech giants like Alibaba and Tencent have long had the reputation of being some of the most active investors in China. They are behind a host of unicorns, from ride-hailing giant Didi to edtech platform Yuanfudao.

Now, they’re looking inwards, pledging to reinvest the money they make into new ventures ranging from supply chain digitization and grocery delivery, even if it means hammering their profits.

Alibaba CEO Daniel Zhang said in an earnings call in May that the company will invest all its incremental profits into core strategic areas. These funds include the difference between the company’s current year profits and those of the previous year. 

Tencent has made a similar pledge, aiming to sharply increase investments this year. Meanwhile, Pinduoduo said it will boost investments in logistics infrastructure and agricultural science.

In some cases, these pledges represent up to 15% of these companies’ annual incomes, according to analysts.

“While we don’t expect to see significant [returns] in the short term, we believe these investments will create sustainable long term profit growth for investors,” Esme Pau, analyst at China Tonghai Securities, told TechNode. 

Bottom line: Chinese tech majors Alibaba, Tencent, and Pinduoduo have all promised to up their investments as their users change behavior in the wake of the pandemic and stricter regulations weigh on tech firms’ businesses.

Tech investment hikes

Alibaba will invest all of its “incremental profits” in 2022, after a hefty $2.8 billion antitrust fine triggered its first quarterly loss in nine years. The company didn’t specify an amount, but Bloomberg has estimated that the total amount could reach RMB 25.8 billion this year, or 15% of the company’s RMB 172 billion non-GAAP net income for 2021 fiscal year.

• Non-GAAP figures usually exclude irregular or non-cash expenses to smooth out high earnings volatility. In Alibaba’s case, this figure excludes the $2.8 billion fine, which is reflected in the company’s RMB 142.3 billion net income for 2021.
• Alibaba has promised that its investments will be “highly targeted and disciplined,” given the potential size of its spending spree.
• The company’s investment priorities include technology innovation, support programs for merchants to lower their operating costs, improving user acquisition and user experience, upgrading merchandising and supply chain capabilities, and new business initiatives, according to CEO Daniel Zhang.

Focused spending: A source with knowledge of the matter told TechNode that livestreaming, Alibaba’s Pinduoduo competitor Taobao Deal, and Cainiao Logistics will be the focus areas of these investments.

• Funding for Alibaba’s livestreaming business will be focused on training livestreamers, helping more merchants use its livestreaming services, and improving livestreaming technology, the source added.
• Livestream is an important segment for the company. Alibaba’s Taobao Live, China’s largest player (in Chinese) in e-commerce livestreaming, recorded a gross merchandise volume of RMB 500 billion in fiscal year 2021.
• Taobao Deal, which offers value-for-money products for price-conscious consumers, is working to integrate suppliers from its wholesale e-commerce platform 1688.com to boost Taobao Deal offerings.
• Investments in Alibaba’s logistics arm Cainiao will be used to improve the company’s cross-border delivery capabilities by building and upgrading its global logistics infrastructure, the source said.

Tencent will plow a larger portion of its incremental profits this year into investments, as China’s internet industry undergoes “a heavy investment phase,” the company said in its first-quarter earnings report. 

• The social media and gaming giant also announced a RMB 50 billion fund that will invest in areas such as basic science, education innovation, carbon neutrality, and food provision, the company said.
• In an earnings call with analysts in April, Tencent President Martin Lau said the company would invest up to 20% of its incremental profits. 
• It’s unclear how much Tencent’s incremental profit will be this year. The company’s profit for 2020 was RMB 127 billion, with an incremental profit of RMB 29.4 billion. That would amount to around RMB 5.9 billion in investment.
• Tencent said it would channel the funds into enterprise services, gaming, and short-form video apps, largely in line with the company’s past investment strategy.
• As of the end of May, gaming made up around 17% of Tencent’s past investments while business services totaled 13.3%, according to Itjuzi (in Chinese), which tracks China’s venture capital market.

Pinduoduo, which claims to have a larger user base than Alibaba, plans to increase spending in areas along the agriculture industrial chain, where typically digitalization remains low. At the same time, the company is narrowing in on logistics, an area requiring massive, long-term investments. 

• The company has not specified the amount it intends to invest.
• Nevertheless, Pinduoduo plans to boost spending on logistics infrastructure ranging from cold-chain transport to warehousing and delivery. 
• For a company like Pinduoduo, logistics is even more critical given its increasing focus on perishable agricultural products. 
• While continuing to fund its grocery pick-up business Duo Duo Maicai, Pinduoduo will “invest heavily” in logistics infrastructure technology, said Tony Ma, vice president of finance and the company’s de facto chief financial officer. 
• Pinduoduo recorded RMB 2.9 billion in net losses during the March quarter. The company had RMB 83.4 billion in cash, cash equivalents, and short-term investments as of March.

What about the others?

We haven’t seen the other tech majors making such a fuss about investment, but here’s what we know.

Meituan: In March, Meituan warned about losses due to heavy investment in its community group buy service Meituan Select, which CEO Wang Xing called the company’s “best opportunity in five years.” 

• Retail, especially the community group buy business, continued to be Meituan’s largest investment area, the company said after reporting a RMB 3.9 billion net loss in the first quarter of this year.

JD: The company didn’t say much in its recent filings or in response to TechNode’s queries. JD continues to invest in new opportunities in cooperation with suppliers and brands, Chief Financial Officer Sidney Huang said in the company’s first-quarter earnings call. 

The effects

Hit to profits: Huge investment promises will mean less short-term profits.

• After Alibaba announced its investment plan on May 13, Bloomberg revised its estimate for Alibaba’s non-GAAP net income growth rate to 15% from 19% year on year for the 2022 fiscal. 
• Alibaba’s Chief Financial officer Maggie Wu said it would be “stupid” to promise short-term profit to long-term investors because “there are so many competitors who are investing large amounts to gain a foothold in the market.”

Long-term vision: The investments imply that these tech giants see big post-pandemic opportunities.

“This focus on reinvestment comes as China’s leading internet companies double down on capital-intensive growth opportunities,” said Michael Norris, senior analyst at AgencyChina. 

“Whether it’s reimagining retail, facilitating same-day or next-day delivery, or building out cloud computing infrastructure, it’s not cheap,” he added.

Tightened regulation is also likely a factor, as companies align their businesses with current government priorities, such as basic science, rural revitalization, food/energy/water provision, carbon neutrality, and technology for senior citizens.

READ MORE: INSIGHTS | Tech in the five-year plan

“Tightened regulation is likely to create a healthier ecosystem and a more competitive market, which might reduce the moat of these giants and slow down their growth,” said Pau from China Tonghai Securities.

These investments reflect a change in how digital giants see their role in the economy, Norris said.

“When they first burst onto the scene, China’s digital giants tended to be a thin, interfacing layer between consumers, products, services, and attention. Now, as China’s digital giants work on digitally transforming entire industries, that layer becomes thicker and more capital intensive,” he added.

Subject to crackdowns? Tech firms’ vast investment plans may meet with regulatory roadblocks as Beijing tightens antitrust grips on their anti-competitive practices, especially with unreported mergers and acquisitions (M&A) coming under scrutiny.

• While tech majors’ investments may be focused internally, venture capital investment and acquisitions are also likely to be part of the plan.
• Before the State Administration for Market Regulation (SAMR) fined Alibaba a record RMB 18.2 billion in April, most antitrust fines imposed on tech companies were related to a clause in China’s antitrust law that requires firms to report M&A deals that could create a monopoly.
• An overhaul of the law, which is expected to take effect this year, will allow regulators to issue fines up to 10% of the company’s annual revenue over unreported deals.
• The changing regulatory climate means tech giants now have to report their investment deals that could create “dominant players” in a market to the authorities. Antitrust regulators like the powerful SAMR would have a say in those deals.

China is also cracking down on the so-called disorderly expansion of capital, vowing to prevent firms from growing their businesses into every sector of the economy and forming monopolies. 

For those tech giants seeking to grow even bigger via investment, this could be a warning sign.

READ MORE: INSIGHTS | Antitrust push in China tech

Regulations

China’s top market watchdog, the State Administration for Market Regulation (SAMR), fined Nice Tuan, an online grocer focusing on community group buy, RMB 1.5 million ($235,000) on May 27 due to price dumping and false promotion. The Alibaba-backed company was also ordered to suspend business operations in Jiangsu province for three days until May 30, according to a statement by the regulator. (SAMR, in Chinese)

SAMR opened an investigation into online housing firm KE Holdings for forced exclusivity practices, Reuters reported on May 25, citing unnamed sources. The investigation has not been publicly announced. KE Holdings denied the news, calling the report “fake news” (in Chinese). The Tencent-backed company runs popular housing platforms Lianjia and Beike. (Reuters)

Check out TechNode’s Techlash Tracker for an overview of the crackdown.

Funding and IPOs

JD Logistics, the logistics branch of the online retailer JD.com, debuted on the Hong Kong Stock Exchange on May 28, pricing its shares at HK$40.36 ($5.20). The stock surged more than 18% before dropping and closing at 3.3% higher than the issue price. JD Logistics CEO Yu Rui said the company expects users outside the JD ecosystem to power growth. (Reuters)

NetEase plans a separate listing for its music streaming arm called NetEase Music on the Hong Kong stock market. The company owns 62% of the subsidiary, and it plans to keep a controlling share. (NetEase)

Meituan

Meituan beat estimates on May 28 with its first-quarter earnings statement. Revenue is up 121% year on year to RMB 37 billion (about $5.8 billion). CEO Wang Xing said the company had addressed investor concerns about its ongoing antitrust probe by setting up a dedicated investigation team. (SCMP)

The company is also changing how it charges businesses, hoping to get closer to financial sustainability. The food delivery giant used to charge a flat fee for all deliveries. The new rate system will allow Meituan to charge businesses fewer fees if the order is within three kilometers of delivery distance, more in longer-distance orders, the company wrote in a May 24 WeChat post (in Chinese). (TechNode)

Pinduoduo

E-commerce giant Pinduoduo posted better-than-expected first-quarter earnings. Revenue increased by 239% year-on-year to RMB 22 billion, and the company’s annual active buyer count surpassed that of Alibaba’s. The group-buying platform plans to increase spending on agricultural products and “building China’s first agri-focused infrastructure,” said chairman Chen Lei. (TechNode)

Kuaishou

Short-video social app Kuaishou has begun allowing international brands to sell their products on its platform. Its total e-commerce transaction volume is up 220% year on year, but sales from live streaming are showing slower growth. Rival Douyin took the same step last December, but current international offerings are limited. (KrAsia)

Autonomous Delivery

Local officials gave online retailers JD.com and Meituan permits to test driverless delivery cars on designated public roads in Beijing. Previously, those unmanned vehicles were only allowed in semi-closed areas. Officials also announced rules for managing the autonomous delivery vehicles’ size, speed, and loading capability. (Caixin Global)

Chinese e-commerce giant Pinduoduo posted better-than-expected results for the first quarter of this year, readying for more investments in agriculture research and logistics.

Why it matters: Facing intensified competition in China’s e-commerce market, the Shanghai-based company has become laser-focused on “digitizing agriculture” and the grocery sector.

• Investment into agriculture aligns with the government’s drive to modernize agriculture. It’s also a priority for rivals like Alibaba and JD.

Revenue beat: Pinduoduo posted first quarter revenue of RMB 22.2 billion ($3.4 billion), climbing 239% year-on-year from RMB 6.5 billion in the same quarter of 2020. The increase was primarily driven by revenue increase from online marketing services and merchandise sales. 

• Revenue beat the average analyst estimate of $3.2 billion compiled by Yahoo Finance.
• Pinduoduo’s annual active buyers rose 31% year on year to 823.8 million as of March, slightly higher than Alibaba’s 811 million.
• But the company’s budget sensitive users continue to spend less than Alibaba’s. Based on its latest GMV figures Pinduoduo, had per-user spending of RMB 2,115 in 2020, compared to Alibaba’s RMB 9,200 in Q1 2021.  
• The company’s net loss attributable to shareholders narrowed to RMB 2.9 billion from RMB 4.1 billion in the same quarter of last year, though the figure is significantly wider compared with an RMB 1.4 billion net loss in the previous quarter.
• Despite the revenue beat, shares of Pinduoduo dropped 5.5% on Wednesday amid regulatory concerns and lingering impact of departure of founder Colin Huang in March.
• The company’s shares have sunk by about 40% from a historic high in February this year.

Focus on ag: The discount e-commerce platform is doubling down on a pivot to agriculture, now describing itself in investor materials as “the largest agriculture platform in China.”

• Pinduoduo announced a plan to boost investment in logistics infrastructure, the e-commerce backbone that is even more critical for perishable agricultural products. 
• “In building China’s first agri-focused infrastructure, our priority remains partnering existing third-party service providers first and foremost on everything from cold-chain logistics, warehousing, sorting, and delivery,” said Chen Lei, Pinduoduo chairman and chief executive officer, during the Wednesday earnings call.
• The firm also announced a partnership with the Singapore Institute of Food and Biotechnology Innovation (SIFBI) for studies on nutritional impact from replacing traditional animal proteins with plant-based proteins.

Context: China has imposed fines totaling RMB 6.5 million on five community group-buy platforms in March, including Pinduoduo’s Duoduo Maicai, for irregular pricing.

• The ongoing regulatory crackdown on Chinese internet firms casts shadows on the e-commerce company. The Shanghai Consumer Council ordered Pinduoduo to address consumer rights issues this May.

Joining one of China’s tech majors is a bit like moving to a new country. There’s a lot to learn.

Then you’ve got to get on the local time zone—probably some variation on the infamous 996 hours.

Maybe you adopt a local religion, such as the benfen idea of duty. Or maybe you study the way of the fish touchers and stockpile snacks in the break room.

Working in big tech companies in China is certainly grueling, hard, and all-consuming. But it can also be liberating compared to the rigid hierarchies of traditional workplaces.

No boss or big brother

Nickname systems were introduced not just for discipline and management, but also for information safety and secrecy. In companies and departments that strictly implement the system, it is normal to not know the real name of a co-worker you cooperate with, especially when she works in a different department. Even when companies display the real names of employees along with their nicknames in internal communication systems—as Baidu and ByteDance do—just about every tech company omits precise ranks.

The nickname systems can be liberating, or at least were intended to be. “Everyone going by their nickname instead of calling each other based on their seniority felt more egalitarian than back in college,” explained a young employee at gaming giant NetEase. 

The ambiguity of the job position descriptions is intentional. In fact, internet companies are known to be China’s biggest advocates of a western workplace-inspired sense of equality and direct communication. ByteDance founder Zhang Yiming has stressed multiple times in public that he encourages employees to address each other by their real given names, even those of elders and supervisors.

It’s a clear rejection of the omnipresent hierarchy in traditional Chinese culture that is still commonplace in state-owned enterprises. Zhang has stressed that the use of zong (boss), ge (older brother) and jie (older sister) should all be abolished as well to create a more inclusive and equal workplace. 

Watermelon and Monkey King

Even though tech companies try hard to cultivate a flat workplace, seasoned employees still find ways to thwart the system. Since internal communication systems do not allow two employees to have the same nicknames, the shorter and easier one’s nickname, the higher ranking a co-worker tends to be. 

It is no secret that Pinduoduo founder Colin Huang, who recently announced that he is stepping down as chairman, bears the nickname A Zhuang, while the real identity of top executive A Bu remains a mystery even to the media. Below the founders’ circle of A nicknames, the next tier of executives tend to use the names of fruits.

“If you see someone nicknamed ‘Watermelon,’ ‘Monkey King,’ or ‘Doraemon,’ it’s almost certain they are senior managers,” said a Pinduoduo marketing employee. “More recent employees sometimes have to rack their brains just to think of a nickname that hasn’t been taken,” she said.

There are also some business units in which all staff members share matching nicknames from the same family in a work of fiction. “The longer an employee stays at the company, the better he or she will get at identifying a co-worker’s grip on the company just by their nicknames,” said the Pinduoduo employee.

Old-school Alibaba

Although the biggest Chinese tech companies largely share the desire for innovation, productivity, and growth that defines the industry, they tend to have different interpretations of the terms. 

Zhang’s own company, app factory and TikTok owner ByteDance, does not buy into the nickname system. The founders took a more direct approach to flattening their organizational structure. ByteDance employees are encouraged to call each other directly by their real given names, including calling Zhang himself “Yiming” to set the trend. The practice was also mirrored in Lark, the workplace messaging tool and working station developed by ByteDance. 

On the other hand, DingTalk, the internal messaging app of Alibaba, is an indicator of a more traditional hierarchical structure. It features stringent managerial functions, including punching in and out, review and approval, as well as briefings to the superiors. “DingTalk was designed to meet the managers’ administrative needs rather than those of individual team collaborators,” said a front-end engineer who has used DingTalk extensively for three years, “This reflects Alibaba’s culture. A relatively old-school internet company, Alibaba feels more authoritarian than some of the other internet companies, but is also more stable in terms of personnel and administration.”

Media outlet Jizhou Studio described some of the common perceptions among young students of the emblematic personality traits of each internet giant.  Alibaba prefers “high-achieving team players, who also lay great emphasis on execution,” it said, while graduates who get job offers from Tencent “tend to be the ones who are better at self-expression and active in student clubs and societies.” Those who go on to join ByteDance tend to be creative, while Pinduoduo prefers “hard-working, simple-minded, and benfen people.”

Staying in the benfen lane

The term benfen repeatedly cropped up in the accounts of working conditions by former Pinduoduo employees in the aftermath of the recent deaths of two young overworked employees. Pinduoduo is renowned for demanding work hours even beyond the notorious 996 so common in internet companies. Benfen roughly translates to “one’s part/role” and implies “staying in one’s own lane, realizing one’s own duty as well as what is beyond one’s grasp.” Benfen is stressed as a key value and enforced as an important guideline inside the company.

Chinese media consider benfen culture a legacy of Chinese entrepreneur Duan Yongping, the founder of electronics appliance company BBK, which was later split into smartphone makers Oppo and Vivo. Duan also served as a business mentor to Colin Huang. On the corporate level, these four companies share a conservative development strategy that places cost-effectiveness of an existing popular product or proven viable model over revolutionary innovation.

In the newest interpretation of Duan’s benfen philosophy, Pinduoduo has transformed the idea into a means to whip employees into hyper-intense competition. To a regular employee, the culture translates into nothing less than selfless dedication to the company, which only leads to one result: endless overtime work.

Hamsters touch fish

Oftentimes, unwritten expectations are what keep people in the office longer than the usual 996 working hours. For Zeng Jiajun, a former product manager who worked, consecutively, at Tencent, Baidu, Meituan, and ByteDance, getting off work at 9 p.m. was the earliest he experienced during his years at big internet companies. In fact, leaving then after a 12-hour workday was considered a “very early” punching-out time in the industry. “It feels like being a hamster on a wheel. We are more driven by the KPIs (key performance indicators) than the mandatory working hours themselves,” said a former Pinduoduo employee, who prefers to stay anonymous. “You cannot choose to leave when all other wheel gears are turning in the machine.”

The hustling culture often feels oppressive and unnecessary to many workers, especially when combined with bureaucracy and administrative errands. While many big tech companies embrace “wolf culture,” a term coined by Huawei founder Ren Zhengfei that highlights “hyper-intense teamwork,” burned-out young workers have come up with their own types of resistance: They have cultivated an underground culture of slacking off, or moyu. Literally meaning “touching fish,” the term comes from a Chinese proverb: “Muddy water makes it easier to catch fish.” In the online world, moyu has come to refer to surreptitious coping mechanisms undertaken in high-pressure workplaces. 

“What are the solutions to keep a balance between making money and staying healthy? The first way is to have a rich father, the second is moyu,” advises Xianren Jump, a popular Bilibili creator in a viral video that calls on fans to join the moyu force.

Forces of moyu

Moyu caught public attention in multiple online communities as netizens shared hacks for dossing off at work and memes for a good laugh. On Weibo, blogger “Massage Bear” garnered a big following for her passive-aggressive approach to moyu philosophy. “Set eight daily reminders on your phone to drink water. Every time you go to the pantry room or bathroom, try to hang out longer and use more company resources like free beverages and toilet paper,” reads one of Massage Bear’s posts. To the internet workers who have very little leeway to let loose at work, taking small opportunities to loaf on the job almost feels revengeful.

When clever moyu practices become too evident, companies take measures to crack down on them. Zhang, the ByteDance founder, rebuked employees for generating too many messages during work hours in an internal group chat of Genshin Impact game players. “I’m curious: Do these friends in the group have too much free time at work?” asked Zhang.

Other companies have tried to regulate the length of toilet breaks in response to employees dallying in bathrooms to recharge. Pinduoduo reportedly blocked internet access in bathrooms, which made playing with smartphones on toilet breaks practically impossible, while Kuaishou installed a timer to display how long each stall has been occupied. 

Aside from trying to do less work while maintaining the same work hours, internet company workers have also developed the art of “making their progress seem bigger.” In a recent viral WeChat post, a blogger known as “Xierqi Life Guide” ridiculed the phenomenon of increasingly unnecessary report writing. As actual working hours stretch beyond the default 996, commonly required work summary documents have ballooned from weekly reports into daily reports at many over-achieving business units. Rather than accurately communicating workloads, many commenters agreed with the original WeChat post that the arduous reporting system only added to the formality of internet corporates.

996 survival skills

Why do China’s best and brightest young people choose to join these cyber factories? The opportunities promised by internet giants, along with the financial incentives, are a key appeal. The 996 workweek is hardly a dealbreaker for many driven young people in the face of a full package of benefits in today’s extremely competitive job market, as well as opportunities to be part of “something bigger.” 

For some, the still private ByteDance is an ideal career starter for the potential it represents, despite the demands of 996. ByteDance recruited more than 40,000 employees globally in 2020 alone, almost doubling its workforce by the end of the last year. Newish internet powerhouses Pinduoduo and Meituan also ramped up their fresh graduate recruiting numbers this year in order to enrich their talent reserve for future competition.

For a lot of young graduates of top Chinese universities, their experiences of extreme competition that enabled them to survive China’s notorious gaokao university entrance exam make 996 hours appear less appalling in comparison. Even with the limitations, internet companies are, after all, places where hard work and good performance pay off. 

To more and more young people, though, opting to work in big tech feels more practical and “safe” than a wild dream coming true. “Internet companies are the new state-owned enterprises, said Eddy Gu, a recent graduate in search of a job. Turning the clock back only 20 years, state-owned enterprises were regarded as the dream career destinations in Chinese society due to the complete package of benefits, institutional stability, and prestige. With all the efforts to “be different,” internet giants are probably in the end more similar than they intended to be to those now-stagnant predecessors.

READ MORE: INSIGHTS | Why 996 just won’t go away

Just another dagongren

Some big tech employees, therefore, are just showing up to earn a paycheck.

A recent trend has young internet laborers referring to themselves as dagongren—working stiffs, the same phrase used to refer to migrant workers who go to the city to work on construction sites. “Dagongren” channels youths’ disillusionment with their outwardly glamorous city life: In a competitive job market and fast-paced society, they simply do not have much control over their own lives compared to their almighty employers.

Kyle Lin, currently an intern at ByteDance, thinks the surging living costs in major Chinese cities partially explain why many young people gravitate towards 996 hours. Lin rents a very small bedroom in an apartment shared with three other roommates in Beijing. “The wage I get as an intern barely covers the rent, but staying at the company for the entire day means free meals, free snacks, and a gym that I use,” said Lin. These Silicon Valley-inspired perks, of course, are meant to keep people on the company “campus” beyond their required working hours.

“I already accepted the reality of sacrificing health and personal life when I accepted the job after graduating,” said Kiki Zhou, a product manager who joined Alibaba about a year ago as a fresh university graduate. “The trade-off is a cruel but economic one, especially when there’s no other way to get enough savings for the down payment on an apartment,” she said.

Zhou now resides in Hangzhou with her boyfriend, who also works at Alibaba, but she plans to get a government job that allows more leisure time as soon as the couple have saved enough money. To accumulate that sum, Zhou estimates their stints as big tech dagongren will last at least four more years.

Forced exclusivity on platforms

• The State Administration for Market Regulation (SAMR), China’s top antitrust regulator, fined e-commerce giant Alibaba RMB 18.2 billion ($2.8 billion) on Saturday for “forced exclusivity,” a practice in which platforms force merchants to use only one company’s platform or services. The penalty is equivalent to 4% of the group’s 2019 revenue. (TechNode)
• Alibaba chairman Daniel Zhang promised to end forced exclusivity practices in a Monday briefing. He also said that the company would spend billions to lower merchant costs, including investment in merchant training and the development of the merchant back end workstation. Shares in Hong Kong for Alibaba Group jumped 8% on Monday morning. (TechNode)   
• Regulators also announced on Monday a RMB 1.2 million penalty for Shanghai-based food delivery app Sherpa’s. The Shanghai Municipal Administration for Market Regulation (SMAMR) concluded that the company has dominated a separate, English-language food delivery market and does not compete against industry leaders Meituan and Ele.me. (TechNode)

Logistics missteps

• The Yiwu Post Management Bureau cracked down on delivery services Baishi Express and J&T Express for price-dumping, partially closing their distribution centers on Friday in the county-level city of Yiwu, an important coordination point for eastern Zhejiang province. The action followed an April 6 letter stating that the companies had received warnings on four separate occasions to halt artificially lowering prices beyond the industry standard of RMB 1.4 per order. The Bureau had asked Baishi Express and J&T Express to resolve the issue by Friday. (21st Century Business Herald, in Chinese)
• Pinduoduo issued a statement on Monday clarifying that the company does not have a special collaboration or investment relationship with J&T Express. In the process of securing new clients, J&T employees had told merchants that if they used J&T Express to fulfill their Pinduoduo orders, they would be exempt from fees related to faked orders created by “brushing,” Pinduoduo said. The e-commerce giant added that any previous collaboration with J&T Express during the Spring Festival period ended on Feb. 22. (Sina)
• Share prices for Chinese delivery and logistics giant SF Holding dropped by the Shenzhen exchange’s limit on Monday for a second day in a row, lopping a total of RMB 70 billion ($10.7 billion) from its market cap. SF Holding warned Thursday that it was expecting first quarter losses due to higher labor costs and new business development, a first since going public in 2017. Founder Wang Wei said that the company will not “blindly burn cash” to expand and has promised that there will be no losses in the current quarter. (Yicai Global)

Funding and IPOs

• Baidu-backed travel booking site Trip.com aims to raise $1.4 billion in its secondary listing in Hong Kong. The company began selling shares on Thursday at $42.95, an 11% premium to its closing price of $38.81 at its primary listing venue on the Nasdaq. The sale, which ended April 13, comes with the slow recovery of the leisure travel market. (South China Morning Post)
• Chinese grocery e-commerce platform MissFresh submitted its prospectus to the US Securities and Exchange Commission (SEC) earlier this week, targeting a valuation north of $500 million. Apart from operating its grocery delivery service in 16 major Chinese cities, MissFresh announced on March 26 that it will build a digital platform for community retail, which will support local supermarkets, vegetable markets, and small stores. (PanDaily)
• Suning Retail Cloud, a subsidiary of smart retail service provider Suning.com, announced Monday that it had completed its Series A financing. Concentrated in lower-tier cities and county-level markets, Suning Retail Cloud uses a franchise model to provide Suning.com’s logistics, warehouse, supply chain, and SaaS capabilities to small, medium, and micro businesses in rural areas. More than 3,200 retail cloud franchise stores opened in 2020, and 600 more have been added in 2021. (Suning Blog)
• Online real estate vertical Anjuke filed for a listing in Hong Kong on Thursday, with BofA Securities, Credit Suisse, and CICC serving as joint sponsors. The Tencent-backed company finished a $250 million financing round led by Country Garden’s affiliate Beam Merit Limited in March. (Deal Street Asia)

Xianyu summoned

The Beijing Municipal Commission of Housing and Urban-Rural Development said on Friday that it concluded an investigation into secondhand marketplace Xianyu. The Alibaba-owned e-commerce platform had been summoned for publishing illegal real estate listings and information, and for allowing unlicensed brokers to use its site. (National Business Daily, in Chinese)

Douyin e-commerce

• Douyin e-commerce president, Kang Zeyu, said during an event on Thursday that “interest e-commerce” is a valuable opportunity, with estimated GMV to exceed RMB 9.5 trillion by 2023, according to third-party calculations. The entertainment app’s shift into content-driven e-commerce follows a trend of using content to understand user interests and what they could potentially purchase. (Company statement)

Community group buying is the hottest story in e-commerce. Major tech companies are pushing hard into the industry, with Alibaba alone backing five such platforms (in Chinese).

Most recently, Alibaba led a $750 million investment round for grocery app Nice Tuan on March 31. Pinduoduo founder and CEO Colin Huang said he is ready to go all in on March 11, and Meituan chairman Wang Xing named Meituan Select, its community group buying platform, as the company’s top priority in an earnings call on March 26.

But with a dip in sales after the group-buy industry hit peak volume during the Spring Festival, the Chinese internet doesn’t expect a feast. 

After a year of all-out growth during the pandemic, regulators in Beijing have cracked down on the industry, with the State Administration of Market Regulation (SAMR) and the Ministry of Commerce setting nine rules in December to govern this sector. SAMR also concluded an investigation into community e-commerce in March, levying fines for irregular pricing on five tech majors, including Alibaba, Tencent, and JD.Com. Regulators are likely thinking of former fad industries, such as second landlords, bike rental, and P2P loans, that eventually blew up and left consumers holding the bag. 

In recent Chinese analysis, the consensus is that the market is consolidating, and platforms are fighting a different war to survive. Last year, many companies rushed into the industry, spending big to claim territory, but community group buying is now shifting from sprint mode to creating sustainable profits. 

Commentators discuss how far along the consolidation process is, debating when and how the winners, if any, will be decided.  They also talk about those getting the short end of the stick, from companies being pushed out of the industry to suppliers being squeezed by platforms. 

Pick your battles 

It doesn’t look like one company will wind up owning the whole community group-buy market.

Commentators are optimistic that the community e-commerce market offers room to grow. Major group-buy platforms may have wide reach, with Meituan Select presently operating in more than 90% of cities and counties in China, but continuing negative profit margins means other players have the chance to dominate in specific regions. The jury is still out on who will sink or swim. 

Chinese magazine Ran Caijing writes that different winners are emerging in different regions. 

‘Community group buying moving in different directions’

Yan Junwen
Ran Caijing, March 30

Community group buying has gone through half a year of rapid progress, with startups and big businesses currently moving in different directions. Some focus on counties, towns, and rural areas. Others have turned toward Beijing, Shanghai, and Guangzhou. 

In the community group buying market of today, the players are not all squeezing together, but have instead chosen their own directions for key breakthroughs. They continue in regions where they are able to succeed. In regions where they are unable to succeed, the companies pivot or exit the market. The situation of order volumes for different regions and different companies probably vary greatly. For example, in Hunan and Hubei, Xingsheng Youxuan holds an absolute advantage. However, in Guangdong, Jiangxi, and Shandong, Meituan Select is the leader.

The way forward is not rosy for all group-buy companies, though, and Ran Caijing emphasizes that staying in the industry means taking on greater risks. Summer, with its high temperatures and humidity, will be the next challenge. There is also the problem of getting good customer ratings. 

Ran Caijing points to the community e-commerce platform Chengxin Youxuan as a cautionary tale: Chengxin Youxuan offered flash sales and cash incentives to customers and saw growth potential in various cities and provinces such as Wuhan, Chengdu, Jiangxi, and Guangdong. But consumers in some places did not bite, and with an uneven unit volume of sales, things quickly turned from good to bad. A source in the supply chain industry told Ran Caijing that they’re about ready to write the company off: “Right now, Chengxin Youxuan is already on a downhill trajectory. There are not many cities in which it has done well overall.”

Tough decisions

The industry is maturing, She Xiaochen and Ke Xiaobin write in finance and business outlet Jiemian News. Companies who are still in the game are building moats, reinforcing their strongholds. Even as platforms continue to expand, seeking economies of scale, they are closing operations in low-efficiency areas and cutting low-performing business development teams. Leading group-buy platforms aren’t exempt from these pressures either. Many of them gave out free promotional products to attract consumers across a wide range of cities and counties. Jiemian argues that, soon, they will be unable to settle accounts. 

An investor told Jiemian that the main reason for streamlining isn’t regulations. The market is also pushing companies to cut costs.

‘Community group buying pauses war to strategize: with free promotional products in many locations, tech giants are close to unable to settle their accounts’

She Xiaochen and Ke Xiaobin
Jiemian News, March 31

An investor who has followed the new consumer industry for a long time said that apart from the impact of policy, the other reason for community group buying entering the streamlining stage is the particular characteristics of the industry: “Community group buying touches upon many links in the supply chain, including categorization, logistics, and warehousing. The input cost is sizable, and the business is not really suited to the cash-burning model that used to work for internet companies.” 

The co-founder of a mid-size player told Jiemian that the company is giving up on areas that aren’t turning a profit.  

According to the co-founder of a mid-level community group-buy platform, “after almost a year of operations, we have found that the performance of group buying in certain regions is not high. Streamlining operations means that business development activities that do not perform well will be retired.”

But Jiemian also writes that platforms still have a long way to go in terms of sound business models and operations. To cut costs, major group-buy platforms are shifting responsibility to merchants to ease the financial pressures on themselves. The writers worry that this is a bad sign. Not only are mid-level companies experiencing profitability issues, Jiemian writes, but the tech majors are also in trouble. 

Meituan Select, Xingsheng Youxuan, and Shihui Tuan have employed a mix of direct operations and third-party agents in county markets in pursuit of profits. An industry insider familiar with the supply chain for community group buying told Jiemian that this model allows platforms to shift risks to their agents: “Every agent individually bears the responsibility of profit and loss. This ‘dual mode’ of operations allows leading players to maximize cost-cutting and minimize losses.”

Squeezing bottom lines

Some suppliers say they’re having second thoughts about community group-buy as platforms squeeze their bottom line. 

A supplier for Chengxin Youxuan told Jiemian that the platform had asked them to fill large orders at rock-bottom prices as it built up operations in new regions. By Lunar New Year 2020, which came on Jan. 25, he had already emptied almost half of his inventory, giving it away for free or at low prices. This supplier has been happy to go along with the platform up to that point, led by the promise of strategic losses for greater gains. But he says that he wants to see profits soon: “Volume is not our only standard. We still look at whether we can make money. Speaking as businesspeople, our ultimate goal is to profit.”

Other commentators warn that it will become impossible for small suppliers to live off what they earn from community group-buy platforms. 

WeChat blog Future Consumption (Weilai Xiaofei) explains that compared with selling directly to supermarkets, the group-buy model requires product suppliers to shoulder more risk and cost in terms of logistics and operations. This has caused suppliers to leave the group-buy industry.

Writer Zhao Xiaomi describes the predicament of  Lao Liu, who joined community group buying at the beginning of this year.

‘Major suppliers flee community group buying’

Zhao Xiaomi
Future Consumption, March 17

Previously, when supplying to supermarkets, Lao Liu only had to consider how to sell his products to the markets. However, with community group buying, things are not the same. Risks, losses, and operations responsibilities that were originally borne by the supermarket have all been passed onto the supplier.

Suppliers have to cover attrition costs for perishable goods such as tofu shipped to warehouses near consumers for quick delivery. They are also responsible for the costs of returned products, including fresh foods unsuitable for resale. Platforms charge them fines for these returns. One supplier told Future Consumption that platforms have strict policies that make suppliers financially responsible for customer returns.

“The first time the return rate for a supplier’s products in a given period is between 0.3% and 1%, the supplier will be fined 5% of the transaction amount. The second time and each time thereafter, the supplier will not be able to register products on the platform for three months. If the return rate for a supplier’s products is greater than 1%, the supplier will pay a fine of 25% of the transaction amount the first time this happens. The second time will result in termination of the agreement between the supplier and the platform,” the supplier said. 

Dog eat dog

The community group buying that exploded in the second half of 2020 was quickly rolled out. It sprung up fully, and the construction of infrastructure for supplying, warehousing, and logistics was basically completed. In the coming summer, high temperatures and humidity will further put the results of the last six months to the test. User ratings may be divided on which platforms are better or worse, further determining if this platform business will continue or shrink. Summer is a test. By the end of 2021, the industry will probably be able to see who is swimming and who is left standing on the shore. 

Ran Caijing, March 30

The winners of community group buying are still unclear, but commentators are betting on many losers. They argue that surviving in the industry means being able to sustain substantial losses, which is often only possible for the largest tech companies. 

Even those leading group-buy platforms, however, have questionable futures. Both Jiemian and Ran Caijing raise doubts about profitability for the tech giants, including Meituan, which offers community group buying in  90% of China’s cities and counties but continues to expect operating losses.

Mid-level players aren’t able to carry on, and the tech giants aren’t able to settle their accounts either. 

Jiemian, March 31

Ran Caijing reserves judgment about the overall direction of the industry, arguing that summer and the challenges it poses will provide a clearer picture of which companies will emerge as leaders. Jiemian, however, says that consolidation is already far along, with more successful companies already creating strategies and models to protect their businesses. Future Consumption argues that factors such as supply chain and customer ratings will also determine the future of the players.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

In this episode, James and Elliott are joined by frequent CTI guest Michael Norris to cover the 2020 Q4 earnings of Pinduoduo, Kuaishou, and Meituan. The guys also answer some questions posed by listeners of the show on Twitter.

Sorry folks, we had a little trouble with our recording setup and there’s some interference in the audio.

Hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Kuaishou

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:                   

• Michael Norris – @briefnorris

Editor:

• Peter Isachenko

Podcast information:

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• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

End of an era for Pinduoduo

• The billionaire founder of Pinduoduo, Colin Huang, stepped down as board chairman just as the e-commerce giant overtook its rival Alibaba as China’s largest online selling platform by user size. (TechNode)
• Chen Lei, Pinduoduo CEO and chairman, told the Wall Street Journal that the company will “keep plowing revenue back into subsidies” until it “supplants Alibaba as the default shopping platform for perhaps a billion Chinese consumers.” The firm plans to boost ad income to earn a profit while keeping the hefty subsidy program going. Despite its huge user base, Pinduoduo’s $324 average annual spend per active buyer in 2020 was less than a quarter of Alibaba’s average annual spend per user during the same time period. (Wall Street Journal)

E-commerce giants

• Alibaba Group plans to launch Taobao Deals as a mini program on Tencent’s mega chatting app WeChat, according to a Bloomberg source. Taobao Deals is Alibaba’s response to rival Pinduoduo. Cooperation between Alibaba and Tencent—two of China’s most exclusive technological ecosystems—is a clear indication that Beijing’s anti-monopoly efforts are taking effect. (Bloomberg)
• JD.com said it will invest $800 million in Dada Nexus, giving the Chinese online retailer a total 51% stake in the on-demand delivery company by combining its existing shares. (TechNode)

Power bank rentals

• An online poll conducted by Chinese business newspaper 21st Century Business Herald showed that around 80% of the users said they would stop renting power banks if fees were hiked again. The most recent price increase raised the average per-hour rental fee to RMB 4 ($0.6), up from RMB 1 charged when the service first took off in 2017. Rental fees for devices at high traffic locations like cinemas, tourist spots, and airports are as high as RMB 6 per hour. A Weibo hashtag titled “Power bank rental fee increase from RMB 1 to RMB 4” had attracted 260 million views as of Tuesday morning. In China, a power bank can be purchased for around RMB 50. (21st Century Business Herald）
• One week after filing for a US IPO, Chinese power bank rental firm Energy Monster announced Friday a partnership with food delivery platform Ele.me to cooperate on channel operation resources, merchants, and membership services. Starting April, Ele.me will add Energy Monster’s services to its app. Users will also be able to call Ele.me drivers to pick up the power banks they forget to return. (Tencent Tech)

Content-driven e-commerce

• In the coming year, microblogging platform Weibo plans to support the growth of 10 million merchants who use high-quality content to sell by dedicating RMB 100 million worth of traffic and cash incentives. (Sina Tech, in Chinese)
• Weibo reported net revenue of $513.4 million in the fourth quarter of last year, a 10% year-over-year increase. Advertising and marketing revenues accounted for 88% of total revenue. The company’s monthly active users reached 521 million in December, a net addition of approximately 5 million on a year-over-year basis. (Weibo)
• Sina, operator of the Sina news portal and Weibo’s controlling shareholder, announced the completion of its merger through which the Nasdaq-listed company had planned to go private. The company has filed with SEC for delisting of its shares. (Sina statement)

The billionaire founder and chairman of Pinduoduo, Colin Huang, has stepped down as board chairman and handed responsibilities to company chief executive officer Chen Lei just as the e-commerce giant overtook its rival Alibaba as China’s largest online selling platform.

Why it matters: Chinese workplace culture is to a great extent influenced and shaped by founders’ personalities and management styles. The departure of a leader as notoriously driven as Huang is expected to prompt a significant shift at Pinduoduo.

• The company’s share prices slumped 7.1% Wednesday on the news.  
• Huang’s resignation comes at a time when the company faces criticism for its grueling overtime culture, brought to light after the highly publicized deaths of two employees and complaints from others.

READ MORE: Tech in the five-year-plan

Details: Colin Huang said in a letter sent to shareholders on Wednesday that he had resigned as the company’s chairman. Chen Lei will take over while continuing in his existing role as CEO.

• Huang’s voting rights were passed to the board, but the 1:10 super voting rights attached to his shares will no longer apply. He pledged to hold his 29.4% share of Pinduoduo for the next three years.
• Huang said he is embarking on a new journey exploring food and life sciences.
• Along with shareholder letter, Pinduoduo reported fourth quarter revenue of RMB 26.5 billion ($4.1 billion), climbing 146% year on year from RMB 10.8 billion in the same quarter of 2019. The growth was primarily driven by an increase in ad revenue and contribution from merchandise sales, the company said. Pinduoduo’s revenue beat the high end of analyst estimates compiled by Yahoo Finance.
• The company’s active buyers in 2020 jumped 35% year on year to 788.4 million from 585.2 million in 2019, overtaking rival Alibaba, which reported 779 million annual active users during the same period.
• The e-commerce platform is repositioning itself as China’s largest agriculture platform, according to CEO Chen Lei’s comments during the earnings call held Wednesday evening, as it shifts toward selling agricultural products and offering services to farmers. 
• Chen said Pinduoduo’s gross merchandise volume (GMV) for agricultural products doubled on an annual basis to more than RMB 270 billion in 2020, though it remained a modest share compared with the company’s total GMV of RMB 1.7 trillion for the year.

Context: Serial entrepreneur Huang, 41, has stepped away from the company he founded five years ago to devote himself to the research of food and life science. The areas have significant overlap with Pinduoduo’s new business focus—agriculture. Agritech was mentioned in the 14^th Five-Year Plan an important industry for China, which seeks to shore up agricultural efficiency and innovation.

• Colin Huang handed his CEO role to Chen Lei in July.
• Forbes once listed Huang, a former Google employee, the second-richest man in China, on its Real-Time Billionaires List, though he had fallen to 24th place as of publication.

Curbing community group-buy

China’s top market regulator levied fines totaling RMB 6.5 million (around $1 million) on five community group-buy platforms for price dumping, reinforcing Beijing’s efforts to regulate the red hot industry.

The companies subject to the penalty are Didi’s Chengxin Youxuan, Pinduoduo’s Duoduo Maicai, Meituan’s Meituan Youxuan, Alibaba-backed Nicetuan, and Wuhan-based Shixianghui. (TechNode)

Female consumers power growth

• Chinese female shoppers make household purchasing decisions in 75% of homes, according to a report released by online retailer JD.com, and are spending increasingly more on themselves as a proportion to the household. The report was released on International Women’s Day, which falls on March 8. Women are driving growth in a diverse range of categories such as cosmetics, baby products, luxury goods, alcohol, cars, and mobile gaming, the report said citing Meha Verghese, executive at agency MediaCom. (JD)
• A Pinduoduo consumption report identified the same trend, saying that the female users are spending more on products and services to “please themselves.” The sale of lipstick, skincare products, and apparel top the sales growth chart, according to the report. (Tencent Tech, in Chinese)
• A total of 2.72 million female drivers work for Didi across Asia, Latin America, Russia, and Australia, according to a report from the ride-hailing giant. China accounts for 2.37 million of the total. Many women, who are often also caregivers and homemakers, turned to gig economy apps due to economic uncertainty caused by the pandemic, the report said. (Ifeng, in Chinese)

Earnings season

• Chinese online grocer JD Daojia reported RMB 2.02 billion ($308.62 million) in revenue during the fourth quarter, an increase of 69.9% year on year. The revenue missed the $309.18 million average estimate compiled by Yahoo Finance. The company’s full-year net revenues in 2020 amounted to RMB 5.74 billion, a year-over-year increase of 85.2%. Total gross merchandise volume for the year of RMB 25.3 billion more than doubled compared with 2019. (Ebrun, in Chinese)
• Fourth quarter revenue for China’s online travel platform Trip.com dropped 40% year on year to RMB 5 billion, which the company attributed to the pandemic. The decline in revenue slowed compared with 48% year-on-year drop in Q3 and 64% in Q2, signaling a gradual recovery of domestic travel market. (KrAsia)

This week in funding

• Ymatou, the Chinese cross-border e-commerce site backed by microblogging platform Weibo, has closed a Series D Plus worth hundreds of millions of RMB from Prosperity Investment, local media reported. (36kr, in Chinese)
• Chinese beverage chain Manner Coffee received investment from investors including Singapore sovereign wealth fund Temasek Holdings at a valuation of $1.3 billion. The Luckin rival operates more than 100 stores across the country, mostly located in Shanghai. (Ebrun, in Chinese) 

China has imposed fines totaling RMB 6.5 million (around $1 million) on five community group-buy platforms for irregular pricing.

Why it matters: Beijing is moving to regulate the red hot community group-buy industry as part of a recent campaign to curb the power of China’s internet giants.

• Fines targeting the growing sector comes as the state has stepped up regulation of internet giants over the past few months. China has extended various degrees of penalties on tech majors including Alibaba, Tencent, JD.com, and Vipshop.

READ MORE: Friendly neighbors are the key to China’s community group-buying craze

Details: The State Administration of Market Regulation (SAMR) said Wednesday that it decided to levy fines on five community group-buy companies after more than two months of investigation. The platforms are some of the biggest in the sector, and hold “a large share of the group-buy market,” according to regulator.

• Didi’s Chengxin Youxuan, Pinduoduo’s Duoduo Maicai, Meituan’s Meituan Youxuan, and Alibaba-backed Nicetuan are each subject to a fine of RMB 1.5 million. Wuhan-based Shixianghui was fined RMB 500,000, according to the notice.
• The investigation showed Chengxin Youxuan, Duoduo Maicai, Meituan Youxuan, and Nicetuan leverage their capital advantage to compete for market share by selling products at prices lower than cost, according to SAMR. All of the five falsely advertised discounted prices to boost orders.
• The companies were fined the maximum penalties due to the negative impact of their practices, a SAMR spokesperson said in a press conference (in Chinese) on Wednesday.
• The spokesperson said that using irregular measures to squeeze offline community economies will create market disorder and lead to social instability. At the same time, unfair competition among the tech firms will hurt consumer interests in the long run.

Context: The government summoned representatives from tech majors including Alibaba, JD.com, Meituan, Tencent, Pinduoduo, and Didi for a meeting in December to discuss oversight of the group-buy sector.

• Regulators issued a list of restrictions on group-buy businesses, forbidding predatory pricing to beat out competition as well as falsely advertising discounted prices and posting misleading product information.
• The state-run People’s Daily said in a commentary that tech companies should focus on innovation for bigger benefits instead of “thinking about the traffic of a few bundles of cabbage and a few pounds of fruits” (our translation).

Mimi Tao walked outside of her residential compound at seven in the morning as usual, but found that the driver had already dropped off the products at the front gate and left. After checking her order list and confirming all the products were accounted for, she hauled them all back to her garage and began the deliveries to residents on her list. There were cherries, apples, imported snacks, rice, and even handmade wontons from a local store in Suzhou. It usually takes Tao about two hours to complete the deliveries. 

Tao is the organizer of the group-buying platform Linxuanhaohuo for her residential development in Zhangjiagang, Suzhou in eastern Jiangsu province. She started the job in August 2018, after a friend’s recommendation. Tao works full time as an accountant as well. She says she usually spends four to five hours every day coordinating the orders and posting products on the WeChat group of 219 people she manages. 

“I am busier on Mondays, Wednesdays, and Fridays because I need to deliver products on these days,” Tao said (our translation). 

Tao is not the only person in the apartment complex who manages a community-buying group. She has a competitor in the compound—Maggie Xu, who works for another platform, the name of which roughly translates to Tongcheng Life. Xu’s group is double the size of Tao’s and the platform offers a wider variety of products. 

Group-buying platforms have their own mini programs on WeChat which customers use to place their orders. Each day, organizers post links in the chat group to products that are popular or are on sale. Xu usually starts putting product links in the group chat around 9 a.m. She first posts links for products on promotion, and then fruits. In the afternoon she posts links for snacks such as yogurt, sweets, and nuts, and then sometimes eggs. As Spring Festival approaches, gift boxes are also popular in the group. 

Resurgence of online fresh groceries

China’s grocery market is large—it is expected to be worth RMB 11 trillion ($1.8 trillion), the world’s largest, in 2023, according to research agency IGD. But it’s complicated—rather than a weekly trip to the supermarket, most Chinese consumers visit a variety of stores and marketplaces to stock their pantries.

Chinese companies from small to large have been trying to figure out how to sell groceries online for years. Venture capitalists fueled the craze by injecting hundreds of billions of yuan in the sector since its first boom around 2013.

The earliest attempts included asset-heavy approaches like Dingdong Maicai, which ran its own warehouses and logistics systems, and marketplace operators like Meituan and JD Daojia that offered delivery support for offline vendors.

However, within the broader online grocery category, selling fresh produce online has proven a hauntingly difficult task. Selling highly perishable goods with significant logistics requirements has driven more than a few fresh produce platforms out of business, from Amazon-backed Yummy77 to Xianpinhui. The most recent example is the collapse of Dailuobo, a grocery upstart that burned $92 billion in five months. 

China’s community-buying trend can be traced back to the early days on platforms like Meituan and Dianping, which offered Groupon-like deals. Community-based group-buying emerged around 2016 within chat groups on ubiquitous messaging app WeChat. The model gained momentum around 2018, especially in second-and lower-tier cities after WeChat launched its mini program ecosystem.

The Covid-19 outbreak changed Chinese consumers’ daily routine of shopping for fresh food and daily necessities offline. Although the behavioral shift boosted all businesses in the grocery delivery sector, community group-buying has taken off. One platform, Xingsheng Youxuan, has attracted investment from a number of tech giants, and was valued at $5 billion as of its latest round of funding led by Tencent. 

The group-buying model addresses the pain points of online grocery deliveries. Many group leaders themselves operate small mom-and-pop stores, which become informal hubs for such platforms. This saves on overhead costs such as running an offline storefront and expensive last-mile deliveries. Pre-ordering and overnight deliveries lower the attrition rate for fresh food compared with storing big piles of inventory at a nearby location to sell. Meanwhile, group leaders, motivated to acquire users through their own social networks for higher commission, help the platform save on user acquisition costs. 

The community group buy platforms are popular in second- and lower-tier cities in China, often outside of service areas for big-name online platforms such as Alibaba’s Freshippo. Some 85% of group leads for the community-based group-shopping model platforms are based in second-or lower-tier cities, according to a report (in Chinese) from Kaiyuan Securities.

Lower-tier cities and rural areas are also powering the next stage of overall e-commerce growth in China. Its shoppers are viewed as being more inclined toward social shopping experiences, given the quick rise of social e-commerce site Pinduoduo.

Bargain-hunting buyers

Unlike other sectors in China’s tech industry, there’s no big player monopolizing the community group-buy market. It’s more like a collection of stores, where customers place orders on different platforms according to what kind of products they want, such as fruit, seafood, or snacks. Some residents will buy eggs on one platform and cherries on another. 

For most of the buyers, finding a good deal is the main reason to join a community-buying group. Some residents in Zhangjiagang told TechNode that they have joined more than one group-buying platforms to compare prices. Customers aren’t loyal to a platform; what matters is the price of the product and how well the platform handles the order fulfillment.

Partially due to platform competition and partially because of consumer demand, group leaders have started to promote products from multiple platforms (in Chinese) within the WeChat groups they manage, and offline pickup centers serve several platforms.

Xu said her mother-in-law had used Duo Duo Maicai exactly twice to take advantage of the platform’s free gifts for new shoppers. Unlike many group-buying platforms that deliver products to customers’ front doors, Duo Duo Maicai opened offline stores outside of compounds for customers to pick up. 

“She hasn’t bought anything since then because there are fewer products on their platform and they don’t support home delivery service,” she said.

The community aspect

Discussions with neighbors who share the same interests is a reason for shoppers to stay active on one platform. 

Deng Chanling, a stay-at-home mom in Shanghai, became an organizer for group-buying startup MMchong after using the service for a year. When Deng moved to her new neighborhood in October 2019, the part-time job helped her to get to know her neighbors. She now knows most of her 200-member WeChat group from offline promotional events, she told TechNode.

The workload of less than 20 hours a week gives her a comfortable balance between a job and taking care of her son, who is in primary school. Deng earns around RMB 3,000 ($462) a month, and RMB 6,000 during peak holiday seasons, through the 10% commission she earns from her sales in exchange for promoting the products, using her space for product storage, and logistics services.

The income is far from sufficient to support a family in a metropolis like Shanghai, but good enough for the time and energy she invests daily, Deng said.

The company delivers the products to Deng’s home the morning after a group order is placed, every other weekday. “It usually takes me an hour or two to sort out the orders. My neighbors will drop by to pick up their orders in the afternoon.” she said. She only delivers the parcels to a doorstep if the order is higher than RMB 108. 

The part-seller, part-user role of the group leaders help the platform select what products to sell, a crucial factor in differentiating from rivals. MMchong constantly updates its product listings. Deng says she tests samples recommended by suppliers and gives her feedback as a user before the platform determines whether or not to sell it. 

Deng doesn’t rely on the job to make a living, but some co-workers do. There are group heads who earn monthly income of around RMB 15,000 by mobilizing the whole family. “In such cases, they are operating on a larger scale and can afford to rent their own pickup storefronts,” Deng said.

Scorching hot market

As the community group-buying sector grows in size, smaller group-buying platforms are feeling the pressure. Xu said the competitive market has affected her commission rate. When she first started in 2018, she would net around 10% to 11% commission on each product, but now she earns just 6% to 7%.

“Last year there were not so many group-buying platforms so we had a high commission rate,” she said. “Now, more platforms have joined and they give a lot of coupons and discounts to attract customers, so the platform ended up cutting our commission.”

At the onset of the group-buying war last year, tech giants that set their eyes on the model had been poaching staff from existing players like Xingsheng Youxuan and Nice Tuan by promising to double or triple their salaries for similar positions, according to local media. In one case, most of Xingsheng’s employees at a Wuhan delivery center jumped ship to Pinduoduo within two weeks, forcing the downtown center to suspend its business. 

Competition between platforms starts with suppliers, according to Deng, the MMchong group lead. “Our supplier for sweet corn, a top seller on our platform last year, says that they have already sold out this year’s harvest to higher bids,” she said.

A threat to offline markets, maybe

Experts expect group-buy platforms to eclipse grocery stores. “There’s no chance for supermarkets larger than 500 square meters to survive in the next year or two given the increasing adoption of community-based grocery e-commerce,” (our translation) Ye Guofu, founder and CEO of Chinese low-cost retailer and variety store chain Miniso, said in December.

Pinduoduo cited an estimate from Goldman Sachs: By 2025, nearly half of China’s grocery shopping will take place online, up from 20% currently, and reach about $1 trillion in sales.

For Xu, she hasn’t set foot in the neighborhood supermarket for a while. She believes group-buying will replace the offline supermarket one day.

“I can just order online and the products will appear at my door the next day,” she said. “The price is also cheaper, so why not?”

However, there is still a lot of uncertainty in the sector. 

The government summoned tech majors including Alibaba, JD.com, Meituan, Tencent, Pinduoduo, and Didi for a meeting in December. Regulators issued a list of restrictions on group-buying businesses, forbidding predatory pricing to beat out competition as well as falsely advertising discounted prices and posting misleading product information.

The move follows a few months after these companies pushed into the sector with rock-bottom prices for fresh groceries, charging RMB 0.99 (around $0.15) for a box of eggs and RMB 0.01 per 500 grams (around a pound) of cabbage. The state-run People’s Daily ran a commentary telling tech companies to focus on innovation for bigger benefits instead of “thinking about the traffic of a few bundles of cabbage and a few pounds of fruits.”

Using low prices to attract users is reminiscent of the subsidy wars seen in many industries, but particularly tech-related sectors, from ride-hailing to bike rentals. Such an early intervention from state regulators comes against the backdrop of intensifying tech regulation, but could also be a result of the importance of fresh produce and grocery, a sector considered too vital to the masses for hot money to mess up. 

Many people have relied on group-buying platforms for daily groceries, rivals to offline supermarkets that also stock standardized and durable goods such as packaged snacks and detergents.

But there are exceptions, including neighborhood wet markets that consumers in China still depend on for the day’s fresh vegetables. Freshness still outranks convenience for many shoppers, particularly older generations who would rather make the daily trip outside rather than risk allowing a platform employee select food for the family dinner.

Xu stopped posting links for vegetables to the group after many complaints about quality. Tao said one of the advantages of living in second- and third-tier cities is their proximity to the countryside, which means easy access to fresh vegetables and seafood. For Tao and her family, going to the wet market for vegetables is a deeply ingrained habit.

“Usually it’s my mother-in-law who buys the vegetables and she is more picky and wants to see them before buying them,” Tao said.

Pinduoduo backlash, again

The Shanghai-based e-commerce platform was denounced on Chinese social media for infringing on data privacy after a user accused the app of remotely deleting screenshots in his smartphone photo album without consent.

The user saved screenshots as evidence to support a complaint he made about the company. In a marketing campaign, Pinduoduo had promised a RMB 100 ($16) cash reward to users who invite a friend to the app. The user only received a small voucher after doing so.

Pinduoduo responded in a statement (in Chinese) that it deletes the original picture in its app if it is edited, causing an erroneous command to delete related photos in the user’s smartphone album. The firm pledged that it will no longer delete users’ original photos once they are edited. (Liehuw, in Chinese)

• On Jan. 12, Pinduoduo launched Duo Duo Maicai in Shanghai, highlighting the e-commerce giant’s big bet on expanding its community group-buying business into the more competitive markets in major metropolises. (21st Century Business Herald, in Chinese)

Luckin the franchise

Luckin Coffee announced a partner recruitment program on Monday, inviting franchisees in 22 provinces and autonomous regions, including Sichuan, Shanxi, Heilongjiang, and Jilin to join the coffee chain. The firm has continued its offline expansion efforts, especially to lower-tier cities, despite its management tumult.

Cities where Luckin already had a solid presence, such as Beijing, Shanghai, and most of China’s provincial capitals, are excluded from the program.

The company will not collect franchisee fees from the partners, but becoming a Luckin franchisee requires an upfront investment between RMB 35,000 to RMB 37,000 for storefront decoration, equipment, and deposit. (Luckin, in Chinese)

Upcoming Spring Festival

• Short video app Douyin has taken over from Pinduoduo as the sole red packet sponsor for this year’s CCTV Spring Festival gala in February, local media reported Friday. The Shanghai-based firm is facing a wave of negative media coverage after two employee deaths which many attribute to its compulsory overtime work schedule. (KrAsia)
• Alibaba’s Tmall kicked off on Wednesday the shopping season for Spring Festival holiday, which falls on Feb. 12 this year. Alibaba’s logistics arm Cainiao is setting aside RMB 200 million for delivery staff incentive pay for working during the holiday. (Ebrun, in Chinese)

WeChat levels up in e-commerce

• The gross merchandise value of WeChat mini program commodity transactions doubled in 2020, reaching around RMB 1.6 trillion in 2020 based on the RMB 800 billion GMV figure the company disclosed for 2019. (TechNode)

The amount of goods sold on digital storefronts accessed via instant messaging app WeChat doubled in 2020 as the mega social platform becomes an increasingly popular entry point for online shopping in China.

Why it matters: WeChat parent company Tencent is a rising challenger for the sector’s biggest players, including Alibaba, JD.com, and Pinduoduo.

• Mini programs are an important growth driver for apps, functioning as an entry point for Chinese mobile users to access online services, according to a Quest Mobile report published in July.
• The Covid-19 pandemic accelerated consumer adoption of e-commerce on WeChat and powered growth, as confined shoppers spent more time browsing and shopping on the app.

Details: The gross merchandise value (GMV) of WeChat mini-program commodity transactions doubled in 2020, the company announced Tuesday at its 2021 Weixin Open Class PRO conference held in Guangzhou.

READ MORE: Why analysts don’t trust GMV, and why they use it anyway

• GMV booked through the “lightweight” apps on the chatting platform reached around RMB 1.6 trillion ($247 billion) in 2020 based on the RMB 800 billion GMV figure the company disclosed for 2019.
• In comparison, Pinduoduo posted RMB 1.46 trillion GMV for the 12-month period ended Sept. 30, 2020. WeChat mini program GMV includes sales from lightweight apps belonging to other platforms including Pinduoduo.
• Daily active users for WeChat mini programs increased by a third to 400 million in 2020 from 300 million in 2019, out of WeChat’s massive pool of 1.2 billion monthly active users.
• There were  731 million annual active buyers on Pinduoduo as of end-September, and 757 million on Alibaba platforms as of June.
• Fast-moving consumer goods and fashion brands were among the platform’s categories that recorded the most rapid growth, with GMV surging from two- to five-fold.
• Per user, the number of mini programs used rose 25% and the average transaction value increased 67% year on year in 2020, according to the company.
• WeChat Search, the app’s built-in search function, saw its monthly active users exceed 500 million for the first time.
• WeCom, WeChat’s enterprise and work communication tool, serves more than 5.5 million organizations and has more than 130 million active users.
• The company is planning more integration this year between official accounts, mini programs, and its short video feature, Channels.

READ MORE: New Wechat e-commerce tools point to Tencent’s ambitions

Context:  First introduced in 2017, mini programs have become ubiquitous on many of China’s biggest apps, including Tencent’s QQ, Baidu, Meituan, Alibaba’s Alipay, and Taobao, as well as Bytedance’s Jinri Toutiao and Douyin.

It has been nearly two years since Chinese tech workers took to Github, a coding collaboration platform, to protest Chinese tech firms’ overtime work culture known as “996,” a work schedule of 9 a.m. to 9 p.m., six days a week. The virtual protest drew global press attention, but things have scarcely changed since then. Today, Chinese tech workers are still plagued by 996.

The problem came under public scrutiny again this month when it was reported that a 23-year-old employee of Chinese e-commerce firm Pinduoduo collapsed and died on her way home after finishing work at midnight on Dec. 29, 2020. The tragedy prompted Chinese authorities to start a probe into Pinduoduo’s working conditions, something the 2019 protest failed to achieve.

Meanwhile, poor working conditions for blue-collar workers for China’s tech companies continue to draw public ire, triggered by similar misfortunes, including the death of a courier at food delivery platform Ele.me at work earlier this month, and the self-immolation of another Ele.me deliveryman this week.

Bottom line: 996 is still a problem in China’s tech industry. It’s brutal to employees, but it is questionable whether overtime work pays off even for companies. Tech executives have implied that 996 is one of the key ingredients for China’s tech success, but economists argue that it is a symptom of low productivity.

A brief timeline

• It’s unclear when 996 was first introduced. Online sources say it can be traced back to the early 2000s.
• January 2019: Youzan, a Chinese e-commerce software provider, announces it will adopt the 996 work schedule. Employees take to social media to protest.
• April 2019: Chinese tech workers create a repository called 996.ICU on Github. The crowd-sourced database collects allegations about Chinese companies’ overtime work schedules. Among the companies named are some of the biggest names in China’s tech sector: social media giant Tencent, e-commerce behemoth Alibaba, and Bytedance, Tiktok’s Chinese owner. The project is “starred” 255,000 times on Github. 
• April 2019: Meanwhile, tech executives jump to the defense of long work hours. Alibaba’s Jack Ma famously calls 996 “a huge blessing.” Richard Liu, CEO of e-commerce platform JD.com says people who slack at work “are not brothers of mine.” (Both links in Chinese)
• The topic soon died down without major changes made by companies. Despite condemnation from state-affiliated media, the government didn’t launch investigations into alleged violations of the labor law.
• H1 2020: Tech company workers complain that the 996 schedule followed them home as employees work from home during the pandemic.
• Jan 2020: Death of the Pinduoduo employee renews public scrutiny of tech firms’ overtime culture. In the same month, a second Pinduoduo employee dies after jumping from the 27th floor of an apartment building in Changsha, the capital of central Hunan province.
• Jan 2020: A Pinduoduo employee is fired after posting a photo of a co-worker being taken away by an ambulance from the company’s Shanghai headquarters. Pinduoduo says in a statement that he was fired for posting “radical” messages “in violation of the company’s employee guide.”

Changing demography: Shao Yu, chief economist at brokerage Orient Securities, wrote in a 2019 essay  (in Chinese) that anti-996 sentiment reflects China’s demographic shift from labor surplus to labor shortage in the past decades. 

• China reached a key demographic turning point in around 2010, wrote Shao, when the country’s unskilled labor market moved from surplus to shortage. Known as the “Lewis turning point,” this is a situation in economic development where surplus rural labor is fully absorbed into the manufacturing sector.

“Once the Lewis turning point is crossed, we enter the neoclassical development stage,  in which labor supply shifts from surplus to shortage, and economic development no longer relies on the crude input of labor force, but on the improvement of production efficiency.”

“One result of the shift is that people start to pursue a quality life instead of basic needs.” 

— Shao Yu, chief economist at Orient Securities

However, China still has surplus skilled labor, including tech workers, curbing skilled workers’ “bargaining power,” Eli Friedman, associate professor at the Cornell University School of Industrial and Labor Relations, told TechNode in an email.

“China’s higher education has expanded dramatically in recent years, creating a huge number of graduates competing for jobs, particularly in the prestigious big companies. In essence, the companies can get away with it because workers don’t have a lot of bargaining power in the marketplace. Companies of all kinds would like to extend their employees’ working hours, and the tech firms have been in a position to get away with it.”

— Eli Friedman, associate professor at the Cornell University School of Industrial and Labor Relations

How do they get people into 996? It’s not as simple as telling people to stay late at work. Tech companies try to “create consent” when forcing employees into overtime work, He Xuesong, professor at East China University of Science and Technology, wrote in a 2020 paper (in Chinese).

• He wrote that tech firms have widely adopted a project-driven work system. As a result, wrote He, “tech workers have to work overtime to catch up with the speed of projects.”
• He also mentioned that tech firms tend to create an “overtime culture” in which anyone taking time off is seen as not pulling their weight.

“The overtime culture makes it impossible for employees to choose whether to work overtime or not according to their own will. They are forced to choose to work overtime together with their supervisors and colleagues in the atmosphere of overtime.”

— He Xuesong, professor at East China University of Science and Technology

• Not every tech office in China has such a culture.  In August, employees of Microsoft China, a company whose workers usually go home at 5 p.m., called out colleagues who had formerly worked at Huawei and Alibaba to “stop the 996 work schedule,” saying that they were disturbing the company’s work culture.

Is it legal? On the front page of the 996.ICU project’s official website, organizers printed clauses found on China’s Labor Law that prohibit unpaid overtime work imposed on employees. In April 2019, online protestors called on people enraged by Jack Ma’s endorsement of 996 to send an official copy of China’s labor law to Alibaba’s headquarters.

However, China’s courts have held that forcing salaried employees to work overtime does not run afoul of China’s existing laws, according to a lecturer at Nanjing Audit University.

• Tech workers are usually paid fixed monthly wages, rather than hourly rates, writes labor law expert Li Gen. The law provides that hourly workers receive overtime pay for hours worked over 44 in a week or on weekends. However, provisions about whether salaried workers should be paid for their overtime work are “ambiguous and chaotic,” Li wrote in a 2020 paper.
• China’s Wage Payment Provisional Regulations, first released by the Ministry of Commerce in 1994, said its provisions about overtime pay “don’t apply to workers with irregular working hours.” This means that the provisions on overtime don’t apply to workers who are paid fixed monthly wages, wrote Li:
• “This provision has become the main basis for both the judiciary and scholars to hold the view that ‘workers working irregular hours are not required to be paid overtime wages’.” 

Wrong metrics: Tech firms had to adopt the 996 work schedule to make up for low productivity, but longer working hours doesn’t necessarily mean better outcomes, Zhang Yilai, an economic professor at the Business School of China University of Political Science and Law, wrote in a 2019 paper (in Chinese).

• China has a low GDP per hour worked, according to Zhang’s paper, meaning low productivity: China’s GDP per hour worked was $13.5 in 2017, while that of the United States was $72 and Germany was $69.8 in the same year.
• GDP per hour worked measures how efficiently labor input is used in the production process. Data from the Organisation for Economic Cooperation and Development (OECD) shows that efficient work is associated with more time off—countries with better per-hour productivity tend to work less hours overall.
• Zhang wrote that Chinese companies don’t tend to think in terms of output per hour worked. Instead, they tend to use the concept of “output per person,” which simply divides total output by the number of employees, neglecting hours worked. Thus, he wrote, “it’s no wonder that enterprises utilize overtime work schedules like 996 to increase their ‘output per person.’”

But it just doesn’t work: Increasing labor inputs, including increasing working hours, may lead to a rise in output, Zhang wrote, but it “follows the law of diminishing marginal returns,” a theory that predicts adding an additional factor of production will result in smaller increases in output.

“Chinese enterprises still tend to use ‘output per person’ as an indicator of management, which prompted the rampant 996 phenomena. We should switch to the management idea of how to improve ‘GDP per hour worked’ in order to maximize the innovation potential of enterprises and the society. ”

— Zhang Yilai, economics professor at the Business School of China University of Political Science and Law

Friedman of Cornell University said it’s unclear if 996 is good business, but he reckons that it’s an “ethical problem.”

“Why should people be forced to devote the overwhelming majority of their waking hours to work, even as these companies amass billions of dollars of wealth? Companies like Alibaba and Tencent can absolutely afford to have employees work the legally-mandated number of hours and still turn a profit.”

— Eli Friedman

Big tech’s labor practices under fire

• Netizens denounced Alibaba-backed Ele.me for its response to the sudden death of a 43-year-old deliveryman who worked for the platform via its on-demand logistics service Fengniao. In an initial response to the driver’s death at work, the company said “There is no direct labor relations between the rider and the platform” (our translation) and it would only provide a RMB 2,000 (around $308) compensation out of “humanitarianism.” Relenting to public criticism of its first response, Ele.me said in a Friday statement that it will raise the insurance payment for the worker’s family to RMB 600,000 (SCMP)
• A one-minute video showing a Chinese food delivery driver setting himself on fire in front of a Fengniao delivery station in the eastern Chinese city of Taizhou went viral on Chinese social media on Tuesday. (TechNode)
• A video posted by a former Pinduoduo employee detailing poor working conditions at the company went viral amid renewed discussions of compulsory overtime work schedules at Chinese tech companies. The video from the disgruntled former employee follows two recent deaths of Pinduoduo employees. (TechNode)

US-listed Chinese firms feel the squeeze

• E-commerce giant Alibaba, along with rival Tencent, may be cut off from US capital. (The Wall Street Journal)
• In response to the US forcing Chinese companies from its stock market, Chinese online retailer Vipshop, livestreaming platform Joyy, and Tencent Music are reportedly seeking secondary listings in Hong Kong. (Dealstreet Asia)
• Secoo, the Nasdaq-listed luxury retailer, has launched a privatization plan, joining a growing list of US-listed Chinese companies fleeing the American stock market amid worsening trade tensions. (Caixin Global)

Red-hot tea market

• Management at beverage chain Luckin Coffee has demanded the removal of Guo Jinyi, who was named its CEO in July after the company’s April financial fraud scandal, citing cronyism and incompetence. They also asked to launch an independent investigation into Guo’s conduct. (Caixin Global)
• Beijing-based tea beverage brand Willcha raised an eight-digit funding round from angel investors, which it said will be put toward offline expansion. China’s tea beverage market has drawn more than RMB 3 billion investment between 2010 to 2020, data (in Chinese) from corporate intelligence service Qichacha showed. The market has surged over the past decade with number of registered merchants increasing more than tenfold to 87,000 in the first 11 months of 2020 from 7,410 in 2010. Venture capital invested in the sector reached a historical high of RMB 104 million in 2020. Bubble tea brand Naixue’s Tea reportedly received more than $100 million in January at a nearly $2 billion valuation. (TechNode Cn, in Chinese)

A former Pinduoduo employee is speaking out about poor working conditions at the Chinese e-commerce giant after posting online a photo of a co-worker being taken away by an ambulance from the company’s Shanghai headquarters.

Why it matters: The former employee’s complaints about the e-commerce company has further fueled social-media backlash against overtime work schedules at Chinese tech firms. Pinduoduo is the target of a fresh wave of online criticism for its alleged coverup through its punishment of the whistleblower.

• Last week, the death of 23-year-old Pinduoduo employee reignited online discussions about the overtime work culture at Chinese tech giants.
• On Jan. 9, another Pinduoduo employee died after jumping from the 27th floor of an apartment building in Changsha, the capital of central Hunan province.

Details: The morning of Jan. 7, the employee, surnamed Wang, witnessed a co-worker taken away by an ambulance at an exit of Pinduoduo’s Shanghai headquarters. He posted anonymously a picture of the scene on Chinese social networking platform Maimai, where the topic quickly went viral.

• Pinduoduo fired Wang the next day. In a statement sent to TechNode, Pinduoduo denied firing Wang for his Jan. 7 Maimai post, saying it ended Wang’s work contract because he had previously posted several comments the firm considers “extreme,” in violation of the company’s employee guide. Pinduoduo included comments it attributed to Wang including “I want to kill XX” and “I want Pinduoduo to die” (our translation) on Maimai as examples.
• Since he was fired, Wang has continued to speak out against what he says are toxic working conditions at Pinduoduo, where pressure to work excessive hours is endangering employees’ health.
• “Employees at Shanghai headquarters are required to work more than 300 hours per month.. and workers at the grocery unit have to work more than 380 hours per month,” Wang said in a 15-minute vlog on video platform Bilibili. Chinese labor law specifies a standard 40-hour work week.
• His complaints include a number of details about the company’s working conditions, including a limited number of toilets, shortened official holidays, and delayed year-end bonuses.
• Wang’s firing has also drawn public ire over Maimai’s user privacy practices, since Pinduoduo was able to quickly identify him despite his anonymous posting. Maimai CEO Lin Fan has denied (in Chinese) that the company shares user data to third parties.

Context: Overtime schedules like the infamous “996” and “10-12-6” have drawn widespread attention as recent deaths of tech employees are stoking intense public discussion.

READ MORE: INSIGHTS: 996 and China speed—Slowing growth in the face of a changing workforce

Overtime culture in the spotlight, again

The sudden death of an employee of e-commerce giant Pinduoduo renewed public discussion about the work culture at Chinese tech companies, accused of encouraging or even requiring grueling work hours.

The employee, surnamed Zhang, worked for the company in the western Chinese administrative region of Xinjiang. Zhang fainted on her way home after finishing work at midnight on Dec. 29. After six hours of first aid, Zhang, who joined Pinduoduo in July 2019, was pronounced dead. Her death didn’t get much public attention until a self-identified acquaintance of Zhang’s blamed Pinduoduo’s grueling work schedule as the cause for her death in a post (in Chinese) on professional social media platform Maimai. The post has drawn more than 3,500 shares, while the hashtag, “Pinduoduo employee sudden death” was viewed more than 270 million times as of Wednesday on microblogging site Weibo.

The e-commerce firm then responded to a thread discussing the news via its official account on Q&A platform Zhihu in defense of the illegal but commonplace practice: “Who isn’t exchanging their life for money? I’ve never thought of this as a problem with money, but rather as a problem of this society” (our translation).

Pinduoduo quickly deleted the response, and later published a lengthy post on Weibo, explaining that the comment was posted by an employee from a partner company. The employee forgot to log out from the official Pinduoduo account when sharing his opinion. Pinduoduo apologized and pledged to tighten control over their management.

The labor supervision department in Shanghai, where Pinduoduo is registered, has launched a probe into the company’s working conditions.

However, investor interest in the company appears resilient. Share prices for Nasdaq-listed Pinduoduo had more than tripled in 2020, and surged 12% on Wednesday after falling 6% on the news Tuesday.

READ MORE: INSIGHTS: 996 and China speed—Slowing growth in the face of a changing workforce

• A Chinese netizen based in Hangzhou voiced a complaint online after her company’s human resources department used data collected from a smart cushion to track her working hours, local media reported. As the developer of the smart cushion, the company responded in a statement that it asked employees to test the product in order to collect relevant data and promised it wouldn’t use the data to evaluate employee performance. (Jiemian, in Chinese)

Regulation enforcement

Chinese market watchdog, the State Administration of Market Regulation (SAMR), has issued fines of RMB 500,000 ($76,657) each for JD.com, Alibaba’s Tmall, and Tencent-backed fashion e-commerce site Vipshop for irregular pricing strategies during this year’s Singles Day shopping festival held on Nov. 11.

SAMR offered a detailed list of more than 20 products that were affected by irregular pricing across the three platforms. For example, a gift box of pastries sold on JD.com was priced at RMB 149 on Nov. 4 for the Singles Day promotion where buyers could get an RMB 20 rebate for orders over RMB 100. However, the product was priced RMB 10 lower on Nov. 3. (Reuters)

Online consumption in 2020

• Transaction volume in 2020 for China’s food delivery market is expected to hit RMB 835.2 billion, 14.8% higher than that in 2019, according to the state-backed media outlet Guangming Online. Growth decelerated sharply from the 30% year-on-year increase seen in 2019. The penetration rate of food delivery services in the first three city tiers reached 96.3%, according to the report. (Guangming Online, in Chinese）
• Total box office revenue in China reached RMB 20.42 billion in 2020, making it the largest movie market in the world for the first time thanks to the country’s largely successful coronavirus pandemic response. However, the revenue still marks a significant 68.2% decrease from 2019. Alibaba-backed Taopiaopiao and Tencent-backed Maoyan dominate the online movie ticketing market in China, where around 90% of film ticket sales happen online. (Maoyan statement)

Pinduoduo unveils Duoduo Pay

Chinese e-commerce titan Pinduoduo on Thursday rolled out its own payment tool, Duoduo Pay, as it moves to close the service loop within its ecosystem for its 731 million users.

To activate the payment tool, Pinduoduo users have to register with their real names and then link a credit or debit card to their accounts. Duoduo Pay supports basic payment features such as account recharging and cash withdrawals. Its features are minimal compared with those offered by Alibaba’s Alipay and Tencent’s WeChat Pay.

Duoduo Pay is supported by Fufeitong, a Shanghai-based third-party payment service founded by the local Shanghai government to facilitate online payment of utility bills. Pinduoduo became a controlling shareholder after acquiring a 50.01% stake through a Shanghai-based subsidiary in January.

By luring users to its payment tool, Pinduoduo could both lower the cost for financial transactions—it paid RMB 516 million in 2019 to use Tencent’s WeChat Pay—and keep user payment information within its own system.

Payment is a crucial infrastructure service for Chinese tech giants that aim to keep users within its own service ecosystem. E-commerce giant JD.com, food delivery app Meituan, ride-hailing app Didi, and smartphone maker Xiaomi are all promoting their own payment options to attract users from WeChat Pay and Alipay. (36kr, in Chinese)

Community grocery e-commerce sizzles

Authorities in the eastern Chinese city of Nanjing rolled out on Dec. 9 a guideline targeting unfair competition and shadowy practices in the red-hot community grocery e-commerce sector.

• The watchdog warned tech firms to cease “dumping” products prices below cost, a practice platforms use to beat out competition. The authorities also prohibited the platforms from falsely advertising discounted prices and posting misleading product information.
• Management at top players including Alibaba, Meituan, Didi, Suning were summoned for a meeting, where they signed an agreement promising to comply with the rules. Competition between Chinese tech companies can turn cutthroat when battling for market share in an emerging sector, from ride-hailing to food delivery. (Jiemian, in Chinese)

JD.com poured a massive $700 million strategic investment into community grocery e-commerce platform Xingsheng Youxuan, the company announced on Friday. (Ebrun, in Chinese)

READ MORE: Covid-19, an opportunity for e-commerce

Pandemic a boost to China’s online retail

Growth in China’s online retail sales decelerated to 11.5 % year on year in the first 11 months of 2020 from 16.5% in the same period last year, according to data from China’s National Bureau of Statistics.

China’s online retail sales totaled RMB 10.54 trillion (around $1.61 trillion) in the same time period, according to the report. Sales during the period were 0.6% higher than those during the first 10 months, signaling a gradual recovery for the world’s second-largest economy.

More Chinese consumers shifted to online purchases during 2020, the report said, with online retail sales for physical goods accounting for 25% of total sales for retail consumer goods in the reporting period, up from 20.4% during the same period last year. (National Bureau of Statistics, in Chinese)

Food technology is gaining traction in China’s VC world. It’s a huge industry—from plant-based meat to agricultural drones, foodtech encompasses everything in the food supply chain that uses technology to improve efficiency and output.

So far, grocery delivery has garnered the most attention. The sector saw a boom thanks to pandemic-induced demand for everyday items on e-commerce platforms. 

This year, tech giants like food delivery platform Meituan and e-commerce firm Pinduoduo have tapped into the market. Meanwhile, venture capitalists have injected billions of dollars into startups to compete with them.

Grocery delivery is just one part of the “downstream” link in the food technology value chain, said Matilda Ho, founder and managing director of Bits x Bites, a Shanghai-based foodtech venture capital firm. Companies in this category deal directly with customers.

China has built a vast digital economy with “impressive e-grocery and food delivery penetration,” which has been driving food and retail investment in the country, said Ho. 

But when it comes to producing food to deliver, the country could still face challenges. “Without investment in upstream innovation, we won’t see meaningful improvement in farm production efficiency to sustain the rapidly growing food demand,” she said.

China was the world’s second-largest market for foodtech investments in the first half of this year, following the US, according to a report by foodtech venture capital firm Agfunder. 

Some 24 startups raised a total of $1.2 billion from VCs during the period, according to the report. More than half of the total investment went to grocery delivery startups Missfresh and Tongcheng Life, which raised $500 million and $200 million in July and June, respectively.

“Since the start of the trade war and the African Swine Fever outbreak in China, self-sufficiency in food production has become a national priority. The Covid-19 pandemic has accelerated the timetable for investment in supply chain efficiency.”

— Matilda Ho, founder and managing director of Bits x Bites.

In the “upstream” link of the foodtech value chain, which includes categories such as farm management technology and farm automation, one of the biggest deals went to Suzhou-based farm drone company Skysys, which raised RMB 10 million (around $1.5 million).

Nevertheless, investment into the upstream link is growing. Funding for companies focused on farm management technology, including internet of things (IoT) equipment and management software for farms, reached $490 million in 2019, up 363.4% from the previous year, according to another Agfunder report. The largest deal last year went to Beijing-based Mcfly, which provides remote sensing, big data, and AI technology to digitize farming in China. The company raised $14 million in March 2019.

READ MORE: How tech is changing agriculture in China

Big deals

• April 29: Suzhou-based farm drone company Skysys raises RMB 10 million.
• June 11: Suzhou-based Tongcheng Life raises $200 million from investors including Legend Capital, Bertelsmann Asia Investment Fund, and Yilian Capital.
• July 23: Missfresh, a grocery delivery startup, raises $495 million from investors including CICC Capital and Tencent, valuing the company at $5 billion.
• Nov. 10: Jianyun Technology, a precision agriculture company, raises RMB 10 million.
• Nov. 12: Yinongyuan, an agriculture supply chain firm, raises RMB 20 million.

Investor talk

Matilda Ho, founder and managing director of Bits x Bites. (The interview has been edited for brevity and clarity.)

TechNode: How do you decide whether to invest in a foodtech startup?

Ho: We invest in companies that are advancing bioscience, data science, and processing technology to tackle challenges in China’s food supply chain, from precision agriculture to crop and animal health to protein alternatives and nutrition. 

I should add that we’re a purpose + profit fund. That means we invest in companies that can demonstrate they have a sustainable business model to achieve meaningful growth and scalable impact. We carefully select founders with purpose in their core and empower them to build great enterprises of the future. With the $30 million first close of our new fund, we look forward to working with more pre-A to B stage companies that are bringing disruptive solutions to our food system.

TN: What are your projections for the foodtech market in China? 

Ho: Since the start of the trade war and the African Swine Fever outbreak in China, self-sufficiency in food production has become a national priority. The Covid-19 pandemic has accelerated the timetable for investment in supply chain efficiency. In the past two years, we have seen tremendous investment from state-owned enterprises and other corporates to consolidate agriculture. 

Without industrial-scale operations, it is very challenging to apply technology and modernize production. So, in agriculture, we are looking at IoT and bioscience solutions that can help producers improve yields while reducing input, address soil degradation, and protect animals, crops, and farmers’ health.

Midstream, only 19% of the Chinese market has access to cold chain logistics, far below other developed countries, which exceed 95% [on average]. We are looking at how automation and data can improve food safety and cut down spoilage in storage, processing, and transportation. 

TN: Why are investors interested in food tech?

In the past few years, there has been a surge in startups that are tackling the challenges in the food system. Many of them are applying proven technology from other industries.

For example, satellites from the aerospace field are now being applied to provide farmers with environmental analytics to make better decisions to improve crop yields. Gene engineering driven by human medicine is now used to improve breeding technology for more resilient and disease-resistant crops and livestock. Automation in industrial manufacturing is now being adopted to address the labor drain in agriculture.

The food industry is the largest sector of the global economy. The World Bank estimates food production to compose 10% of all economic output. This is an opportunity that investors cannot ignore. 

TN: How do you categorize food tech startups? Which category do you think is the most promising?

Ho: One way to dissect food tech startups is by where a solution fits in the food supply chain. Downstream generally refers to innovations directed at the consumer, such as new packaged foods, personalized nutrition apps, and grocery or food delivery platforms that offer convenience. 

Bits x Bites tends to focus more on upstream and midstream opportunities. Upstream examples are farm automation, breeding technology, and crop and animal health solutions that address food security and production efficiency. We also look at midstream applications such as ingredient technology [Editor: techniques that help make new food ingredients], food processing, packaging, and food preservation that can address nutrition and safety challenges. 

TN: Will plant-based meat become the next big thing in the market? What is Bits x Bites’ projection of the market?

Ho: Chinese people consume more plant protein per capita than most countries in the world. Until two decades ago, meat was barely affordable for most consumers. In our view, China’s per capita demand for animal protein is unlikely to come down any time soon in the same way it has started happening in more meat-centric western diets. This leaves little room for plant protein consumption in China to see substantial growth. 

READ MORE: We tried Beyond Meat in China. Did anyone else?

TN: What are the exit options of food tech companies?

Ho: There are numerous initial public offering (IPO) and merger and acquisition (M&A) cases in agrifood. In China, recent acquisitions are primarily driven by the Chinese government’s push for self-sufficiency and food security. We’ll likely see more Chinese acquisitions of very few large, and likely international, targets. Globally, we see a number of multinationals highly active in M&As in the ingredient tech and agtech [agriculture technology] spaces. Most recently, Ingredion gained full ownership of legume protein company Verdient. However, I would still be more positive on IPOs when talking about exit [options] in China rather than M&A. Especially with the STAR market, biotech and data science companies in agrifood have an achievable pathway to raise public funding.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

This week, Michael Norris is back for his regular earnings check-in, as the guys go over the calls from Bilibili, Pinduoduo, and Tencent, including Bilibili’s formula for success, and the increasingly intense debate between Pinduoduo’s longs and shorts.

Hosts may have interests in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Hosts:

• Elliott Zaagman – @elliottzaagman
• James Hull – @jameshullx

Guest:             

• Michael Norris – @briefnorris

Editor:

• Peter Isachenko

Podcast information:

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• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

Chinese e-commerce platform Pinduoduo is planning to raise up to $6.1 billion through a convertible notes offering and equity.

Why it matters: Pinduoduo is looking to fundraise amid buoyed investor confidence on the company’s first-ever quarterly profit, reported in the quarter ended September. The fast-growing e-commerce platform plans to fund new business channels and cover rising expenses.

• Robust third quarter results sent Pinduoduo shares up more than 20% on Nov. 12.

Details: The company is offering $1.75 billion in convertible senior notes due in 2025, as well as 28.7 million American Depositary Shares (ADS) at $125 apiece. There is a greenshoe option of $250 million in notes and 4.3 million ADS, bringing the total offering potentially as high as $6.1 billion. Pinduoduo said the offer was oversubscribed.

• The proceeds will be used to “strengthen its balance sheet and make strategic investments in infrastructure, expanding business operations, making future acquisitions, and entering partnerships,” the company said in a statement on Wednesday.
• During the earnings call held last week, Pinduoduo management highlighted two points of focus for the company: its “New Brand” initiative where the platform provides support to merchants and manufacturers under the “consumer-to-manufacturer” business model, and the produce and grocery pick-up service, which began taking off after the pandemic lockdown.
• “We are seeing large-scale changes in consumer habits as a result of Covid-19, which are accelerating digital transformation across different sectors,” Chen Lei, chief executive officer of Pinduoduo, said in the statement. “We are prepared to invest capital and resources to improve our platform and build infrastructure to capture key opportunities.”

Context: Pinduoduo had already received nearly $1.8 billion before going public, and continues to actively fundraise even after its $1.6 billion Nasdaq debut in 2018.

• Pinduoduo offered $1 billion convertible notes in September 2019 to fund its expansion into higher-tier domestic markets.
• Undisclosed long-term investors invested $1.1 billion in the e-commerce company through a private placement in March.

Going to the toilet can be very difficult for employees in China’s big tech firms, claims an article that went viral on Chinese social media yesterday. Big tech offices don’t provide enough toilets for their staff, writes magazine Renwu.

Why it matters: It’s not the first time that big tech firms in China have been under fire for workplace practices, but it is the first time that toilets have been the issue.

• China takes toilets very seriously. In 2015, the Chinese government launched a “Toilet Revolution,” to build public toilets across the country, pursuant of higher sanitary goals.

In the eyes of managers, toilets are the enemy of efficiency. The toilet is the last part of the management system of a large factory. What this system has to do is to occupy the body of the employee as long as possible, so that the employee can create more productivity per unit of time.

Chinese magazine Renwu

Details: The viral article is based on reports from employees in China’s big tech firms who report long toilet queues due to insufficient facilities. It alleges that some companies limit toilet facilities in a deliberate attempt to control employees’ bodies.

• The problem is worst at Pinduoduo and Kuaishou, the article said:
• “I try to drink as little water as possible every day. If I urinate, I go to the mall while eating lunch downstairs,” Liu Xiaoran, a Pinduoduo employee, was quoted in the article (our translation). The e-commerce app has increased staff in a Shanghai office sixfold in the last year, but toilets have not been added to match the influx of workers.
• Similarly, short video app Kuaishou has expanded its staff from 1,000 employees in 2017, to 8,000 in 2018. In 2020, it has opened more than 10,000 new positions, but it has not added enough new toilets to keep up.
• Kuaishou has reportedly even installed timers on top of the toilets.
• Alibaba’s Ali Park in Hangzhou is not lacking in sanitary facilities, but employees told Renwu that during China’s biggest shopping festival, so many Alibaba employees work overtime that the toilets fill up.
• As of writing, the hashtag “big tech’s toilet problem” has reached almost 42 million views on Weibo.

The worst experience is when you wait for a long time to enter, and find that the last colleague who rushed back to work forgot to flush.

Chinese publication Renwu

Context: Big tech firms first faced criticism over working conditions in March 2019 after employees took to Github to protest its “996” working culture; working from 9 a.m. to 9 p.m., six days a week.

• Renwu magazine last blasted tech for working conditions in September, when an article accusing delivery companies of forcing drivers to take risks to meet tight schedules provoked outrage.

Share prices for Pinduoduo rocketed 20% in New York on Thursday after reporting robust top-line growth which easily beat analyst estimates as well as a surprise adjusted quarterly profit—its first since going public in 2018.

Why it matters: The results renewed investor confidence in Pinduoduo, which had missed market expectations in earlier quarters and faced mounting scrutiny for its inability to turn a profit.

• Chinese tech stocks plunged earlier this week after Beijing rolled out on Tuesday anti-trust draft rules aimed at some of the country’s biggest internet companies. Pinduoduo shares dipped along with its peers but creeped upward on Wednesday. The new rules could benefit smaller platforms and have more impact on larger names, Barron’s reported citing analysts at research firm Morningstar.
• Alibaba shares closed down around 9% on Wednesday on news of the rules, shadowing its Singles Day feat of booking gross merchandise volume of RMB 498.2 billion during the promotion.

Details: Pinduoduo posted third quarter revenue of RMB 14.2 billion ($2.1 billion), climbing 89% year on year from RMB 7.5 billion in the same quarter of 2019. Revenue reached the high end of analyst estimates compiled by Yahoo Finance. Growth decelerated from the 129% annual rate seen in Q3 last year.

• Pinduoduo’s annual active buyers rose 36% year on year to 731 million in the 12 months ended September, representing a net add of 48 million from Q2. The user size is on par with rival Alibaba, which added 15 million to reported 757 million annual active buyers in the quarter ended September.
• However, Pinduoduo’s clientele are significantly more budget-conscious that those of its peers. Annual spend per active buyer on the platform in the 12-month period ended September was RMB 1,993 ($293.6), an increase of 27% from RMB 1,567 over the same period last year. Annual spend per active buyer for rival Alibaba was around RMB 9,000 per buyer, and approximately RMB 6,000 for JD.com.
• The company recorded its first quarterly adjusted profit with non-GAAP net profit attributable to shareholders hitting RMB 466 million compared with a net loss of RMB 1.6 billion the same quarter a year ago. Adjustments noted in its filing included share-based compensation and interest payments related to its convertible bonds.
• Pinduoduo will continue to invest in its “New Brand” initiative by providing support to merchants and manufacturers under the “consumer-to-manufacturer” model.
• The company recently launched Duo Duo Maicai, an agricultural product sales channel. To address the specific logistics demands for produce, the company is “prepared to go heavy in building” and “accelerating the development of agriculture infrastructure,” David Liu, vice president of strategy, said during the earnings call held Thursday night.
• Tiger Brokers analysts expect the company will swing back into a loss in Q4 given the huge marketing expense for Singles Day. However, they are bullish on the company’s long-term prospects. “Profitability is just a matter of time after the model is proven,” the analysts wrote in a research note.

Context: Pinduoduo and Alibaba, two of the largest e-commerce platforms in China, have long been locked in a public spat about “forced exclusivity,” whereby marketplace platforms force sellers to exclusively list on one online marketplace.

• Chinese market regulators began to curb such unfair practices last year, reminding more than 20 e-commerce sites on a forum that forced exclusivity is illegal.
• “Intensified” forced exclusivity efforts from rivals has weighed on Pinduoduo’s performance, according to the company.

Chinese e-commerce giants including Alibaba and JD.com have announced new record-breaking sales for Singles Day, the 11-day shopping extravaganza that ended Wednesday at midnight.

Why it matters: Singles Day, typically a 24-hour event, has evolved into a weeks-long shopping festival. Alibaba, credited with popularizing the promotion, extended the event this year by creating two shopping windows that combined spanned Nov. 1 to 11.

• Singles Day is the world’s largest sales event and is considered an informal bellwether for China’s economic health.
• The two checkout periods mean that gross merchandise volume (GMV) recorded on the actual Nov. 11 date do not total all of the sales for the promotion, as in prior years.

Details: Alibaba booked RMB 498.2 billion ($74.1 billion) in GMV for the Singles Day promotional period of Nov. 1 to 11, an increase of 26% compared to the same timeframe in 2019, according to the company.

• JD.com, which always discloses 11-day figures for the event, recorded RMB 271.5 billion in GMV during the same period, rising 33% year on year compared with the 28% annual growth seen last year, to RMB 204.4 billion.
• China’s overall e-commerce sales across platforms for Nov. 11 dropped to RMB 332.87 billion from RMB 410.1 billion booked last year, according data from China-based data services company Syntun. This figure does not include total sales for the 11-day period for all e-commerce platforms.

• Alibaba lengthened the shopping period to 11 days to allow consumers more time to browse and grab deals while easing pressure on the logistics infrastructure, therefore creating a better shopping experience, Alibaba chief executive officer Daniel Zhang said during the September quarter earnings conference held on Nov. 5.
• Despite splitting its sales with the first checkout window from Nov. 1 to 3, Alibaba remained the biggest Singles Day player on Nov. 11, accounting for 59% of total sales compared with 66% last year. JD.com accounted for 26% of sales compared with 17% last year, while Pinduoduo’s share stayed flat at 6% and Suning declined slightly to 3% from 5% a year ago.
• Chinese couriers processed 3.9 billion parcels during the 11-day time period, according to data from the State Post Bureau. More than 675 million parcels were processed on Nov. 11, up 26% year on year. The number of packages during the post-promotional period between Nov. 11 to 16 is expected to rise 28% compared with last year to 2.9 billion, double the average daily number.
• Brands are continuing to leverage the shopping event to promote new products. Syntun data showed 6.4% of the total 31 million stock-keeping units (SKUs) on sale on Nov. 11 were newly launched products, up from last year’s 5.4%.
• Home appliances, smartphones and consumer electronics, apparel, and cosmetics were the most popular product categories.

Stepped-up scrutiny: The event took place as authorities tightened regulations over internet companies to curb anticompetitive practices, such as forced exclusivity and price discrimination.

• The new rules have weighed on Chinese tech firms. Alibaba share prices in New York closed down around 9% on Wednesday since the draft rule was released on Tuesday, Beijing time. Share prices for JD.com dipped more than 2% during the timeframe.
• In addition to government scrutiny, Alibaba is weathering the impact from its fintech affiliate Ant Group’s public offering debacle.

READ MORE: China widens antitrust rules to rein in internet firms

Context: First popularized by Alibaba in 2009, Singles Day has become the biggest national shopping promotion day in China.

• This year’s shopping promotion comes as the whole country is focused on driving post-pandemic domestic consumption.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

In an earnings season tradition, Elliott and James bring on Michael Norris to discuss the quarterly earnings reports of Alibaba, JD, and Pinduoduo, and discuss what investors should be looking for from them going forward.

See supporting charts here.

Hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:

• Michael Norris– @briefnorris

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

Gains in revenue and users during its second quarter fell short of market expectations for Chinese e-commerce platform Pinduoduo, with shares prices dropping 12% by midday Friday on its topline miss and strategic focus on household essentials rather than consumer brands.

The social e-commerce platform’s Q2 revenue surged 67% year on year to RMB 12.19 billion ($1.73 billion), largely driven by ads, but missed analyst estimates of RMB 12.20 billion. 

The company added 81.4 million monthly active users (MAU) during the quarter, growing 55% year on year to 568.8 million, slower than first quarter’s 68% growth. Operating losses widened to RMB 1.64 billion ($232.1 million), a 10% increase year on year but a decrease from RMB 4.40 billion ($621.0 million) the first quarter. 

What investors are watching

Pinduoduo shrank its net loss attributable to shareholders to RMB 899.3 million ($127.3 million) from RMB 4.20 billion in Q1. But share prices on the Nasdaq dropped 12% to $85.77 by midday, signaling investor disappointment in its second quarter performance.

Momentum in GMV, a measure commonly used among e-commerce platforms in China to represent sales volume, fell below 100% for the first time to 79% annually from 108% in Q1, according to data compiled by Tiger Brokers. 

“Pinduoduo’s business looks like it is maturing. That will dissuade some investors, who were hoping for triple-digit GMV growth to continue,” said Michael Norris, leader of research and strategy at AgencyChina. For comparison, Alibaba’s GMV growth rate from fiscal year 2019 to 2020 was 23.2%. 

Strategic focus on users vs. rivals

Financial struggles brought on by the pandemic caused a notable consumption shift in Pinduoduo’s user base. “Users had strong demand for household necessities and agricultural products, and continued to be more cautious in discretionary spending,” Tony Ma, vice president of finance, said during the earnings call Friday. 

The company’s strategic focus during the 618 shopping holiday held in June was to meet consumers’ need for daily products rather than luxuries. 

The company will prioritize meeting user demand for necessities and farm produce through a “recommendation model” rather than focusing on brands and developing separate livestreaming services on the platform, a growth catalyst for rival Alibaba. Pinduoduo executives’s pledged to maintain its user-focused strategy and group-buying model during the Friday earnings call, disappointing investors.

“The prepared remarks focused more on everyday essentials and agricultural products, rather than branded goods,” in a shift away from what investors see as key test in its competition with rivals Alibaba and JD.com, “which I found disconcerting,” Norris said.

“In Q2 this year we observed consumers’ spending to be more value conscious,” Pinduoduo Vice President David Liu said. 

The company plans to continue investing in marketing to users through the rest of the year, as well as to drive research and innovation in agricultural technology. 

“We have demonstrated that our user-centric strategy works,” CEO Chen Lei said on the earnings call. “In particular, we started our business in agriculture, and plan to continue our strategy in agriculture.”

Pinduoduo’s user base is growing fast, and at 683 million is closing in on Alibaba’s 742 million users—though reaching the upper echelons of the e-commerce industry’s user base could represent a hard limit for the company. “This represents practically the entire online shopping population in China,” Wang Shan, an analyst at Tiger Brokers, wrote (in Chinese). “The growth rate is bound to slow down. If Pinduoduo is still a loss-making company, how will capital treat it?”

READ MORE: Tesla urges workers to defend company in Pinduoduo spat

US tech war

Additionally, an ongoing tech war between the Trump administration and Chinese firms listed in the US could lead to troubles for Pinduoduo. The White House recommended in early August that Chinese companies failing to comply with US audits would be delisted. On the earnings call, the company’s finance executive, Ma, expressed a commitment to working with US and Chinese regulators to address these concerns.

Yet regardless of the quarterly report nuances, e-commerce is growing, helped along by pandemic-driven digitization. “E commerce is generally doing well globally,” said Esme Pau, an analyst at equity firm China Tonghai Securities. “Consumers spending patterns are moving online.”

The head of Tesla China urged employees to speak up in defense of the company on social networks amid a public spat with online marketplace Pinduoduo over a discounted Model 3 group-buy purchase.

Why it matters: Tesla’s reputation in China for poor treatment of its customers and arrogant business practices is growing as a result of the public squabble. Pinduoduo’s circumvention of Tesla’s restrictive direct-sales only channel meanwhile threatens to open the door to other third parties looking to gain from the brand’s strong consumer demand.

• Tesla has a direct sales model in China with a retail network of 58 showrooms across major Chinese cities in addition to its online sales channel. It opened a flagship store on Alibaba’s Tmall marketplace earlier this year, but only for traffic from customers looking to test drive and purchase car accessories.

Details: Zhu Xiaotong, Tesla’s global vice president and the top boss in China, on Monday called for employees to speak up and defend Tesla’s direct sales retail model in cyberspace, Chinese media reported citing persons close to the company. 

• Zhu urged “every employee to take action” (our translation) on behalf of the company on social media networks. Given the limited manpower and budget in the company’s public relations, Zhu also asked employees to fight back against slander by reporting rumors to internet regulators.
• Tesla then sent a statement to Chinese media on Wednesday, in which it accused Pinduoduo of twisting the truth and manipulating public opinion for its own benefit.
• On Tuesday, the e-commerce platform told Chinese media that a Wuhan-based customer who had been refused the Model 3 delivery had placed a new order along with valid auto insurance with the assistance of Pinduoduo and Yiauto, a Chinese car dealer company.
• Tesla countered, saying that the sedan was not delivered according to its normal procedures. The Model 3 it delivered had been ordered in late July, long before the customer’s later order involving Pinduoduo, which it canceled, according to Tesla’s statement.
• This contradicts the Wuhan buyer’s story to Chinese media that he placed the new order in a family member’s name after Tesla cancelled his group purchase Model 3 and has blocked him from placing a new order, the electric carmaker said.
• Pinduoduo said it was “disappointed” that Tesla was making it difficult for some of their fans to get their dream car and “will do everything” to protect consumers’ rights, the company said to TechNode in an emailed statement.
• The company reiterated to TechNode that the Wuhan buyer, who paid the discount price, has received the car. 
• Tesla did not immediately respond to a request for comment.

Context: Along with Chinese car dealer Yiauto, Pinduoduo in July began promoting a group buy flash sale, offering five randomly selected buyers the chance to purchase a Tesla Model 3 at a discount of RMB 40,000 ($5,770), if 10,000 people signed up for the campaign.

• Tesla denied on July 21 via microblogging site Weibo that it was involved in the promotion, saying that it didn’t provide vehicles for the group buy. The campaign meanwhile hit the target number of sign ups, and five selected buyers paid for the vehicles.  
• A Shanghai-based buyer from the same flash sale has received the vehicle, local media reported.
• Pinduoduo, the social e-commerce platform known for its steep discounts, has a history of clashing with premium brands when applying its subsidy strategy to drive sales.
• In addition to Tesla, Pinduoduo’s aggressive discounting tactics has reportedly irked the likes of Apple and Dyson.

Pinduoduo has rolled out a Wechat-based mini program that focuses on creating an online fashion shopping community for China’s younger consumers.

Why it matters: The new mini program is Pinduoduo’s latest move to increase user engagement by boosting social interaction.

• The platform’s growth is slowing: Active buyers in the 12-month period ended March 31, 2020 totaled 628.1 million, a year-on-year increase of 42% compared with 50% annual growth in the same period a year earlier.
• Pinduoduo is competing with fashion community incumbents in the sector such as Xiaohongshu or Red, Dewu, formerly Poizon, and Nice.

READ MORE: Sneakerheads are China’s latest set of unlikely blockchain users

Details: Shanghai Xunmeng Information Technology Co., Ltd., Pinduoduo’s China-based operating body, rolled out last week Duochao, a fashion and lifestyle mini program on Wechat, local media reported on Monday.

• Duochao is an online community where fashion enthusiasts can post their favorite items via the platform’s central content feed, as well as share their passion for street fashion, from sneakers to clothing and accessories.
• The mini program does not have e-commerce functionality at this stage, though it is widely expected, according to local media.
• Seventeen fashion brands including Nike, DC, Y-3, and Fog have launched official accounts on the platform.
• For now, Duochao does not have a standalone app or website. The program is currently not accessible through Pinduoduo’s main app.
• With the new mini program, Pinduoduo is tapping its popularity with China’s younger consumers. A massive 78% of Pinduoduo users are under 35 years old, according to data from Iimedia (in Chinese). The 24-and-under segment accounts for 24% of the total user base.

Context: Pinduoduo founder Colin Huang just left the board of Shanghai Xunmeng on August 3, one month after he abdicated the position of CEO to focus on the e-commerce giant’s long-term strategies.

Pinduoduo founder Colin Huang left the board of the company’s main operating body in China on August 3, one month after he abdicated the position of CEO to focus on the e-commerce giant’s long-term strategies. Huang still sits on the board of Pinduoduo Inc., US-listed entity that’s incorporated in the Cayman Islands.

Why it matters: Coming on the heels of last month’s leadership reshuffle, Huang’s exit from the board is the latest in his withdrawal from the company’s daily operations.

• Huang may appear to relinquish control, but he still holds significant power over the company: He holds 80.7% of voting shares and sits on Pinduoduo’s powerful Partnership, a superboard created to override the board of directors.
• Other key Pinduoduo leaders followed Huang’s lead with similar moves, triggering widespread speculation about what’s going on within the company as well as the future of the e-commerce giant.

READ MORE: What’s really behind Pinduoduo leadership switcheroo?

Details: Colin Huang and Pinduoduo CEO Chen Lei exited the board of Shanghai Xunmeng Information Technology Co., Ltd., the China operating subsidiary of Pinduoduo,  local media (in Chinese) reported on Thursday, citing information from corporate data platform Qichacha.

• Co-founder Sun Qin stepped down from his roles as legal representative, board chairman, and general manager of the company.
• General Counsel Zhu Jianchong replaced him as the legal person, executive chairman, and general manager.
• The company says the leadership changes are part of an adjustment to the company’s Variable Interest Entity (VIE), a structure adopted by many Chinese tech startups to lure foreign investment.
• The move won’t impact the company’s operation, Pinduoduo said.

READ MORE: INSIGHTS | Can superboards save China tech from one-man rule?

Context: The change in Huang’s position came shortly after he was named China’s second-richest man, replacing Alibaba’s Jack Ma. Huang, who was worth $45.4 billion as of June 22, is second only to Tencent founder and CEO Pony Ma in net worth.

• Huang has already stepped down from top management roles from several Pinduoduo affiliates in Hangzhou and Shanghai since 2018.
• Similarly, Richard Liu, the JD founder who was embroiled in a sexual assault scandal in 2018, is also gradually taking a back seat at the company to avoid key man risk.

Correction: A previous version of the story didn’t clarify that Huang only exited the board of the Shanghai-based operator of Pinduoduo’s China operations, rather than the board of the US-listed entity that’s incorporated in the Cayman Islands.

First Alibaba, now Pinduoduo: Top leaders of China’s superstar tech firms may seem to be bowing out, but have kept significant control over their companies by forming powerful “Partnerships,” superboards which have the potential to control the board of directors. When Alibaba’s Jack Ma and Pinduoduo’s Colin Huang retired from their CEO positions, the two founders simply stepped into new roles at Alibaba Partnership and Pinduoduo Partnership.

In publicly listed US companies, a board consisting of independent directors oversees the firm’s direction, making important decisions such as hiring C-level executives. The boards are elected by shareholders to represent their interests; a democracy of sorts. For some Chinese tech companies, this model has been overridden by a self-selected oligarchy.

Alibaba and Pinduoduo’s Partnerships are, in effect, a second board of directors, a group of experienced leaders plucked from within the company that guides the company’s development—a superboard. They wield concrete powers that can supersede the board of directors at the expense of shareholder control. Some of these powers include choosing board members and future CEOs.

Bottom Line: The e-commerce companies’ superboards were formed to address concerns about one-man rule. Critics argue that the elite nature and range of powers granted to these superboards do little to address oversight concerns; they give power to those they were supposed to take it from. Yet these superboards have done little to dissuade investor interest.

The birth of superboards

Alibaba consolidates top talent: Alibaba’s Partnership launched in 2010 with the goal of allowing “senior managers to collaborate and override bureaucracy and hierarchy.” The company said it was formed to preserve Alibaba’s vision and mission: building the future infrastructure of commerce and making business everywhere easier.

• The Partnership is currently made up of 36 members.
• For the first three years of their tenure, the Partners must maintain at least 60% of the shares they had when they joined the Partnership to ensure that their interests align with those of shareholders, according to its 2014 registration statement. Afterward, they must retain at least 40%.
• Ma and Tsai are both lifetime Partners, and also sit on the board of directors. Partnership rules dictate that they can be removed by a majority Partners vote.
• Tsai said in an interview with Reuters in 2014 that changing the Partnership was “never going to happen” in order to list in Hong Kong, which at the time did not allow a weighted voting structure.
• The Partnership has the right to nominate a simple majority of the company’s board of directors regardless of voting shares, and can unilaterally appoint directors at its own discretion.
• As of July 2020, the Partnership has not exercised this right to a majority, having nominated five out of the current 10 board members.

Further consolidation: Within Alibaba’s superboard lies a super superboard, the Partnership’s administrative body, where the power ultimately lies.

• The six-member Partnership Committee is made up of an even more elite group of insiders, plucked from the Partnership itself.
• It is responsible for administering the superboard and, ultimately, makes the decisions.
• Membership is strictly limited to Alibaba’s top names: Co-founders Ma, Joe Tsai, and Lucy Peng, as well as Alibaba Chairman and CEO Daniel Zhang all sit on the Committee, according to its 2020 annual report.
• Only the existing Committee Partners can nominate a new Partner to the super superboard, a restriction which further concentrates control of the company.
• Over the past year, Ma has decreased his stake in Alibaba from 6.2% to 4.8%, and Tsai reduced his holdings from 2.2% to 1.6%. However, their places on the Partnership Committee supplant any fluctuation in ownership stake, unlike traditional dual-class share structures.

At Pinduoduo, CEO out, Partnership in: In a surprise move, Pinduoduo’s 40-year-old CEO Colin Huang stepped down from his executive position on July 1. Huang said that he plans to spend more time with the board of directors to work on the company’s mid- to long-term strategy and further develop its corporate structure, goals that sound eerily similar to a CEO’s.

• One of his main post-CEO goals is to continue “building and refining” the Partnership, which hasn’t yet reached a quorum of members so it cannot wield any of its powers.
• Aside from big-picture strategies, as part of Pinduoduo’s superboard, Partners will have the power to nominate the CEO and other executive directors.

Admission of power: Pinduoduo issued a frank warning to its shareholders about the superboard’s potential to override shareholders—once it’s active—in a prospectus filed with the SEC: “To the extent that the interests of the Pinduoduo Partnership differ from the interests of our shareholders on certain matters, our shareholders may be disadvantaged.”

• Huang acknowledged in his letter that the Partnership he envisions has obligations to shareholders. The entity should conduct fundamental research and corporate social responsibility activities, the letter said, “without impacting the short- to mid-term interests of existing Pinduoduo shareholders.”
• Huang reduced his personal holdings in the company to 29.4% from 43.3%, in addition to donating 371 million ordinary shares to the Pinduoduo Partnership. He still owns 80.7% of voting shares.
• Pinduoduo doesn’t have a super superboard like Alibaba at the moment. The Partnership’s structure and allocation of power are still evolving. For now, the superboard is in control.

Solution or smokescreen?

The Luckin parable: Though Chinese corporate governance has evolved over the years, the leaders at top tech firms tend to be a rotating cast of the same characters who hold onto power until extenuating circumstances, like a scandal or illness, force change. In Luckin Coffee’s case, the same people followed founder Lu Zhengyao from China Auto Rental to the coffee startup’s spectacular demise.

• In January 2020, Luckin founders Jenny Qian Zhiya and Lu Zhengyao admitted the company had fabricated at least $310 million of its sales.
• Observers blamed the company’s top management for the lack of effective internal supervision.  
• Concentration of corporate power in the hands of a handful of controlling leaders left Luckin ill-prepared to manage a crisis involving the executives themselves.

Made from the same cloth: It’s not just Chinese tech firms that struggle to move on from a single dominating founder-CEO. One study found nearly 40% of tech IPOs offered dual-class shares, while just 14% of non-tech firms did.

• Mark Zuckerberg—Facebook’s founder, chairman, and CEO—holds more than 400 million shares of Facebook and controls 57.9% of the total voting shares.
• In a 2019 interview, Zuckerberg called his concentration of power “valuable” admitting that if he didn’t have so much influence he would have long ago been fired by the board.
• Facebook co-founder Chris Hughes called Zuckerberg’s power “dangerous” and the board nothing more than an “advisory committee” in an op-ed.

Autocracy vs. oligarchy: Both Partnerships and dual-class shares give control rights to the management and founders, said Liu Jing, Finance Associate Dean at the Cheung Kong Graduate School of Business in Beijing. Though similar, there is a key difference.

• “[The Partnership] is more democratic than that because there are many partners,” he said.
• Rather than a single leader, he said, Partnerships involve collaboration from dozens of experienced leaders, allowing tech firms to diffuse a founder’s power while safeguarding their continued involvement.

In theory, this means superboards are well-suited to address key man risk. In reality, Alibaba’s Partnership concentrates most power in its six-person Partnership Committee, not its 36-member Partnership.  

Alibaba faces criticism: Alibaba’s corporate governance was rated worst in class by investment research firm MSCI for its “high level of risk to public shareholders due to lack of shareholder rights and independent board supervision.”

• The superboard “completely separates shareholders’ equity stake from corporate control,” according to the Brooklyn Journal of Legal, Financial, and Corporate Law.
• The Partners’ total control over the board and relatively low equity stakes leaves them with little skin in the game.
• This paradox gives them incentives to “divert value to other entities in which they own a substantial percentage of the equity,” wrote Lucien Bebchuk of Harvard Law School.
• Tech companies such as Alibaba and Pinduoduo can use their rapid growth to entice shareholders to accept changes, and even withstand pressure for equal shareholder rights.

Philosopher kings

On the bright side: The superboards could be a way to solve broader challenges that Chinese tech firms face, such as China’s foreign investment laws and hostile takeovers, experts say. Some think that the trade-off of control for stability is one shareholders are happy to make.

• Chinese law forbids foreigners from owning strategic assets in the country. Alibaba and Pinduoduo had to register in the Cayman Islands in order to list in the US.
• Loh argues the Partnership structure will help tap global capital while keeping control of the company within China
• This is crucial for compliance since technology companies can store troves of user data or have access to sensitive technology.
• Superboards’ control over the board of directors also ensures protection against hostile takeovers by other domestic or foreign companies. Founders can keep their original mission and vision safe from corporate raiders.

Outside investors are still here: The superboards’ ability to vote a majority to the board of directors hasn’t diminished interest in Alibaba.

• The Partnership Committee’s oligarchy appears to “not matter to shareholders as can be seen in the strong trend of share prices over the years,” said Lawrence Loh, Director of the Centre for Governance, Institutions & Organisations at the National University of Singapore.  
• Loh said shareholders are likely willing to trade control for “predictable and robust corporate performances.”
• Share prices for Alibaba and Pinduoduo have increased steadily through the management shifts. Pinduoduo’s share price on the NYSE peaked at $93 the day after Huang announced he was stepping down, reflecting investor confidence.

Liu said superboards, on average, “have been value-enhancing. It helped to ensure that visionary entrepreneurs are able to see their vision materialize while diversifying financial risk and obtaining needed equity financing.”

“The consistency of values across time provides steadiness for the company, including its board of directors,” he said. “For shareholders, there is probably some sacrifice in their normal control of the company as per global practices, but on balance, they may gain in owning a sturdy entity that provides assurance of strategic direction.”

Chinese e-commerce platform Pinduoduo is testing a new wholesaling feature named Duoduo Pifa, which connects merchant buyers with manufacturers and wholesalers.

Why it matters: Expanding into enterprise services highlights Pinduoduo’s ambition to attract and retain business customers, an increasingly important component for its ecosystem.

• The launch of Duoduo Pifa further fans its rivalry with Alibaba, which has been operating its own B2B wholesale site, 1688.com, since 1999.

Details: Pinduoduo recently launched a new service dubbed Duoduo Pifa, or Duoduo Wholesale, for merchants that procure goods for resale, according to a report from Chinese media outlet Jiemian.

• The feature is still under development but has been opened for merchant applications.
• Pinduoduo recently added to its merchant app a supply management function consisting of wholesale supply and direct shipping options.
• For the direct shipping option, the wholesalers will provide shipping and after-sale services to consumers on behalf of the merchant.
• The feature is free from commissions and promotion fees for now, local media reported.

Context: Alibaba and Pinduoduo are increasingly moving onto one another’s home turf.

• Alibaba’s e-commerce marketplace Taobao is expanding its direct-to-customer selling platform for bargain-seeking consumers, Pinduoduo’s core user group.
• To speed up offline expansion and increase supply chain efficiency, Pinduoduo invested in the household appliance and electronics retailer Gome Retail, similar to Alibaba’s partnership with Gome rival Suning.
• Pinduoduo said it had around 585 million active buyers and 5.1 million active merchants in 2019.
• One of Alibaba’s earliest business units, 1688.com is a top domestic wholesale marketplace in China, providing sourcing and online transaction services to merchant buyers.
• As of March 31, 2020, 1688.com had approximately 900,000 paying members who use the service for additional services, such as premium data analytics and upgraded storefront management tools, as well as customer management services.

Meituan-Dianping is testing a new Pinduoduo-style group buying feature for its core food delivery services, Chinese media reported.

Why it matters: The Chinese food delivery giant and services platform is taking a leaf out of Pinduoduo’s book by integrating social elements in its platform to boost user engagement for food delivery from restaurants.

• After five years of fast growth, China’s food delivery industry is losing steam as the market saturates. Transaction volume in the sector expanded at 30% year on year in 2019. While still healthy, it was the slowest growth in four years, according to a report from mobile intelligence platform Trustdata.
• Meanwhile, Meituan is seeking new ways to maintain growth momentum in the face of competition from old rival Ele.me, as well as new threats like mobile payments platform Alipay, which is exploring local services—Meituan’s home turf.
• Targeting price-sensitive groups, Meituan’s new group buying feature could help the company consolidate its foothold in lower-tier cities, a major growth engine for the food delivery industry.

Details: Pinhaofan, Meituan’s new social shopping feature for food delivery, is available through its WeChat mini program, National Business Daily reported (in Chinese).

• The feature encourages users to share food links from Meituan’s WeChat mini-program with their friends and family to earn discounts through group buying, according to the report. The model resembles the “social e-commerce” strategy that underpins the tech giant’s phenomenal growth over the past four years.
• Currently under early testing, the feature is only available in Wuhu, a third-tier city in eastern China’s Anhui province, another sign that Meituan is targeting lower-tier markets.
• The company is offering generous subsidies to customers who use the feature and promises free delivery with no packaging fees. Restaurants typically charge customers RMB 1 ($0.14) to RMB 2 per dish for the takeaway packaging.
• Compared with normal buying, there are limitations on orders made through Pinhaofan. Customers who place orders together are required to order from a limited menu at the same store. In addition, each user can initiate or join up to four orders every day, according to the report.
• A Meituan spokeswoman declined to comment when reached by TechNode for further details on Friday.

Context: Meituan previously added a group buying feature covering physical products such as beauty products, household appliances, fruits, and snacks to its WeChat mini program in 2018.

• The company announced an organizational adjustment in early July to launch a premium business division for community group buying services.

In case you missed it, the founder of Pinduoduo, Colin Huang, recently stepped down as CEO. The move was announced a week after Huang eclipsed Jack Ma as China’s second-richest person. That feat was underwritten by a sudden, rapid increase in Huang’s personal wealth, adding $25 billion in six months on the back of Pinduoduo’s surging stock price. 

Analysts described Huang’s sudden departure, and immediate appointment of CTO Lei Chen as his replacement, as “unexpected.” That’s a polite way of saying, “We don’t know what the bloody hell is going on.” 

The circumstances look odd

Huang’s sudden resignation comes as Pinduoduo gains traction in China’s e-commerce—on the basis of self-reported GMV numbers, Pinduoduo may have as much as 10% of China’s e-commerce market. He stepped down amid the convergence of four events: the pandemic’s catalytic effect on e-commerce in China, Pinduoduo’s strong reported GMV growth, a sharp jump in the company’s share price, and Huang’s concomitant increase in personal wealth.

I’ll put it as plainly and objectively as I can—stepping aside in these circumstances looks odd, and dents confidence in Pinduoduo’s staying power.

Here are the two charts that matter.

The market has rewarded Pinduoduo for its advances into incumbents’ market share. At the time of writing, Pinduoduo’s share price has increased 120% this year. Huang, who held 43.3% of Pinduoduo’s shares before his resignation announcement, saw his wealth explode by $25 billion.  

So, why leave when everything’s going so damn well? Without a cogent explanation, analysts may question Pinduoduo’s resilience. Cynics may even have flashbacks of other significant shareholders in high-flying Chinese companies using sky-high share prices to cash out on the down-low.

Inconsistencies in words and actions

In a release circulated to media outlets, Huang said he would step back from day-to-day management to work on the company’s long-term strategy and corporate structure. That’s a pretty limp explanation, and it sows confusion—it’s the CEO’s job to think about strategy and corporate structure. 

McKinsey, a consultancy, articulates the six main elements of a CEO’s job as: 

Setting the strategy, aligning the organization, leading the top team, working with the board, being the face of the company to external stakeholders, and managing one’s own time and energy.

The very activities Huang relinquished the CEO role to perform are the two first elements on a CEO’s list of responsibilities. Either Huang’s understanding of a CEO’s responsibilities is deficient, or the explanation around his departure contains material omissions.

The inconsistencies don’t stop there.

Media outlets have breathlessly recounted how Huang has given away some of his shareholding. That’s true, to an extent. From the chart below, you can see Huang donated a small chunk to a charitable foundation and returned another chunk to an (unnamed) angel investor. 

The biggest “giveaway,” around 8% of the company’s shareholding, goes to the Pinduoduo Partnership. As flagged in Huang’s internal memo to staff, this may be part of a move to incentivize up-and-coming managers. Nice in theory, but currently the only members of the Pinduoduo Partnership are ex-CEO Huang and current CEO Chen. Huang is also the authorized representative and director of Qubit GP Limited, a corporate entity that owns the shareholding. That’s cozy, convenient, and potentially lucrative. 

Putting that together, Huang’s effective company shareholding hasn’t decreased from 43.3% to 29.4% as intimated. He still has effective control of around 37% of the company’s shareholding and retains 80.7% of Pinduoduo’s voting shares. 

Make no mistake, Huang is still the boss. However, for some reason he’s not comfortable wearing the CEO’s hat, nor is he comfortable with Pinduoduo’s leadership extending beyond him and co-founder Lei. 

Lingering gaps in corporate governance

Critically, Huang’s handpass of the CEO role to Chen means that Pinduoduo’s senior management team looks emptier than a movie theater during a Covid-induced lockdown. There’s no CFO (which I view as problematic), no COO, and no CTO. 

Pinduoduo has never had the former two roles. That’s fine for a start-up, but incredibly difficult to justify when Pinduoduo’s $100 billion-plus market capitalization is higher than 98% of listed stocks in the US. Can you imagine the headlines if Shopify, another $100-billion-plus e-commerce company, had similar corporate governance gaps? It’s time for some adults in the room to give investors additional confidence in the company’s corporate governance. 

At this point, Pinduoduo fanboys might point out the company appointed a VP of finance as part of the company’s leadership shakeup. The company’s previous VP of finance, Tian Xu, resigned for personal reasons in April 2019. He lasted 10 months in the job. The new VP of finance will have his work cut out for him. Pinduoduo faces questions from investors on issues including:

• Allegations of aggressive revenue recognition, as flagged by Lightstream Research and Blue Orca Capital.
• The “Critical Audit Matter” that Pinduoduo’s auditors, Ernst & Young Hua Ming LLP, identify in its annual report regarding the company’s practice of classifying subsidies as marketing expenses, rather than costs of revenues. 
• The scale of “free traffic” Pinduoduo supplies to merchants. 
• Declining cash and equivalents, which plunged 75% year on year to RMB 5.53 billion ($780.5 million) in Q1 2020 from RMB 22.50 billion ($3.35 billion) in Q1 2019. However, Pinduoduo does have cash reserves it could apply in the future.

These issues aren’t trivial, and it may only be a matter of time before investors start asking smarter questions. I’d say the company needs to appoint a CFO to answer those questions satisfactorily. 

Pinduoduo declined to comment on this story.

Changes bring fresh doubts

Huang’s decision to relinquish the CEO role but retain significant shareholding and control over Pinduoduo should raise more scrutiny. His publicly announced rationale for leaving the top job at this point in time doesn’t pass the sniff test. 

My working hypothesis is, relieved of the CEO title, Huang gives himself a layer of protection if something goes wrong. He may even be able to sell some of his shareholding without raising too many eyebrows. 

That hypothesis may make some uneasy, but there’s a lot about Pinduoduo that could give investors pause. Pinduoduo’s share prices have more than doubled this year. The company seems to be pulling out all the stops to sustain its growth trajectory, including allegedly subsidizing as much as 60% of the purchase price of some items during June’s 618 e-commerce extravaganza. At this critical juncture, sudden CEO departures and corporate governance gaps raise questions about what’s driving decisions at Pinduoduo, and dent confidence in the company’s staying power. I’ll be looking for reassurances at the company’s next earnings call.  

Clarification: This article has been edited to clarify the questions raised by investors referred to in the second to last section.

Colin Huang, the 40-year-old billionaire behind e-commerce upstart Pinduoduo, stepped down as the company’s chief executive officer on Wednesday, handing day-to-day operations over to chief technology officer Chen Lei. 

Also known as Huang Zheng, the founder will remain chairman of the board, one of two members of an administrative super committee called the Pinduoduo Partnership, and retains a significant majority in company voting rights. Along with Chen’s appointment, the company named a general counsel and vice president of finance.

Pinduoduo’s new captain

Five years ago, Huang founded Pinduoduo, now China’s second-largest e-commerce platform, along with a team formed from his previous startups. 

• Chen Lei: The new CEO worked alongside Huang as the CTO of Xinyoudi, a gaming studio Huang launched in 2011. He continued to work with Huang at Ouku.com as an architect engineer in 2007 and was named Pinduoduo’s CTO in 2016. 
• Zhu Jianchong: Senior vice president of strategy and legal at Pinduoduo since November 2018, Zhu was appointed the company’s general counsel on Wednesday. Previously, Zhu was a partner at the Beijing office of White & Case LLP, overseeing cross-border public and private mergers and acquisitions after serving various roles at Skadden, Arps, Slate, Meagher & Flom LLP.
• Ma Jing was named the vice president of finance. He began at Pinduoduo in June 2018, coming from Chanel’s China business, where he held finance-related roles for 17 years. Pinduoduo has never had a CFO, rare for a listed tech company of its size, and a fact that has raised eyebrows. Ma’s vice president of finance role is the closest equivalent.

Huang downsizes his share but retains control

The shakeup goes beyond a management reshuffle. A Wednesday regulatory filing showed that Huang reduced his personal holdings in Pinduoduo to 29.4% from 43.3% but retained strong control over the company with 80.7% of voting shares, down from 88.4%. 

The change in Huang’s stake followed shortly after wide media coverage of his new ranking as China’s second-richest man, replacing Alibaba’s Jack Ma. Huang, who was worth $45.4 billion as of June 22, was next only to Tencent founder and CEO Pony Ma in net worth.

In an open letter on Thursday, Huang details his share distribution plan for various new initiatives.

• Huang transferred roughly 371 million ordinary shares, or about 7.74% of the company’s total shares, to the Pinduoduo Partnership to support fundamental science research, social responsibility activities, and to further incentivize future management. 
• Additionally, Pinduoduo’s founding team donated a total of 113 million Pinduoduo shares, or 2.37% of total shares, to Starry Night Charitable Trust, a charitable foundation dedicated to promoting social responsibility development and scientific research.

Huang’s handover of the CEO role may seem reminiscent of Jack Ma’s departure from Alibaba last year, but both Huang and the company he built are much younger. While Huang has said that he is relinquishing running day-to-day operations to provide “space and opportunities for the team to grow,” he will remain heavily engaged in the company’s strategic planning. 

A Reuters column points out that the five-year-old company stuck in “startup governance mode,” against a backdrop of intensifying scrutiny of US-listed Chinese technology companies. The company said that replacing Huang with Chen and appointing two other key management hires addresses governance shortcomings.

“This division of labor will help us steer the company in its next phase of growth and development. As the company evolves, the corporate structure and management structure also have to evolve and keep pace with developments.”

—Chen Lei, Pinduoduo CEO, in a statement sent to TechNode

Lessons learned from rivals

Huang appears to have learned from his business rivals, particularly Alibaba and JD.com, during a critical time for the company. Pinduoduo has been scrutinized by short-sellers, while others have called for a change in strategy.

The concept of Pinduoduo Partnership, which aims to “ensure the sustainability and governance” of the company is similar to that of Alibaba Partnership, a cornerstone for Alibaba’s organization structure. It may also be a way for Huang to retain control of the company he founded.

Huang and Chen are the first and currently only members of the Partnership Committee, which was formed in 2018 and is entitled to appoint executive directors and nominate and recommend the chief executive officer.

Pinduoduo representatives drew distinctions between the body from the Alibaba equivalent. Unlike Jack Ma, Huang can be voted out by other partners and faces mandatory retirement at the age of 60. Huang will be 60 in the year 2040.

“The Partnership is not meant to be a decision-making body,” Huang said in a statement. “It is more of a cultural guardian to ensure that the values of Ben fen [Pinduoduo’s core value that essentially means to adhere firmly to one’s own duties and principles] are carried on.”

Established almost a decade ago, Alibaba Partnership was the foundation for Alibaba’s succession plans and the reason why Ma had the confidence to announce his 12-month draw-down.

From JD.com, however, Huang has learned about key-man risk. The company is one of the rare tech firms in China without an official co-founding team. With Richard Liu’s absolute rule, JD.com suffered greatly during the founder’s rape accusation scandal and the lack of a succession plan. JD.com is gradually recovering as Liu retreats from operations and retail chief Xu Lei takes the lead.

“Building up capable lieutenants, and giving them appropriate shareholding, will be an ongoing consideration,” Michael Norris, research and strategy manager at marketing and sales firm AgencyChina, told TechNode.

Moreover, Pinduoduo needs a more rational “shared brain,” consisting of diversified and professional talents to improve the operating efficiency and governance level of the platform, e-commerce analyst Lu Zhenwang told local media.

Update: The story has been updated with comment from Pinduoduo on differences between Pinduoduo’s and Alibaba’s Partnerships.

China’s online shopping festivals are usually about racking up the biggest sales, but things were slightly different for this year’s 618 festival, the mid-year shopping frenzy that ended on Thursday of last week. In China, shopping festivals have become landmark events that are used to build a “new normal” for sales volumes and to test e-commerce infrastructure. “This year’s peak volume [for Singles’ Day] will become the norm for the next year,” Alibaba’s Jack Ma once boasted.

Here’s how it went down in 2020.

A showdown moment for e-commerce platforms

Annual shopping events like 618 and Singles’ Day are high-profile showdowns for e-commerce players. Observers use sales totals from shopping holidays to gauge which platforms have pulled ahead and who has fallen behind. Updates on shopping events are often dubbed “battle reports” by both the companies and local media to hype up the competition. 

Alibaba still leads the pack in terms of total sales, but their rival JD is catching up quickly. 

• Alibaba booked RMB 698.2 billion in sales over the 18-day shopping festival. The company didn’t publish overall sales data last year, addressing growth over time by saying only that more than 100 brands enjoyed a higher GMV for 618 this year than they did for Singles’ Day 2019.
• JD, which had its Hong Kong IPO on June 18, racked up a record RMB 269.2 billion in sales from June 1 to June 18, up from RMB 201.5 billion in last year. That’s 33.6% growth compared with last year’s 26.6% uptick. The sales are on par with Alibaba’s RMB 268.4 billion one-day Singles’ Day sales on November 11, 2019.
• Pinduoduo did not publish overall sales figures for 2020. When contacted by TechNode, they said only that their sales of baby formula increased 510% year-on-year—and that their users don’t need to wait for twice-yearly sales to get the best value for their money because they get the best value on Pinduoduo platform “every single day.” 

Subsidized shopping propels post-Covid recovery

This year’s 618 festival comes as Beijing is gradually easing coronavirus lockdowns and encouraging people to go out and spend money again. The state has even launched a new digital coupon program to incentivize consumers to re-open their wallets after a difficult spring. Current sales data does indicate signs of economic recovery as the outbreak recedes.

To incentivize user consumption, subsidized shopping has become the order of the day. For an RMB 327 order that I placed for menswear on Alibaba’s Tmall during the 618 festival, I received a discount of just over RMB 80. That discount comprised RMB 60 from Tmall and RMB 20 from the brand itself—on top of an RMB 2 government consumption coupon. 

• The digital coupons issued by the state and distributed over various platforms—such as Alipay, WeChat, and shopping apps—totaled RMB 5.6 billion by the end of May. Though not issued specifically for the promotion, these digital coupons bolstered the consumption-boosting efforts and will continue beyond the holiday.
• Alibaba says this year’s 618 festival featured the biggest giveaway of consumer coupons and subsidies in the event’s history, totaling over RMB 14 billion in value.
• Pinduoduo claimed they had no upper limit for subsidies for the festival, doing anything they could to sweeten the GMV percentage increase. The company also pledged to make coupon usage easy by removing various pre-sales and deposit payment tricks that are popular on other platforms. (Such tricks are often very complicated, with bargain-seekers often joking that you need a talent for math to get the best deals.)
• JD.com planned to offer RMB 10 billion in subsidies, another RMB 10 billion in coupons, and “hundreds of billions of RMB worth of discounts.”
• China’s omnichannel retailer Suning launched their “J-10%” subsidy plan, targeting household appliances, mobile phones, computers, and groceries. The company pledged the products sold on its platform would be at least “10% lower than other major e-commerce platforms,” evidently benchmarking their rival JD. This is clearly a direct response to JD’s similar subsidy program aimed at Suning in 2012.

Despite the expansive subsidy campaigns, the competition among mainstream e-commerce platforms, during 618 and beyond, is still “rational,” according to Liu Yuan, an analyst at UBS Investment Research. “There’s still sustained revenue and profit growth across platforms,” he said.

The months-long lockdown has turbocharged China’s transition to an online world and propelled a huge leap in online shopping. 

The percentage of online shopping (out of total retail) jumped from 20.4% in December to 24.3% in June, according to data from China’s National Bureau of Statistics. “We expect the figure to jump to nearly 40% within four to five years, although it may drop slightly in the near future because of the gradual recovery of offline businesses,” Liu said. 

“Export companies, factories, and farmers who leverage on online channels to boost their sales may contribute to the growth during the 618 festival,” he added.

Livestreaming is a must-have

Similar to Singles Day, which usually launches with a star-studded countdown gala, 618 is increasingly filled with glitz and glamour, and livestreaming has further blurred the line between shopping and entertainment.

Livestreaming was already a big deal during last year’s Singles’ Day, but the feature is now a must-have for shoppers after livestream e-commerce gained momentum during the pandemic. 

Analysts project that sales achieved through livestream e-commerce will total RMB 961 billion in 2010, compared to 2019’s total of RMB 433.8 billion. Livestream shopping is expected to make up 8.7% of all online purchases. 

• As JD geared up for the 618 promotion, the company entered a partnership with Kuaishou on May 27 in a deal that allows Kuaishou users to purchase JD’s self-run products directly without leaving the short-video app.
• Alibaba’s Taobao Live invited more than 300 performers and celebrities to join livestream sessions during the festival.

To reach a wider audience, livestreamers partnered with e-commerce platforms and attended popular variety shows as part of the 618 campaign. Viya, the “livestreaming queen” with 28 million followers on Taobao Live, joined several of the country’s top reality shows, such as “Go Fighting,” to participate in their livestreams.  

Conclusion

As sales rebound, 618 has basically fulfilled the hopes placed upon it by both e-commerce platforms and the government: to spur post-Covid consumption recovery as the biggest shopping event after a months-long nationwide lockdown. Coming at this critical time, 618 has a chance to step out of the shadow of the more established Singles’ Day.

The strategies adopted by e-commerce platforms have proved effective. Livestream e-commerce will continue to be an important tool to reach increasingly online buyers, while subsidized shopping—either through discounts or coupons—will be key to retaining users in a weak economy, as more price-sensitive users from lower-tier cities become the major growth engine for e-commerce.  

The 6.18 shopping festival was China’s largest shopping holiday since the coronavirus outbreak. It was long-awaited as a barometer of how much Chinese consumption has rebounded after lockdowns were lifted.   

Explosive growth across platforms

Transaction volume on JD.com reached around RMB 269.2 billion (around $38.1 billion) during the 6.18 shopping festival (June 1—18).

• Transaction volume saw a year-over-year growth rate of 33.6%, which is higher than that of the 2019 event, at 26.6%. 
• A total of 187 brands reached transaction volumes of RMB100 million in these 16 days. 

Alibaba’s Tmall saw the total value of orders on the platform reach RMB 698.2 billion between May 25 and June 18 —2.6 times its sales on Singles’ Day 2019. Apple, Huawei, Adidas, Nike, and home appliances brands Haier and Midea reached RMB 100 million in the first hour of sales on June 1. It took Estee Lauder only nine hours to match its last year’s 6.18 sales on Tmall.

Other players, such as Pinduoduo and electronics retailer Suning, did not disclose their sales data for the event. We estimate sales revenue across all platforms to be around $155.2 billion, based on Alibaba and JD.com’s 2020 market share. 

With 400% year-over-year growth, video conferencing devices had the biggest boost on JD.com. In the post-lockdown world, businesses are trying their best to avoid face-to-face contact. 

As people try to avoid supermarkets, sales of essential consumer packaged goods, such as milk products, shampoo and conditioner, saw 360% and 300% year-over-year growth respectively. Healthcare products also saw significant growth, with 173% year-over-year increase, as consumers looked to boost their immune system to avoid the epidemic.

Top Performing Product Categories in 6.18 Shopping Festival on JD.com

The winning sales tool: live-streaming

To enhance its livestreaming capacity, JD.com teamed up with popular short-video platform Kuaishou on June 16. Around 100 key opinion leaders (KOLS) on Kuaishou promoted JD.com products. Users on Kuaishou could purchase JD.com’s products without leaving the Kuaishou app, as well as enjoy quick delivery and after-sales service provided by JD.com. 

E-commerce platforms also invited celebrities and company executives to join livestreaming events. Xu Lei, CEO of JD Retail, together with actress Zheng Shuang, singer Da Zhangwei, and actor Guo Qilin raked in RMB 475 million in their six-hour long livestreaming show. They broke last year’s 6.18 record by Top KOL Viya’s of RMB 62 million per hour.

No fancy gimmicks—low prices are the key

Compared with previous 6.18 shopping festivals, this year’s event was more straightforward and simpler in terms of marketing and promotions. E-commerce companies focused on giving out coupons and discounts directly, instead of gamifying the event. 

Previously, consumers had to play games to win coupons. Last year, on JD.com, users had to watch videos on JD.com and answer a few questions. This year, shoppers could directly receive coupons by just clicking a button on e-commerce platforms’ promotion pages. 

In terms of discounts, Tmall offered subsidies worth RMB 10 billion on over 10 million discounted products—equal to Tmall’s  Double 11 subsidies in 2019. JD.com and  Kuaishou gave out RMB 20 billion.

Suning.com tried to beat its competition on pricing. The platform launched a “J-10%” plan, selling products at 10% of JD.com’s price. This initiative covered several categories, including home appliances, mobile phones, computers, and groceries.

A Huawei Mate 30 smart phone cost RMB 3,289 on JD.com and RMB 3,559 on Tmall. On Suning, it cost RMB 3,149 and came with a pair of free earphones. 

Such pricing wars are situated against the background of decreasing per capita consumption expenditure in China. In the first quarter, per capita consumption expenditure fell 12.5% year-on-year to RMB 5,082, according to the National Bureau of Statistics. Urban residents spent RMB 6,478, down 13.5% year-on-year, while rural residents spent RMB 3,334, falling 10.7% in the same time period.

C2M products for price-sensitive shoppers

As shoppers become more cautious in making purchase decisions due to uncertainties caused by the pandemic, sales of customized products are increasing. The consumer-to-manufacturer (C2M) model, which leverages consumer data to produce tailored products at a low price point, is increasingly popular, meeting consumers’ needs and providing good value for money. 

During 6.18, C2M desktop computers sales increased by 400% year over year on JD.com. On Taobao Deals, Taobao’s designated app for direct-from-factory deals, sales of C2M products saw 500% growth year-on-year during the shopping festival.

Upgraded logistics 

Alibaba’s logistics arm Cainiao used a fleet of automated delivery vehicles and set up new pick-up stations to achieve faster delivery. The company also chartered more than 100 flights and 20 freight trains to ship goods during the event. 

The strategy worked—Around 70% of Tmall orders had already been delivered to consumers by 12:00 pm on June 18. 

Consumers came to Cainiao’s official Weibo account to compliment its service. One user called Amy commented that she could not believe that she ordered lipsticks at midnight on June 1 and received the product at noon of the next day.

Logistics is another important element for brands and retailers to consider in order to provide consumers with convenient and seamless shopping experiences. With consumers shifting more to shop online, quick delivery service would become a significant standard for consumers to choose which platform to shop with.

JD Logistics upgraded its logistics network to serve consumers in fourth to sixth-tier cities. The company estimates the growth rate of delivery orders in sixth-tier cities is 150% of first-tier cities. 

The upgrade included JD Logistics linking its 12 highly automated logistics parks to its 13 local warehouses to form an integrated network. The 12 highly automated logistics parks, known as “Asia No.1”, feature automated sorting machines and a smart warehousing software system, which uses algorithms to perform scheduling, coordination, and optimization. 

Key takeaways

The major sales rebound during the 6.18 shopping festival is an encouraging sign for the coming months. It was partly driven by multi-pronged strategies adopted by e-commerce platforms.

Brands and retailers leveraged livestreaming, which allows shoppers to interact with brands and KOLs/celebrities in real-time. Livestreaming has been an especially important tool as the pandemic has reduced visits to shops.

Low prices have also been key to retaining nervous shoppers. C2M products, which are tailored to consumers’ needs and usually sell at a lower price point, are an especially good fit for current consumer sentiment.

Finally, improvements to logistics are another important ingredient for brands and retailers seeking growth in the post-Covid world. With more consumers shifting to shop online, quick delivery services can be a significant competitive edge for platforms.

Pinduoduo founder and CEO Colin Huang has surpassed Alibaba founder Jack Ma to become the second-richest man in China, according the real-time billionaire list compiled by Forbes.

Why it matters: Pinduoduo’s 40-year-old founder, also known as Huang Zheng, saw his net worth rocket in June, triggered by robust sales growth during the annual June 18 shopping promotion known as 618.

Details: Huang, an ex-Googler, is now China’s second-richest man with a net worth of $45.4 billion, second only to Tencent’s Ma Huateng whose net worth is $52.6 billion. Huang holds a 45% stake in social e-commerce platform, Pinduoduo. Jack Ma, who retired last fall from the daily operations of Alibaba to focus on philanthropy, saw his net worth fall to $43.9 billion from $45 billion as of 5 p.m. the previous trading day.

• Pinduoduo didn’t reveal sales figures during the period, saying only that sales of milk formula increased 510% year on year during the period.

• “Pinduoduo users don’t need to wait twice a year to get the best value for their money because they get the best value on our platform every single day,” the company said in a statement.

• Shares of Nasdaq-listed Pinduoduo have more than doubled in value since the beginning of the year, boosting the e-commerce company’s market cap from $44 billion on Dec. 31, 2019, to $104.89 billion as of Monday.

Read more: Pinduoduo growth story needs a new chapter

Correction: An earlier version of this story accidentally reported 2019 sales figures for the 6.18 shopping festival as though they were from this year. In fact, Pinduoduo has not published overall sales figures for the festival this year. The story has been updated with a statement from the company.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

This week, James is taking some time off with his newborn, so CTI regular Michael Norris fills in as cohost. He and Elliott discuss Alibaba, Bilibili, and Pinduoduo’s Q1 earnings, as well as what the possibility of Chinese companies delisting from US exchanges will mean for investors.

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

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Bilibili and the niche vs mass market dilemma– Pingwest

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx
• Michael Norris– @briefnorris

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• Peter Isachenko

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As China’s economy is experiencing a big hit from the coronavirus pandemic, internet giants like Tencent are looking into lower-tier markets for new growth opportunities. In 2025, physical goods in lower-tier markets will account for 45% of total online retail sales in China, or some RMB 8.1 trillion (around $1.25 trillion), Xingye Research estimates. This would represent a compound annual growth rate (CAGR) of 18.3% from 2018 to 2025 (although these estimates were made before the disruption of the coronavirus outbreak). 

Pinduoduo’s partnership with WeChat has been an important factor for Pinduoduo’s success. It helped the relatively new e-commerce platform keep customer acquisition costs low, fueling its expansion.

A closer look at Pinduoduo

Pinduoduo, launched in 2015, operates a group-buying model, inviting users to form groups with others that want to buy a specific product. With increased quantities sold, the merchants can lower the price for each consumer. Users can receive steep discounts, of up to 90%, on certain products if they have enough friends to form a group to buy together. 

Encouraging bulk buying, Pinduoduo’s model has found massive success. it is the fastest-growing e-commerce platform in China. It has enjoyed continuous growth in terms of GMV, and a number of annual active users, from 2017 to 2019. 

Pinduoduo’s gross merchandise value (GMV) rose to RMB 1,007 billion for the fiscal year 2019, from RMB 141 billion in 2017. This represents a staggering 620% growth. By comparison, in the same time period, Alibaba’s Tmall and Taobao combined GMV growth was 52% and JD.com’s was 61%.

Pinduoduo’s fast growth is closely linked to its high penetration in lower-tier markets. Around 58.9% of Pinduoduo’s users were from lower-tier cities in 2019, compared to JD.com’s 48.4% and Alibaba’s 57.4%, according to data firms QuestMobile and GeTui. 

Tencent forays into group-buying 

On April 29, Tencent launched mini-program Xiao’e Pinpin. The mini-program allows users to purchase products at a lower price by forming groups. Currently, available products include electronics, apparel, groceries, and cosmetics. 

It shows products from various sellers in a content feed.  But products are not categorized, instead of appearing in a news feed format. This makes it difficult for consumers to locate specific products they want to purchase, particularly as there is no search function.

Xiao’e Pinpin charges merchants deposits ranging from around $700 to $8,500. Through the deposit scheme, Tencent ensures merchants ship products on time and comply with platform regulations. If merchants do not fulfil these requirements, the platform deducts money from their deposit.

A way forward for Tencent?

In light of Pinduoduo’s success and the slowing economy post-COVID-19, it makes sense for Tencent to look into the group buying model for further growth. The Shenzhen giant has been pursuing e-commerce for over a decade. It launched its own e-commerce platform, Paipai, in 2005, which was acquired by JD.com in 2014.

Tencent has collaborated with Pinduoduo since 2016, when it led the e-commerce platform’s Series B. Tencent also held a 18.5% stake in the company until October 2019.

By pushing further into online shopping, Tencent is now entering its old friend’s turf.

Wechat still gives users multiple entry points to shop on Pinduoduo, delivering meaningful reductions in the cost of customer acquisition: In the June quarter of 2019, Pinduoduo spent around RMB 153 per acquired customer, compared to JD.com’s RMB 520 and Alibaba’s RMB 535. 

But Tencent’s foray into group buying might not compete directly against Pinduoduo. Tencent has proved that it can simultaneously cooperate and compete with other big tech companies. Many retailers have their own stores on WeChat’s mini-program, even Alibaba’s close ally Suning. Tencent is also partnering with multi-category platforms, such as Pinduoduo and JD.com. 

Given Tencent’s track record in this regard, it is not clear whether Xiao’e Pinpin will go after Pinduoduo’s customers. One thing is certain; Tencent wants to reach out to budget shoppers through a push into group buying.

Baidu’s billionaire founder Robin Li. “Home appliance queen” Dong Mingzhu, of electronics maker Gree. Luo Yonghao, the indebted online celebrity founder of smartphone maker Smartisan. China’s livestreaming industry has welcomed a flurry of high-profile figures over the past few months.

Livestreaming is really, really big. From its low-budget, grassroots origins, it has become a mainstream habit and an essential part of marketing in post-Covid-19 China.

Livestreaming is closely intertwined with e-commerce, short videos, and gaming. China’s livestreaming-derived market grew to RMB 61 billion (about $8.6 billion) in 2019, and is projected by research firm Equalocean to achieve a 12% compound annual growth rate to reach RMB 100 billion by 2023.

Among various segments under the umbrella concept, livestreaming e-commerce has emerged as a key monetization model for players in the field—and a key marketing tool for businesses trying to reach China’s digital audiences. China’s livestreaming e-commerce market is expected to reach RMB 23.6 billion, on a 520 million live-show app user scale in 2020, the Equalocean report says.

Spokesperson or salesperson?

The most famous streams are hosted by celebrity KOLs, who build up loyal audiences with QVC-style online shows. The most famous, like “lipstick king” Li Jiaqi, are household names and fodder for memes far beyond e-commerce platforms.

But thousands of humbler streamers act as virtual salespeople, explaining products to potential customers. Lu Lu, who runs a virtual vegetable shop on Taobao Live, is a good example. When an order comes in, the stream (requires app download) shows her weighing out produce and preparing it for shipment.

Many e-commerce livestreamers come across more like a virtual salesperson than celebrity endorser, patiently explaining products on camera and fielding questions from live viewers. While browsing the product page for, say, an electronic toy or a brand of face cream, shoppers will often see a link to either a livestream or a recorded stream in which one of these streamers demonstrates the product.

Turbocharged growth comes with some serious growth pains, and the industry may have to contend with more regulation soon. Users have complained about false advertising, vulgar content, and misleading exaggerations. Currently, rules on false advertising are not applied to KOLs’ “product reviews,” but this loophole could be closed.

The Covid boom

Covid-19 was an unexpected boon for livestreaming e-commerce in China. Many brands and retailers have turned to livestreaming to help reduce the impact and losses from the epidemic. It has prompted businesses closely tied to offline showrooms to try online events—even electric carmakers Nio and Tesla.

According to China’s Ministry of Commerce, more than 4 million e-commerce live broadcasts were hosted in the first quarter of 2020, the key period when China was under countrywide lockdown due to the outbreak.

Compared to entertainment livestreaming, livestreaming e-commerce has a better chance of turning windfall users into recurring users by building up new marketing options for brands and an enriched shopping experience for consumers.

Read more: INSIGHTS | Brands turn to livestreaming as China stays home

The livestreaming players

Pretty much every company with a stake in either e-commerce or livestreaming has tried to combine the two. E-commerce platforms, like Alibaba, Pinduoduo, and JD, as well as short-video platforms such as Douyin and Kuaishou have all jumped on the bandwagon.

With a significant head start and a massive user base, Taobao is the elephant in the room, the one everyone else is responding to with varying success. In an increasingly crowded field, the challenge now for each of these platforms is how to differentiate itself from its peers and stand out by targeting different groups of buyers and brands.

It’s hard to compare exactly how the players stack up—as data on this phenomenon is still limited—but here’s a rough guide:

Taobao Live

• As one of the earliest pioneers of the “livestream + e-commerce” model, Alibaba’s Taobao Live is the clear heavyweight champion, with estimated 2019 GMV between RMB 200 billion and 250 billion.
• It’s one of the largest livestreaming platforms, whether in terms of the merchant size, user base, or sales achieved. 
• The platform accounted for nearly 60% of e-commerce streaming transactions in 2019. 
• It generated sales of RMB 20 billion during Alibaba’s November 11 Singles’ Day 2019 shopping holiday, or 7.5% of the total RMB 268.4 billion sales.
• Taobao Live is available both as an in-app feature on its parent marketplace Taobao, and as a standalone app.
• Just like Taobao, Taobao Live’s most popular product categories are women’s garments, skincare, food, and jewelry. 
• The platform is introducing big-ticket items such as cars and real estate, as well as consumer electronics.
• These popular categories reflect the fact that the platform is dominated by women and younger users. 
• Nearly 70% of Taobao Live’s audience are women, while most of the consumers belong to the post-’80s and post-’90s generation, says a Taobao report (in Chinese).
• Sales on the platform are driven heavily by top-tier KOLs, like Viya and “lipstick king” Li Jiaqi, who have highly sophisticated MCNs (multi-channel networks) behind them. 
• These professional content production agencies, now numbering more than 6,500, are a major force driving China’s livestream boom.
• An overall 20% (around 140) top MCN institutions on the platform contributed almost 75% of Taobao Live’s traffic and 80% of its GMV, according to the 2020 White Paper on Taobao Vendors.
• However, Taobao’s dependence on professional MCNs is highly costly to vendors. 
• Everbright estimates that marketing costs on Taobao Live eat up about 20% of GMV, with 70% of the spend going to MCNs, while Alibaba marketing platforms Alimama and Taobao Live take 10% and 20% respectively.

Social media: The most serious challengers to Taobao Live come not from e-commerce, but rather livestreaming. As livestream e-commerce matures, social media players Kuaishou and Douyin have made plays that leverage their traffic and KOL resources. 

These forays began as partnerships with e-commerce platforms to pilot livestreaming e-commerce features, but the companies gradually built up their own e-commerce capacities and ended the partnerships as trials developed into full-fledged services that keep users in the app when they buy.

Kuaishou

• Kuaishou launched livestreaming in 2017 to a relatively gender-balanced user base with a typical user in a third- or fourth-tier city..
• Kuaishou reportedly achieved an estimated GMV of about RMB 35 billion in 2019, and aims to multiply that to RMB 250 billion in 2020.
• Livestream e-commerce accounted for 19% of Kuaishou’s RMB 55 billion revenue in 2019, although 60% of the revenue still came from virtual gifts associated with traditional entertainment livestreaming. 
• These figures reflect the platform’s KOL-centered online culture, where users address each other as laotie (“old chap”), a colloquial term used in northeast China to refer to unbreakable brotherhood.
• Thanks to strong connections with users, Kuaishou’s e-commerce conversion is five to ten times higher compared to its peer Douyin, according to a report by Frees Fund. 
• But the products are mainly low-margin and low-price, with sales under RMB 50 accounting for 63.3% of total sales, compared with Douyin’s 41.5%.
• The most popular categories are personal care, cosmetics, clothing, local specialty foods, and alcohol.

Douyin

• Douyin did not emphasize livestreaming until 2019. Since then, the business has grown very quickly by encouraging KOLs to transfer their accumulated fans from short-video to livestreaming and online consumption.
• Douyin predicts RMB 200 billion in GMV on the platform in 2020.
• Unlike Kuaishou, Douyin relies on short-video quality and attractive products to make sales, rather than relationships between fans and content providers.
• Douyin users are largely concentrated in higher-tier cities, with purchasing power that results in larger ticket orders.

Read more: Why Kuaishou beats Douyin for e-commerce

Other e-commerce players: Taobao’s e-commerce peers are stuck in the lightweight division for livestreaming, with substantially smaller user bases and sales than Taobao and the video platforms, handicapped by business models that emphasize value for money over fashion-driven impulse buys. Nonetheless, Pinduoduo and JD have built real, if smaller, user bases around livestreaming.

Duoduo Live:

• As a marketplace, Pinduoduo has enjoyed robust growth since its establishment with a unique model that encourages users to get together with friends to buy in bulk.
• But livestream e-commerce didn’t win attention from Pinduoduo until recently, when growth slowed down.
• The Shanghai-based firm officially rolled out Duoduo Live as an add-on within the app in January 2019—after testing the livestream feature the previous November—making it a relative latecomer to the field.
• Over 1 million, or 20-30% of Pinduoduo’s 5.1 million active merchants have opened livestream sessions, according to data from the company.
• Users aged between 20 to 35 years old contribute the most to GMV.
• Pinduoduo’s approach to livestreaming is drastically different from Alibaba’s. With its distinctive consumer-to-manufacturer model, it has leaned heavily on the virtual salesperson model. 
• Duoduo live audiences likely have a potential buy in mind before loading a stream (e.g. drawn in by a discount or social referral), and will use the stream to gain more information before making a decision.
• Duoduo Live’s livestream sessions are centered around products, meaning they’re cheaper for merchants than Taobao Live’s slicker MNC-driven streams. 
• The anchors, often amateur KOLs, are mostly people with a stake in the product—CEOs of manufacturers, government officials for promoting agriculture products from their towns, or even the sellers themselves. 

JD Live

• Livestreaming is a poor fit for JD’s brand, which is built on keeping things simple for users. 
• JD Live is still playing catch-up to Taobao Live, following a similar high-production value approach. Many streams use an “expert + celebrity + host” format, which combines rich content with expert knowledge and a link to purchase. 
• It also serves as a medium to educate users and build brand awareness. 
• Like Taobao, this model means high costs for merchants.
• JD Live has partnered with both Douyin and Kuaishou to leverage their traffic and KOL network, in addition to building up super KOL celebrities to promote premium products. 
• On Wednesday, JD announced a new deal with Kuaishou which will allow Kuaishou viewers to make purchases from JD without changing the app.
• Like Taobao Live, JD Live is also diversifying product categories from consumer electronics, beauty, and food to big-ticket items like real estate. 

Who owns livestreaming eyeballs?

As e-commerce and content blend together, shopping and video platforms are becoming frenemies. On the one hand, they rely on each other: Video apps boast traffic and content, while e-commerce sites have brands and supply chains. On the other hand, they are competing to be the central platform for the new model.

Alibaba has the best of both worlds, with its Taobao Live emerging as a major content platform in its own right.

But the rival e-commerce sites do not have the same traction with in-house content, creating a dilemma. For JD and Pinduoduo, integrating with video apps means handing over some of their crown jewels—control of advertising, product search, and customer data. It’s no wonder that these partnerships can fall apart.

Power seems to be shifting toward video platforms. In the previous partnership model, video apps usually directed users to e-commerce apps such as Taobao and JD to finalize the purchase.  

However, as a new deal between Kuaishou and JD allows users to purchase JD products without leaving the app, JD is giving up its users’ eyeballs to drive sales.

Chinese e-commerce company Pinduoduo posted mixed results for the first quarter of this year on Friday.

Why it matters: The fallout from the Covid-19 outbreak weighs on the Q1 performances of Chinese e-commerce platforms. Similarly, JD released slowed-down Q1 revenue in mid-May.

• Pinduoduo, a strong competitor to JD’s runner-up position in China’s e-commerce market, surpasses its e-commerce rival after price surge on May 12. It’s next only to Alibaba, which remains a far leader.
• Social commerce is attracting attention from global players such as Facebook.

“Despite the unprecedented challenges in the first quarter, Pinduoduo has grown and now serves more than 600 million active buyers.”

–Colin Huang, Chairman and Chief Executive Officer of Pinduoduo

READ MORE: Pinduoduo growth story needs a new chapter

Details: The company’s total revenues increased to RMB 6.54 billion ($923.8 million) in Q1 this year from RMB 4.54 billion in the same quarter of 2019.

• The company’s active buyers in the twelve-month period ended March 31, 2020 were 628.1 million, an increase of 42% from 443.3 million in the twelve-month period ended March 31, 2019 compared with a 50% increase from a year ago.
• The company’s operating loss more than doubled to RMB 4.39 billion in Q1 from RMB 2.12 billion in the same quarter of 2019.
• With Covid-19 being contained in China, Pinduoduo’s daily orders reached 65 million, up from an average of 50 million daily orders in mid-March, according to the company.

Context: In a move to increase operating efficiency, Pinduoduo inked a strategic partnership with GOME Retail in April. Under the deal, the e-commerce upstart is investing $200 million worth of convertible bonds in the household appliance and electronics retailer.

•  Pinduoduo secured $1.1 billion in a private share placement from a number of long-term investors in April, just six months after raising $1 billion by offering convertible bonds.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

This week, the guys welcome Coindesk Asia Editor Wolfie Zhao to the pod to discuss the latest progress in China’s development of a digital currency, and also swap stories of the exciting and dynamic gray market in China that has built up around cryptocurrency mining and trading. James and Elliott also look into Pinduoduo’s 20-F and discuss the latest earnings reports from Tencent and JD.

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

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Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Guest:

• Wolfie Zhao – @Wolfiezhao

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• James Hull– @jameshullx

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Aswath Damodaran, the “dean of valuation,” says company valuation is the interplay between stories and numbers. Every number that makes up a valuation has a story behind it. Every story about a company has a number attached to it.

The growth story of Pinduoduo has been described as “miraculous.” It’s the fastest-growing e-commerce scale-up in China, cracking the RMB one trillion (about $141 billion) in transactions milestone in less than half the time it took Alibaba and JD. That, alongside a few other numbers, tells the story of an irresistible force shaking up China’s e-commerce landscape. If you took that story to the bank and picked up PDD shares at IPO, you’d be up 150% right now.

PDD’s growth story is on the verge of a plot twist: revenue growth is weaker than it should be. Questions are also mounting over its subsidy scheme. Here’s why it needs to write a new chapter better suited to its current circumstances, before investors get wise and start asking tougher questions.

Houston, we have a monetization problem

Two issues threaten to derail PDD’s tale of incredible growth and disruptive innovation.

The first is revenue growth. PDD’s revenue growth has missed analyst estimates two quarters in a row.

A quick word on PDD’s revenue: 90% comes from “online marketing services”, not commissions from e-commerce transactions. “Online marketing services” include keyword bidding and advertising placements such as banners, links, and logos. 

That means the best gauges of revenue health are the number of merchants on PDD and their online marketing services spend.

Here’s what those figures look like, per PDD’s annual report: Where do your eyes gravitate when you see this table?

I look at the last line. Merchants are spending next to nothing on online marketing services, despite massive increases in GMV. That RMB 5,257 per year works out to just $61 a month. The 64% increase looks impressive, until you realize it comes from such a low base.

But maybe it’s not the average merchant who matters, but the big ones. We’ll assume the Pareto Principle applies to PDD’s online marketing services revenue, whereby 20% of merchants are responsible for 80% of revenues.

Under these assumptions, top merchants might be spending an average of RMB 21,030 on PDD online marketing services. That’ll buy you one-tenth of a front-page banner on Taobao.

Scale vs advertising

PDD’s online marketing services are either cheap-as-chips, or merchants are parking their money elsewhere. On paper, Pinduoduo’s online marketing services, particularly keyword bidding, should follow a tight supply and demand model. Low per merchant revenue suggests that few merchants are keen to shell out .

In the short-term, PDD can divert attention away from low merchant spend by trotting out the hackneyed line that advertising revenue will pick up with increases in platform GMV and user expenditure.

However, there’s plenty of evidence that scale doesn’t automatically translate to big digital advertising bucks.

Given that Pinduoduo is already China’s second-largest e-commerce platform by users and third-largest by GMV, it’s only a matter of time before savvy investors ask why merchants aren’t spending more on digital advertising and preferred product listing slots.  

Subsidy accountability

The second issue that threatens to derail PDD’s growth story relates to subsidy accountability and investor relations.

PDD has never had a CFO. The previous VP of Finance departed in April 2019 (Chinese). The company is on the search for a CFO as it continues a subsidy program that is the longest ongoing subsidy program in China’s e-commerce history.

The subsidy program’s results are worth standalone treatment outside this article, but here’s the CliffsNotes version:

Supporters have argued the subsidies have given PDD more users and engagement. Detractors have argued the short-term spike in platform GMV masks issues with stubbornly low user spend and is too high a price to pay for continued losses.

Two charts show why Pinduoduo desperately needs an adult in the room to run a ruler over the subsidy program.

The first chart looks at GMV growth. It suggests subsidies may have been a stopgap to arrest declining sequential change in trailing 12-month GMV growth, but they didn’t work for long.

The second chart shows PDD’s cash and cash equivalents. This is, in part, a measure of how much free cash PDD has got on hand to commit towards its growth. Its subsidy program has cut that number by half.

Together, these two charts suggest that Pinduoduo may be overpaying to fight gravity. Any future CFO must determine whether it’s in the company’s best interest to continue a subsidy war with Alibaba, JD, and Suning. As I will discuss below, there are uses for cash other than incinerating it to juice metrics.

In addition to needing a CFO, Pinduoduo is walking on a few eggshells. It’s been called “the largest bubble in Chinese internet history” by Guosheng Securities (Chinese). The folks at Guosheng reckon PDD is subsidizing merchants and users, running up losses to keep products on the platform artificially cheap. This, they contend, is what’s driving PDD’s GMV growth. PDD has been suspected of not having the right payment clearance processes in place (in Chinese). All this signals a mounting level of market and regulatory scrutiny as Pinduoduo gets a seat at the big boy table.

A new story for Pinduoduo

If you buy into PDD’s current growth story, this is probably why: the scale of its e-commerce marketplace approaches Alibaba.

The story has worked wonders so far. Pinduoduo added $15 billion in market capitalization between Q1 and Q4 2019. That works out to roughly $100 in market capitalization for each user it added over the same period. Clearly, investors have high expectations for what PDD can do with its scale.

The warning signs covered earlier could sour these expectations. Even with PDD’s strong growth, merchants aren’t spending big on online marketing services, leaving a hole in revenues. And that’s not to mention macroeconomic or pandemic-induced headwinds that may dampen digital advertising spend or consumer confidence.

PDD’s growth story must change, before investors realize GMV growth isn’t attracting more online marketing services revenue.

PDD’s new narrative should center on its war chest.

The company raised $1 billion in March. That follows a similar-sized debt financing round in September 2019. That was after a follow-on equity raise in February 2019, also to the tune of $1 billion. Get the picture? PDD is a money-raising machine.

At present, Pinduoduo has a good chunk of these proceeds (and more)—about $5 billion—stashed away in highly-liquid short-term investments.

This war chest creates an opportunity for Pinduoduo to mold itself into a Tencent-like investor. The latter’s investment record is stellar—of the 800 companies Tencent has invested in, 160 hold unicorn status. Of these, five have generated returns of more than $1 billion, six have generated returns of more than $5 billion, and one company (unnamed) has generated returns of more than $10 billion.

Even if Pinduoduo doesn’t quite match Tencent’s lofty returns, their eye for disruptive commerce models could still be highly lucrative—think GGV Capital, who focus on spotting opportunities that transfer between developed and developing economies.

An appetite for change?

I predict that a combination of business challenges and increased scrutiny will make it challenging for Pinduoduo to keep parroting its previous growth story this year. But I’m not sure how much narrative shift the company is up for.

The company’s success to date and its current share price are powerful forces that could tempt it to stay course. Why rock the boat, especially when you have the mother of all scapegoats—COVID-19—up your sleeve?

We won’t have to wait long to find out. Pinduoduo’s Q1 2020 earnings will be with us very, very soon.

Correction (May 12): An earlier version of this article wrote that Pinduoduo added $15 billion in market capitalization between Q1 and Q4 2020. In fact, this happened between Q1 and Q4 2019.

Correction (May 14): A previous version of a chart in this article incorrectly labelled LTM GTV as Quarterly GMV. It also wrote that Pinduoduo’s CFO stepped down in April 2019. Pinduoduo has never had a CFO, and it was the VP of Finance who stepped down.

JD.com has signed a partnership with South Korean manufacturer LG Electronics to sell RMB 5 billion ($707 million) worth of products on the e-commerce platform.

Why it matters: Chinese e-commerce giants are increasingly partnering with manufacturers to facilitate product development and marketing. The trend propelled emerging e-commerce models such as consumer-to-manufacturer (C2M), which connects consumers and producers to manufacture tailored products at lower prices. 

• The defining feature of a C2M model is highly competitive pricing brought about by connecting factories with consumer insights, such as preferences, location, and behaviors.
• The C2M model has powered Pinduoduo’s rapid ascent and is now gaining momentum among Pinduoduo rivals including Alibaba and JD.com. 
• Covid-19 has made health-related home appliances more popular across online marketplaces. JD sales for air purifiers and steam sterilization washing machines surged during the pandemic, the company said.

Details: Under the partnership, the two companies will cooperate in a range of areas, including product development under the C2M model, smart supply chain operations, marketing, offline expansion, and manufacturing of exclusive products. 

• LG will also invest in JD Home Appliance Stores and set up more than 1,000 whole-house appliance demonstration stores, creating smart offline retail platforms in lower-tier markets.
• The two companies have already worked under the C2M model for small home appliances. In May 2018, they started to develop C2M air purifiers, beauty tools, hand-held vacuum cleaners, and clothing care steam “styler” systems based on JD.com data. 

Context: JD.com rolled out its C2M unit Jingzao in 2018. The platform now offers products including custom shirts, luggage, towels, and bedding.

• JD also partnered with electronic brands such as Lenovo, Konka, HP, and Dell to develop tailored products under the C2M model.
• Alibaba boosted its C2M push recently with plans to transform 1,000 manufacturers into “Super Factories” with output exceeding RMB 100 million ($14 million) each within the next three years.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

An episode full of salacious scandals and controversy! In this episode, the guys welcome back Technode’s own Wei Sheng to discuss a recent lawsuit filed against Luckin Coffee in China, and how regulators are cracking down on the company since their admission of fraud. James and Elliott also discuss the controversy brewing between Meituan and their vendors, Pinduoduo’s recent moves, and the scandalous love affair involving some of the biggest names in the Alibaba ecosystem.   

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Links

• Meituan
• Jiang Fan/RUHN scandal
• Pinduoduo

Guest:

• Wei Sheng – @weishengn

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Editor

• Peter Isachenko

Podcast information:

• iTunes
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• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

In a letter to investors, Pinduoduo founder Colin Huang suggests that companies with new business models, a group that Huang portrayed Pinduoduo as leading, are expected to outrun their older rivals in a world that’s witnessing a “reestablishment.”

Why it matters: The already intense rivalry between Pinduoduo and arch-rivals like Alibaba and JD is reaching a fever pitch as the Covid-19 is moving more Chinese shoppers online.

• Instead of playing catch-up, the four-year-old company now claims to be China’s second-largest e-commerce platform with 585.2 million active buyers, next only to Alibaba.
• Both Alibaba and JD have rolled out their counterpart apps that adopt similar models of Pinduoduo. More rivals like Alibaba-backed Suning are reportedly joining the battle.

“When this tiny virus was dropped into our world, it acted just like a catalyst in a test tube, accelerating the formation of a whole new world. Inevitably, some dimensions of the previous world are being restructured, some rules are being rewritten. The impact of this sweeping force will fundamentally and permanently change the world we are in now. Just like what I explained in the previous shareholder letters about PDD’s formation, new models are bound to emerge and grow in a whole new setup. We are indeed seeing the phasing out of some as new ones emerge. It is the time of reestablishment.”

—Pinduoduo founder and CEO Colin Huang in the letter to investors

Details: Included in Pinduoduo’s 2019 annual report released Saturday was a letter from its founder and CEO Colin Huang which sought to reassure shareholders about the company’s long-term growth prospects.

• Different from the previous public letters that mainly address the company’s operations and strategies, Huang explained this time his thoughts on the Covid-19 pandemic as well as the history of time, mentioning the theories of big thinkers from Newton to Einstein.
• By predicting a new world setup, he believes new models will prosper the most. He predicts old models will be phased off, without mentioning the company’s rivals by name. 
• The company has recorded  RMB1.01 trillion ($144.6 billion) of gross merchandise volume from 585.2 million active buyers in 2019. That’s RMB1,720 ($247.1) of annual spending per active buyer, up 53% year on year from RMB 1,127 in 2018, the company’s 2019 report shows. 

Results may vary: Public reception of Huang’s letter has been mixed. While some appreciate Huang’s philosophic thinking, others complain the letter is missing the point and offers no valuable detail for investors.

“When Einstein wrote down his famous E = MC², he elegantly (in some sense also arrogantly) depicted a physical world in his mind. However, what he did not explain in his theory of relativity is the relationship between the human mind and the physical world, nor the relationship between energy and information.”

—Pinduoduo founder and CEO Colin Huang in the letter to investor

Context: Pinduoudo posted weaker-than-expected revenue for the fourth quarter of 2019 in March. The company expects disruption caused by coronavirus outbreak will have negative impacts on its Q1 result.

Chinese omnichannel retailer Suning.com is reportedly planning to launch a new shopping app targeting bargain-seeking consumers by the end of May, taking aim at e-commerce upstart Pinduoduo.

Why it matters: Suning’s entry to the budget shopping market will further fan the contentious competition in the sector, which already seen fierce rivals like Pinduoduo and Alibaba.

• Taobao Special Offer Edition app, Alibaba’s Pinduoduo clone, topped the rankings for the most-downloaded free app on Apple’s China App Store in March.
• Rival Gome Retail entered a strategic partnership with Pinduoduo this week with plans to capitalize on the later’s huge user base and technological capabilities. The move draws a comparison between the tie-up between Suning and Alibaba.

Details: Chinese media Jiemian reports that Suning is launching a Pinduoduo clone this May as a core move for the year to build up its online shopping ecosystem, citing people with knowledge of the matter.

• The Nanjing-based company is recruiting 100 core merchants since April 23, says the source.
• The report says it has got confirmation from Suning, which disclosed that the new project is dubbed as Yizhimai. It will be overseen by Zhang Kui, manager of the company’s group-buying division Suning Pingou.
• The app is expected to be launched around May 20.
• The company denied plans to launch a PDD clone in a written email to TechNode, saying that it is only a rumor.

Context: Suning has been pushing its offline expansion to various segments including convenience stores, supermarkets, and department stores.

Amid a series of offline expansions, Suning acquired 80% equity interest in the Carrefour China in June 2019.

The company has been selling its shares in Alibaba since 2018 along with hefty spending for omnichannel expansions.

Update: The story is updated on April 27 to include the company’s denial of the rumor.

Pinduoduo announced Sunday a strategic partnership with GOME Retail. The e-commerce upstart is investing $200 million worth of convertible bonds in the household appliance and electronics retailer.

“This strategic partnership is a win-win-win. Consumers win because they get a wider range of top domestic and international brands at competitive prices, GOME wins because they can broaden their access to our 585.2 million users, and PDD wins because we enhance our foothold in household appliances and electronics.”

David Liu, Vice President of Strategy at Pinduoduo, says in a statement

Why it matters: Chinese retailers, both online and offline, are working together to increase operational efficiency and improve user experience by leveraging each others’ user base, supply chains, and technological capabilities.

• The deal furthers Pinduoduo’s push into the consumer-to-manufacturer (C2M) realm by working with GOME to source products.
• Alibaba has been making inroads to PDD’s home turf with the value-for-money app Taobao Special Offer Edition.

Listen: An interview with Pinduoduo’s David Liu

Details: Pinduoduo is planning to integrate GOME’s product range, logistics and after-sales customer service to its platform.

• The bonds will carry a coupon of 5% per annum and a tenure of three years.
• If converted at HK$1.215 per share, Pinduoduo would own 1.28 billion shares or approximately 5.6% stakes in GOME.
• Pinduoduo indicates that they have sourced the fund from its $1.1 billion private share placement completed last month. The company said then that they would use the proceeds to help finance growth, upgrade the shopping experience for our users and to offer more subsidized products.
• Pinduoduo will add GOME’s product range—including top domestic and international brands like Haier, Midea, Toshiba, and Siemens—onto their platform at the same, or lower price.
• PDD will provide GOME with digitalization strategies, technology, subsidies, and after-sales service.

Context: Pinduoduo and GOME have been working together since as early as 2018. On March 21, the two companies jointly held a promotion to give away RMB 500 million worth of discounts and consumption subsidies on more than 6,000 items.

• GOME is operating over 2,600 offline retail stores across 776 cities as of 2019. Of the total, 1,026 are located in county-level cities.
• Pinduoduo failed market expectations for a second consecutive quarter in Q4. The COVID-19 outbreak is expected to further weigh on first-quarter results.
• Alibaba invested $4.6 billion in GOME rival, Suning, in 2015 to facilitate a range of collaborations.

Chinese e-commerce platform Pinduoduo announced Tuesday that it has secured $1.1 billion in a private share placement from a number of long-term investors.

Why it matters: Earnings misses for two consecutive quarters coupled with throttled business from the Covid-19 outbreak have dented Pinduoduo’s share prices since late last year. The timing of this investment conveys investor confidence about the company’s growth prospects.

Details: Pinduoduo did not disclose the name of the investors, but sources from a Reuters report said private equity firms Hillhouse Capital and Boyu Capital are on the list.

• With the funds, the investors will purchase the company’s newly issued Class A ordinary shares, which represents approximately 2.8% of Pinduoduo’s total outstanding shares.
• The proceeds will be used to boost online sales and marketing of agricultural products, push the transformation of the export-oriented enterprises, as well as build out infrastructure for the company’s customer-to-manufacturer (C2M) business.
• The transaction is expected to close in early April.

Context: The current funding comes just six months after Nasdaq-listed Pinduoduo raised $1 billion in a convertible bond.

• Rival Alibaba is doubling down on its own C2M selling platform aimed at luring bargain-seeking consumers.

Alibaba’s e-commerce marketplace Taobao is aggressively expanding its direct-to-customer selling platform for bargain-seeking consumers, further escalating its already contentious competition with rival Pinduoduo.

Why it matters: The business model known as customer-to-manufacturer (C2M) powered Pinduoduo’s meteoric rise and has been adopted by rivals like JD.com and Netease’s Yanxuan. Alibaba’s move will further fan the inferno that China’s e-commerce industry has become.

• The defining feature of a C2M model is highly competitive pricing brought about by connecting factories with consumer insights, such as preferences, location, and behaviors. The model has become popular in China, particularly in lower-tier cities, where buyers tend to be more price sensitive.
• Lower-tier cities are winning attention from e-commerce giants, in seek of growth as higher-tier urban markets grow increasingly saturated.

“Stepping up our made-to-order strategy is an ongoing Taobao initiative to diversify product supplies across its ecosystem to meet demand from our consumers and help manufacturers lagging in the digital race use technology to transform their processes.“ 

—Wang Hai, general manager of Taobao’s C2M Business Unit, in an emailed statement

Details: Alibaba plans over the next three years to transform 1,000 manufacturers into “Super Factories” to reach annual output exceeding RMB 100 million ($14 million) each. It also plans to drive productivity at 10 factory clusters in China to reach at least RMB 10 billion each per year within the same time period.

• To support the sales channel, Taobao formally launched its Taobao Special Offer Edition app. The app, which the company soft-launched in 2018, topped the rankings for the most-downloaded free app on Apple’s China App Store as of publication on Friday.
• Buyers can purchase directly from manufacturers unbranded items from TVs to cookware which are produced to fit consumer preference.
• The C2M model passes consumer data, collected from existing purchases, to upstream manufacturers in real-time, thus accelerating the product development timeline and boosting efficiency.
• In addition to improving flexibility and adaptability in conventional manufacturing, the initiative helps manufacturers to digitize as part of the process, according to Alibaba.
• The initiative will bring 10 billion new orders to factories across China over the three-year time period, according to the statement.
• Alibaba’s financial units will provide capital and liquidity to manufacturers.

Context: Alibaba has implemented a series of structural changes in December in preparation for the ramp-up of the C2M initiative. 

• Taobao‘s C2M initiative spans the entire industrial chain from offering consumer insights and research and development suggestions for product development, coordinating raw materials and product inventory management based on precise consumer distribution and preferences, to product marketing.
• JD.com rolled out its C2M unit Jingzao in 2018. The platform now offers products including custom shirts, luggage, towels, and bedding.
• Pinduoduo accused Alibaba of blocking employees’ personal Taobao accounts as competitions between the two e-commerce giants escalate.

Read more: China’s data-based C2M model to drive e-commerce forward

Employees of social e-commerce platform Pinduoduo have accused Alibaba of blocking their personal Taobao accounts as well as those belonging to family members in an open letter posted on Chinese microblogging site Weibo on Wednesday. 

Why it matters: Relations between Chinese e-commerce apps are growing more contentious as growth slows and competition intensifies. The issue of “forced exclusivity,” a practice where platforms force sellers or users to use only their platform or services, has been a common complaint among industry players.

• China’s market regulators in November reminded more than 20 e-commerce players that forcing sellers into an exclusive agreement with one marketplace is illegal.  

Details: Weibo user “PDD Lefu,” a self-identified customer service manager at Pinduoduo, said in a public letter that several Pinduoduo employees received alerts from their personal Taobao accounts on Wednesday, warning them that the app they are using are not accessible until March 28.

• PDD Lefu said in the letter that this was an extension of Alibaba’s “forced exclusivity,” targeting Pinduoduo employees individually.
• She points out that the block was also affecting employees of Chinese artificial intelligence startup Yitu, which shares IP addresses with Pinduoduo since the two companies are both located in the Jinhongqiao International office building in Shanghai. 
• ‘You wouldn’t know until you try. IPs at my company Tenga were also blocked. Is it because we are located in the same building?” (our translation) another Weibo user, “Malanshandeshan,” said in a comment on PDD Lefu’s post. 
• Users on Zhihu, a Quora-like query platform, said in a post that Pinduoduo staff, current and former, have been blocked from certain services on another Alibaba platform, Juhuasuan, including promotional discounts and coupons.
• Juhuasuan responded in a post on Weibo that the platform is open to all users, but “says no” to all kinds of unruly practices. It confirmed that it blocked certain users to curb unscrupulous and disruptive practices on the platform.
• Juhuasuan said in the post that it had spotted a group of web crawlers and discount scams under the disguise of regular users two years ago. They usually feature unclear identification and a similar registration location.
• Alibaba did not immediately respond to requests for comment.

Context: Pinduoduo and its rival Alibaba have been in a years-long public spat over the subject of “forced exclusivity.”

• “Intensified” forced exclusivity efforts from rivals has weighed on Pinduoduo’s performance, according to the company.

Read more: New law brings structure, discipline to the willful world of Chinese e-commerce

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

In this episode, the guys welcome professor Jeffrey Towson to discuss the ongoing battle over the digital services sector in China, as Alibaba, Meituan, Baidu, and others fight on a rapidly-changing battlefield. James and Elliott also chat about the “COVID recession,” investment strategies, and go over the quarterly earnings of Tencent, Pinduoduo, and JD. 

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Links:

• Jeff’s Asia Tech Class podcast

Guest:

• Jeffrey Towson – Jefftowson.com

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

Chinese e-commerce platform Pinduoudo posted on Wednesday weaker-than-expected revenue for the fourth quarter of 2019, sending the company’s shares 7.0% lower on Wednesday.

Why it matters: This is the second consecutive quarter that the Chinese e-commerce upstart has fallen short of expectations, and fallout from the Covid-19 outbreak is expected to further weigh on first quarter results.

“The disruption caused by the outbreak will have negative impact on our results for the first quarter of 2020, but our expectations for the long run remain unchanged and even more positive.”

—Pinduoduo founder and CEO Colin Huang during the Q4 earnings call

Details: The company’s total revenues nearly doubled to RMB 10.79 billion ($1 billion) in Q4 last year from RMB 5.65 billion the same quarter a year earlier. However, it fell short of average consensus estimates of RMB 10.93 billion compiled by Yahoo Finance.

• The company’s annual gross merchandise volume for the first time exceeded the one trillion RMB mark in 2019, an annual increase of 113%.
• Total cost of revenues for 2019 more than doubled from a year ago to RMB 6.34 billion, which the company attributed to higher costs for cloud services, call center, and merchant support services.
• Net loss narrowed 38% to RMB 1.75 billion in Q4 compared with RMB 2.42 billion in the same quarter of 2018.
• Buyer growth is still robust. Monthly active users (MAU) jumped 76.6% year on year to 481.5 million in Q4, though it falls well short of Alibaba’s 824 million total MAU as of the end of the quarter. 
• The company attributed growth to a better understanding of user needs based on its interactive business model, which constantly adapts to user preferences.
• The platform’s merchant operation and logistics have resumed and are gradually returning to normal.
• CEO Colin Huang was upbeat about the company’s prospects, citing broader adoption of digital services by consumers during the outbreak, which bodes well for the future of e-commerce in China. 

Context: Pinduoduo added a new social shopping feature in February to combat counterfeit protective products such as face masks during the coronavirus outbreak.

• Along with local peers, Pinduoduo rolled out support plans to help merchants get through the economically challenging time.

In Shiyan, Hubei, Jiang Xiaosa wants to buy a tablecloth off e-commerce platform Taobao. But no deliveries are coming to Shiyan, so she’s waiting to place the order. Normally, Jiang, who owns a baijiu shop in Hebei province, would have left Hubei weeks ago. Instead, she’s living a low tech life while waiting for the quarantine to end.

Deliveries still make their way into Wuhan, the first city that went into quarantine following the Covid-19 outbreak. But Shiyan is a tier three city 600 kilometers from Wuhan.

The digital economy was one of the first things to go when quarantine started.

The virus has dealt a blow to e-commerce and food deliveries, but consumers in tier one cities still depend on them to avoid now-risky supermarket trips. In Beijing, fresh produce platforms like Alibaba’s Hema saw a surge in demand. In Shanghai, local platform Dingdong feeds families. Those that order takeout on apps like Ele.me must wait longer and pick up deliveries left outside, notified by a call from the delivery man once he’d already left.  

That’s not what getting food looks like in third-tier Hubei. While e-commerce companies may be helping to deliver supplies in the background, people are living like their interfaces, the likes of Taobao and Ele.me don’t exist. In Shiyan and neighboring Xiangyang, there have been no parcels since the quarantine began, and food delivery is close to non-existent. The low tech era is back.

Low tech food

Before the virus emerged, residents preferred brick-and-mortar for groceries. People in Shiyan can usually walk downstairs to a local store, usually at the foot of the residential compound.

This lasted until the local government asked people to stop going outdoors on Feb. 2. Loudspeakers started broadcasting rhymes discouraging shopping trips: “If you have one grain of rice, don’t go out in the crowds; if you have one stalk of spring onion, don’t rush to the market.”

The local store moved some of its produce into the apartment compound. Jiang can now buy tangerines without venturing onto the street. 

Low tech fresh food networks have sprung up. The local neighborhood Party committee is now the equivalent of a Hema delivery man. Jiang can scan a QR code, join a WeChat group, and post a list of what she’s run out of. She says that the neighborhood committee also collects her rubbish and helps pay her gas bill.

A resident in Jiang’s building had symptoms similar to the coronavirus and no one from that building was allowed to leave the compound for a week. Jiang is considering joining the Party committee as a volunteer just so she can get outside more often.

In the neighboring city of Xiangyang, Zhong Shaoxiong manages on his own. Unlike Shiyan, his neighborhood committee does not deliver groceries. They have barred his family from leaving their residential compound since Feb. 1, when cases were discovered within.

“There’s a nearby supermarket; we have their WeChat, we tell them what to buy, they send groceries to the gate of the compound,” said Zhong. He pays at the gate, which separates the local supermarket’s staff and himself. 

Cooked food delivery is totally gone in Shiyan. It’s almost gone in Xiangyang. There was one shop open on Ele.me in the whole city when Zhong checked at 7 p.m on Feb. 11. The choices aren’t bad. Among them are prawn fried noodles, fried rice with Laoganma chili sauce, and Sprite to wash it down. Before the virus, Zhong said, “food delivery was everywhere in Xiangyang.”

E-commerce companies operate in the background. Pinduoduo, for instance, has told Xinhua (in Chinese) that it has shipped agricultural produce to Xiangyang. Fu Zheng, Pinduoduo’s team head for epidemic control, said in the interview that the company has set up new procurement and purchasing channels to circumvent road closures and disruption of normal logistics and that it bought over 100 tons of fresh vegetables and fruit and delivered them to 16 hospitals across seven cities in Hubei.

Nothing comes in, nothing goes out

Quarantine has thrown Shiyan’s residents into a pre-Taobao world. Local governments have implemented strict and varying rules on what is allowed in and out. Nothing comes in unless it’s of the turnip or mask variety, and these go straight to supermarkets or pharmacies. Individual deliveries don’t get past the roadblocks.

TechNode writer Wei Sheng posted masks to his parents who live in a village near Huanggang city on Jan. 26. His parents were waiting to collect the parcel from the nearest town, Gaoqiaozhen. Three weeks later, they are yet to arrive.  “I’ve given up,” he said.

People are getting by without Taobao, but they miss it. Local residents in Shiyan said that they were among its earliest adopters. After placing an order, the seller would call to confirm. The buyer would traipse to the local post office and send money directly to the seller’s account. It could be a ten-day wait before the parcel arrived at the local postal point. “The first people to use it were brave,” said Jiang. The most popular purchases, said her daughter, Yaning, were nicer clothes and shoes then unavailable in the city’s shops.

Jiang can wait on the tablecloth. But there are other problems. During her time in quarantine, her washing machine has broken. She ordered a new one off JD.com.

Not only are no parcels coming in—none are going out. She wanted to post the key to her shop to a colleague back in Hebei. No one would come to pick it up. 

Cut off from the digital economy, Jiang isn’t worried about not being able to sit down to home-cooked meals—the Party committee guarantees that. What she doesn’t know is when she can go back to work and use her washer.

Chinese e-commerce platforms are redoubling efforts to help farmers hit hard by the Covid-19 outbreak to sell their overstock agricultural products online.

Why it matters: Connecting farmers with e-commerce as a method of poverty alleviation has part of the government’s agenda in recent years. During the Covid-19 outbreak and subsequent locality lockdowns, e-commerce has became a crucial sales and distribution channel for farmers.

• Shuttered brick-and-mortar produce markets, logistical interruptions, and labor shortages caused by the Covid-19 outbreak quashed the seasonal sales spike normally seen during the Spring Festival holiday week.
•  Farmers are facing huge losses resulting from China’s paralyzed economy as wholesalers aren’t purchasing as normal during the outbreak. The Covid-19 effect on China’s agricultural sector may be felt over the longer term due to the time needed for crop growing cycles.

Details: Major e-commerce sites like Alibaba, JD, and Pinduoduo have launched special campaigns and subsidy funds to facilitate online sales of fresh produce.

• Pinduoduo unveiled on Feb. 10 a special campaign for direct-from-farm produce, listing fruits and vegetables from nearly 400 agricultural areas countrywide. Of the total, 230 are officially recognized poverty-stricken counties.
• The Shanghai-based firm also allocated RMB 500 million ($71 million) in subsidies in the form of coupons or discounts for buyers to apply to purchases of applicable produce.
• The company said that in addition to the subsidy fund, it also allocates RMB 2 per order to farmers to assist with logistical costs.
• The company has not responded to requests for specifics about the subsidies. Pinduoduo does not hold inventory and users purchase the produce directly from farmers listed on the platform.
• Alibaba’s Taobao is setting up a RMB 1 billion fund for the initiative. The company is maximizing advertising reach for the produce by linking customers with a dedicated landing page on Taobao’s home page.
• JD launched on Feb. 11 a dedicated sales channel for farmers affected by the crisis to sell their produce.

Context: E-commerce has become an important sales channel for farmers, especially those in remote areas.

• Thanks to the rise of content-driven e-commerce, tech companies from e-commerce giant Alibaba to short video apps like Douyin and Kuaishou are leveraging livestreams and videos to boost online sales.
• Pinduoduo earned sales revenue of more than RMB 65 billion in 2018 from a special program that sells farm produce from poverty-stricken regions.

Pinduoduo added a new social e-commerce feature to its app,  creating so-called “circles of trust,” through which users can exchange product reviews with a group of selected contacts, the company said in its newsletter on Tuesday.

Why it matters: The feature, dubbed “Pinxiaoquan,” is meant to tackle counterfeit and substandard goods, especially those related to medical supplies like protective face masks during the coronavirus outbreak in China.

• The launch of Pinxiaoquan adds to last week’s crackdown on substandard mask listings on Chinese e-commerce platforms.

E-commerce firms cracking down on sellers of fake protective masks

Details: Online shoppers can select friends and family to include in their trusted circles, and then follow their purchase histories and comments on listings, cutting through the noise produced by Pinduoduo’s 536 million users.

• Pinxiaoquan provides a shortcut to finding trustworthy merchants by bringing together people with established trust, saving time and tackling information asymmetries, the e-commerce platform said.
• Starting yesterday, the feature is being rolled out to users in batches, according to the company.

Context: Requests for refunds and returns on Pinduoduo have risen by 120% compared with the same period last year, the company said, attributing the increase to “panic buying and erroneous purchases” when the users lack sufficient information and time to select high-quality products.

• Daily demand for masks reached hundreds of millions in China within a few days, the head of Pinduoduo’s anti-epidemic team told TechNode in an emailed statement last week.
• Domestic mask production capacity is around just 20 million, a spokesperson from the Ministry of Information and Technology told Chinese media.
• Pinduoduo said that more than 100,000 merchants and 600,000 products related to masks are listed on its platform.
• Last week, Pinduoduo took down 500,715 listings and 40 shops selling mask-related products that weren’t up to national standards for particle filtering. Alibaba said that it removed 570,000 listings for similar reasons.

Correction: an earlier version of the story identified the feature as the “Circle of Trust” instead of using the pinyin for its official name in Chinese only, “Pinxiaoquan.”

Chinese e-commerce upstart Pinduoduo has rolled out a series of measures to help smaller merchants during the economic slowdown caused by the current novel coronavirus outbreak.

Why it matters: Small- to medium-sized businesses are among those businesses hit the hardest by the panic surrounding the viral outbreak crisis sweeping China. Helping online sellers during this economically challenging time either through subsidies or more flexible platform policies could help the Shanghai-based company to attract and retain these merchants, important components for its ecosystem.

• Pinduoduo and its rival Alibaba had a public spat last year when Pinduoduo’s CEO accused the e-commerce giant of compelling merchants to choose between the platforms through its forced exclusivity policy.

Forcing sellers into exclusivity deals on marketplaces is illegal: regulator

Details: For the majority of orders placed during the period from Jan. 17 to Feb. 10, Pinduoduo has extended the delivery time to Feb. 12, according to an emailed statement from the company. Meanwhile, parcel pick-up time from the sellers after order confirmation was widened from 24 hours to 96 hours.

• Taking the effects of the virus outbreak into consideration, the company made the adjustments accordingly to “ease pressure on merchants” (our translation), the statement said.
• Pinduoduo says it has allocated RMB 1 billion ($140 million) toward subsidies for the initiative, adding that it is “not setting upper limits on the support.”
• The company is offering a RMB 2 to RMB 3 per order subsidy to merchants that are fulfilling their orders during the virus outbreak to mitigate rising logistical and operational costs.
• Likewise, tech giant Meituan also unveiled supportive plans for smaller businesses including setting up a RMB 350 million (around $50 million) fund for merchants, providing no less than RMB 10 billion in low-interest loans to sellers, and lowering commission fees for merchants in Wuhan.

Context: Alibaba invested RMB 30 billion worth of resources to support the growth of small- and medium-sized merchants in 2019.

• Alibaba’s Hema grocery store unit is temporarily hiring employees from restaurant chains in an attempt to ease labor cost pressures on a sector hit hard by the outbreak while addressing a workforce shortage caused by rising grocery delivery orders.
• In June 2019, home electronics manufacturer Galanz accused Alibaba’s online marketplace Tmall of hiding its products from search results after it refused to remove its listings from Pinduoduo’s platform in May.

Chinese e-commerce platforms are cracking down on fake or substandard protective masks, potentially the most visible symbol of the novel coronavirus outbreak that has rocked the country.

Why it matters: The coronavirus outbreak has triggered a rise in global demand for protective masks. Online retailers are tightening monitoring efforts to fight unethical sellers looking to benefit during a country-wide crisis by offering substandard products.

• Face mask production capacity in China is around 20 million per day, a representative of the Ministry of Information and Technology told local media.
• Daily demand for masks in China with its population of 1.4 billion surged to the hundreds of millions within a few days according to estimations from e-commerce platform Pinduoduo, according the company’s head of anti-epidemic team Fu Zheng in an emailed statement.

Chinese tech firms ramp up support to battle outbreak

Details: Alibaba has permanently barred 15 stores from operating on its shopping platforms for selling “problematic” masks, the company announced Tuesday through its official account on microblogging platform Weibo.

• The company has removed 570,000 questionable mask listings and has referred five of the banned stores to authorities for further investigation, Alibaba said in the statement.
• Alibaba’s marketplace regulatory unit reiterated its “zero tolerance” stance towards such behaviors in the statement released Wednesday. The firm suggested that the government should add such sellers to a country’s credit blacklist.
• Alibaba did not respond to requests for comment.
• Pinduoduo has removed 500,715 items and has closed more than 40 stores as of Feb. 4, the company said. Pinduoduo’s anti-epidemic group will run spot checks on protective gear listed on the platform, Fu Zheng added, to assess whether masks are up to national standards for particle filtering.
• Sellers found to be selling problematic products will be removed from the platform, have their cash accounts frozen, and will be reported to the police, the company said, and the platform will reimburse the buyers.
• JD has removed seven merchants from its platform, local media reported.

Context: Counterfeit goods have long plagued Chinese e-commerce platforms. To fight the issue, e-commerce platforms have rolled out anti-counterfeit initiatives by forming industry alliances, and implementing new technologies like artificial intelligence and big data, among others.

• The platforms are assessing protective product quality by analyzing in real-time merchants and product listings using data points such as product specification and user reviews. In addition, they are pulling random samples to examine and test the products.
• On Feb. 2, China’s Ministry of Public Security ordered a clampdown on sales of counterfeit and inferior protective products, the stockpiling such items, and inflating prices during the virus outbreak.

Updated: added the Ministry of Public Security statement.

This article was co-authored by Wei Sheng.

China’s tech stocks have dropped sharply since Jan. 13, when an epidemic disease known as novel coronavirus went global. On Tuesday Feb. 3, they started to recover, but most have a long way to recover from January losses.

E-commerce giant Meituan Dianping opened at HK$109.20 (about $14) on Jan. 13, dropped to HK$99.50 by the end of the day Feb. 3, and has climbed back to HK$100.50.

The stock rise coincided with a strong monetary boost from Beijing on Tuesday. The People’s Bank of China injected RMB 400 billion (about $57 billion) of liquidity to the banking system and strengthened the yuan exchange rate to support the economy.

The liquidity injection was the largest in the past year, sending a strong message to markets that the government will support the Chinese economy during the virus outbreak.

Manufacturers of surgical masks, now widely used and sometimes mandated in China for protection against airborne viruses, have seen a surge in share prices. Stock for three Chinese firms TechNode analyzed have gained 40% in share price since Jan. 13, indicating that investors expect a prolonged health crisis.

But things are looking up this week in tech. Stocks on Shanghai’s tech board started to climb on Tuesday, gaining back on the past few weeks’ losses. The benchmark SSE Composite Index, in which the STAR Market is listed, has gained close to 3% since Tuesday.

China’s Nasdaq-style STAR Market has been on a roller coaster ride after it reopened on Monday. Most shares dropped during the first day of trading after the week-long break with 43 out of 79 listing companies seeing their share prices reach the tech board’s daily limit of 20% downside.

E-commerce bounceback

The e-commerce sector has been hit the hardest among those analyzed, as expectations for consumption were low in the past few weeks. Share prices of the six companies TechNode analyzed saw a 9.4% decrease on average until Feb. 3, and have since won back 5.4%.

Millions of people are staying at home this week due to obligatory work-from-home policies, adding on the fact that fears of the virus spreading is running high. But fear of the virus might prove beneficial for e-commerce companies.

“Alibaba and Meituan’s share prices dipped slightly, but are now on an upward trajectory, as investors price in how important e-commerce will be over the coming months,” Michael Norris, leader of research and strategy at AgencyChina, told TechNode.

Cities across China have ordered entertainment venues to shut down and shopping malls to take strict entry measures during the Spring Festival break which went from Jan. 23 through Feb. 2 after a last-minute extension.

“Over the coming weeks, the default for many folks’ consumption will be e-commerce,” Norris said. E-commerce and delivery platforms have already implemented “no-contact delivery,” meaning the delivery driver doesn’t come in person with the person receiving the goods. This scheme meets consumer desires and “the stock market has responded positively to these developments,” Norris said.

Luckin Coffee shares have dropped by 29%, from $44.17 on Jan. 13 to $31.35 on Feb. 3, the biggest drop among the companies analyzed. On Saturday, the US investment firm Muddy Waters delivered a further blow to China’s largest coffee chain, saying that it believes the company is inflating sales numbers. Luckin Coffee stock has increased by 24.56% this week, recovering to $39.05.

Luckin shares dip further despite refuting fraud claims

Shoppers going online

Smartphones and telecommunications companies have also seen a drop. The five companies TechNode analyzed showed a 2.3% decrease since Feb. 13.

“We predict the overall smartphone shipment in China to drop by 15% to 20% year on year in the first quarter,” said Fang Jing, chief analyst at Cinda Securities, a Beijing-based investment firm.

The drop is attributable to the government’s calls remain during the Spring Festival holiday in an effort to contain the spread of the virus, Fang said.

The holiday is usually considered a barometer of Chinese private consumption because of the traditions of gift-giving and family reunions. However, fears of the deadly coronavirus that has killed 491 people and sickened 24,363, based on official data, have kept shoppers away from the streets.

“We have seen shipments of smartphones through offline channels drop by 70% during the Spring Festival holiday,” said Fang. “If the situation is not going to take a turn for the better, the percentage will likely increase.”

Instead, people are going online for electronics consumption. Online shipments of smartphones are expected to account for as much as 40% in the first quarter, Fang said, adding that the proportion was only 28% in the same period last year.

With a small store footprint, Xiaomi relies on online sales, which makes it a strong contender for the coming months when e-commerce will become an even bigger pillar of consumption. Its stock climbed 3.29% in the time period analyzed, making it the only rising stock in the smartphones and telcos category.

Compounding on Xiaomi’s relatively good outlook in China, are good results in India. The Beijing-based company remains the top smartphone brand in India, according to research by market intelligence firm Canalys published on Jan. 29.

Supply chain delays

The epidemic also creates challenges and disruptions for supply chains in China, especially after authorities in some big cities announced rules barring companies from resuming operations for a certain period of time following the break.

Companies in Shanghai, for example, are not allowed to re-open offices before Feb. 10, meaning either remote work or a longer holiday. In the meantime, jobs that require the physical presence of employees, like factories, remain closed.

DingTalk, WeChat Work overburdened as hundreds of millions work remotely

Car manufacturer Hyundai had to close all its factories in South Korea after it ran out of critical components coming from China. The world’s fifth-largest automaker said it would take three to four weeks to switch to parts made outside China.

“We expect that most consumer electronics manufacturers will resume operations on Feb. 9 or Feb. 10, which means a delay of roughly one week,” said Fang.

“But, given that the first quarter is always a low season for electronics consumption in the year, the impact is limited. We expect that orders affected by the delay will account for less than 2% of smartphone makers’ annual orders.”

CORRECTION: An earlier version of this article erroneously reported Meituan Dianping’s stock price as though it were listed in US dollars. The company’s shares are priced in Hong Kong dollars.

China’s largest technology companies are contributing to efforts to battle the deadly coronavirus which has immobilized the country, donating millions in the form of cash, relief supplies, logistical support, and medical research.

Why it matters: Corporate social responsibility (CSR) is a relatively recent concept in China, where the country’s corporate law first included mention of social responsibility in 2006. As Chinese tech giants like Alibaba, Tencent, and Baidu look to compete globally, they are embracing social and environmental practices in alignment with international CSR standards.

Chinese tech firms brace for impact from coronavirus

Details: As of Feb. 1, nearly 150 Chinese tech firms have donated a combined total of more than RMB 4 billion ($570 million) for efforts to treat those affected by the outbreak, according to Chinese media reports. The funds were raised in addition to other forms of support from medical goods to telecommunications and logistics.

• Alibaba established an RMB 1 billion public health fund to purchase medical products and ensure hospital food supplies. Baidu and Tencent set up RMB 300 million funds each, while Meituan and Bytedance offered RMB 200 million each in aid.
• Alibaba-backed Cainiao Logistics announced on Sunday that it will provide free logistical support to relief materials delivered from more than 38 countries and regions.
• Starting Feb. 2, Ant Financial’s online commercial lender Mybank reduced interest rates for business loans by 10% for 1.8 million small business owners in Hubei, where the outbreak was first reported, including 1.5 million mom-and-pop-type store owners and 300,000 medical supply dealers.
• As of Jan. 28, JD Logistics had transported nearly 70 tons of medical supplies from cities including Shanghai and Guangzhou to Wuhan via rail.
• Pinduoduo, which set up a RMB 100 million fund on Jan. 29, shipped on Jan. 31 100 tons of fruits and vegetables to Wuhan hospitals.
• Bytedance has offered for all the features on its enterprise messaging and productivity app Lark for free to support efforts to work remotely.

Context: The current novel coronavirus has infected 14,557 people as of Feb. 2 , according to the World Health Organization. Infections have been identified in more than 20 countries.

• The catastrophic Sichuan earthquake of 2008, which claimed 70,000 lives, appeared to be a turning point for Chinese CSR efforts. Donation to the victims of the earthquake reached an unprecedented $1.5 billion.
• A growing number of Chinese tech billionaires are doubling their philanthropic efforts, similar to their western counterparts such as Bill Gates and Mark Zuckerberg, the Facebook founder who committed 99% of his company shares to charity initiatives.
• Alibaba’s Jack Ma pledged RMB 100 million to “support the development of a coronavirus vaccine.” Pony Ma, the founder and CEO of Tencent, donated 100 million of Tencent’s shares to the firm’s charity foundation in 2016.

Rural e-commerce is a huge success story—unless you’re a farmer. Even if a program is not profitable, tech giants still reap market share and reputation; governments realize political achievements; consumers get good prices for agricultural products.

A few villages have won big with e-commerce. Jingdong claims its flagship corporate social responsibility project, “Running Chicken,” has helped farmers in Wuyi “increase their annual income by several thousand RMB each.” But it’s a winner-take-all system, and many products fail. And when a product fails in this market, the rural communities behind it lose a lot of assets in the process. Many face real hardship, and a long and hard recovery from their bid for national branddom.

Enter the giants

The major e-commerce platforms are all conducting strategic e-commerce programs marketing agricultural products. Alibaba has developed thousands of Taobao Villages, clusters of online sellers , that the company boasts bring jobs and business opportunities to the countryside; Jingdong, with a typically asset-heavy strategy, has created rural service centers (in Chinese), including drones to build out its in-house logistics. Kuaishou, a short video platform, cultivates rural influencers and invests its data flow resources in promoting agriculture produce.

Among all these players, Pinduoduo is the most successful.Sales of agricultural products via its anti-poverty program more than tripled last year to hit RMB 65 billion (about $9.3 billion). Compared with competitors, Pinduoduo is more rural community friendly because it focuses on the “lower market” and provides extremely affordable products for its budget-sensitive users. Meanwhile, agricultural produce has emerged as strategic sector since the firm’s founding. After its $3 billion Series C in 2018, Pinduoduo soon launched a $1.6 billion project to promote agricultural products.

Why e-commerce appeals

E-commerce solves many pain points in agricultural product marketing. Agricultural products are highly perishable, poorly standardized, and in China are usually cultivated on a small scale without much planning. Rural communities need more orders, larger markets, transparent interaction with consumers, and robust demand estimates to make planting decisions. E-commerce, which breaks geographic and informational barriers, seems to be the natural solution for these issues.

Rural e-commerce is aligned with the needs of stakeholders throughout the system. It benefits from support from government at all levels, who see it as a way to advance China’s poverty alleviation agenda (in Chinese). The saturation of urban markets makes rural areas an avenue for tech giants to grow. What’s more, many former migrant workers bring expertise and labor back to rural areas when they return to their hometowns, which may happen either voluntarily or not.

What farmers lose

Traditional informal sales networks are deteriorating as rural communities move to e-commerce. Agricultural products are traditionally sold through a less institutionalized marketing network that involves multiple levels of commissioning agents. This informal network runs on interpersonal trust and cash: all participants are symbiotic, sharing the risks, and each actor profits from a unique information advantage. Although middlemen are in a more privileged position, they still have an incentive to help farmers survive year to year by offering long-term credit.

This chain acts as a buffer between small landholders and the institutionalized market. However, the informal system faces competition from e-commerce and is being driven out of cities by changes in city planning: for example, wholesale and retail markets are disappearing (in Chinese) from urban areas.

Instead of making up for this decline, e-commerce places rural communities in a structurally weak position. The informal network is sustainable, inclusive, and guarantees the resilience of rural communities. The power distribution is relatively balanced, and even if some parts break, farmers can find alternatives easily.

E-commerce, on the other hand, is strictly institutionalized, and algorithms promote a few crops with outstanding sales or profit margins over all others. Further, the platforms are natural monopolies, and rural communities have no power to bargain with them in comparison as they would with brokers in an informal network.

E-commerce sites often claim to cut out the middleman; but the truth is it just creates a new class of middlemen. Based on a field study, CUHK anthropology PhD candidate Sun Rui says that most online shops are run by specialized companies, and that their role as middlemen is still significant in the age of e-commerce. Not only is the ability of farmers to use digital technologies usually overestimated; but efficiently packaging and shipping products requires specialized tools and labor beyond the reach of individual farmers.

The new middlemen do not consume less than the ones in traditional networks. Online services require operation and maintenance, which reduces profits. What’s worse, e-commerce companies have more power relative to farmers than traditional middlemen because they are centralized, which brings bigger risks for farmers.

Shortsighted e-commerce marketing strategies can also destroy the reputation of a regional product. Desperate to stand out from thousands of other sellers, e-commerce sellers often abuse eye-catching marketing—such as “pity sales.” In the most famous case, apples from Linyi county, Shanxi went viral after a marketing campaign—at best, one “inspired by real events”—begged people to buy thousands of unsalable apples from desperate farmers.

Ads often play on consumers’ sympathy, and many such ads are exaggerated and disconnected from rural reality: you might notice that many e-commerce companies use exactly the same picture (in Chinese) of an old farmer in their sympathy marketing. In 2018, the government of Linyi even formally condemned (in Chinese) relevant marketing strategies as negative and short-sighted.

Nothing more than branding

The success of today’s online agricultural products marketing is the result of institutions and traffic flows: governments provide favorable policies, subsidies, and legitimacy; e-commerce platforms invest funds, infrastructure constructions, training, and data flow, and select celebrity products promoted online are high value-added: Running Chicken chickens, for example, cost roughly RMB 100 per kilo, which is more than three times the normal price.

However, the average rural community cannot enjoy these benefits. The rural communities engaged in e-commerce today are still the minority. As more enter the e-commerce market, these resources will not be adequate. On the other hand, network effects mean that latecomers are easily marginalized and will be excluded from the market.

Behind the mysterious veil of technology and the poverty alleviation movement, stories about e-commerce transformation the countryside are really just branding. Using e-commerce to market agricultural products cannot overturn rural communities’ vulnerable status in China’s economic structure, where they lack power and resources. The process is actually destroying intangible assets for rural communities—while benefiting centralized business groups.

Are e-commerce platforms trustworthy partners for average rural communities? Not really: since the demand for agricultural products is inelastic, local rural communities are actually forced to compete with global suppliers in a single market by new retailers like Hema.

To improve the lot of China’s farmers, we need to go beyond technologies and marketing. We should question what can really change the structurally weak position of the rural economy.

Additional contributions by Eliam Huang.

2019 was the year livestream e-commerce took off, with 250% year over year growth from 2018’s RMB 126.6 billion (around $18.0 billion), according to Chinese financial services firm Everbright Securities (in Chinese) and an estimate by Coresight.

The livestreaming e-commerce market is worth an estimated RMB 440 billion (around $63 billion) in 2019, according to Everbright. This equates to almost 9% of China’s total estimated e-commerce sales this year ($723 billion), or roughly 1% of the 2019 official estimate for total consumer good sales. According to the company, Everbright’s estimated sales revenues generated by livestreaming is based on industry forecasts, and surveys with major industry players, such as Taobao Live.

Online QVC

Livestreaming is becoming a go-to option for Chinese consumers seeking new products, promotions, or an impulse buy on a deal, especially for categories such as beauty and fashion, food, and home products. For instance, Taobao Live, Alibaba’s dedicated livestreaming channel, generated sales of RMB 20 billion during Alibaba’s Singles’ Day 2019 shopping holiday on November 11. This accounted for around 7.5% of the company’s total Singles’ Day sales of RMB 268.4 billion.

Livestreaming is like television shopping—think QVC—upgraded for the 21st century. It hosts real-time broadcasting of video content by presenters that model or try products. Viewers are able to immediately purchase the item from an embedded link online. Just like presenters on QVC, livestreaming hosts sell a wide range of products, from apparel and cosmetics to electronics and cars.

The big platforms

Taobao Live currently holds the largest share of the livestreaming e-commerce market in China.  The next largest players are short-video platforms Kuaishou and Douyin, according to Everbright.

Taobao Live was launched in 2016 and was the first service to use livestreaming to facilitate e-commerce. Following suite, Douyin linked up with Taobao and Tmall in March 2018, allowing viewers to buy products from these platforms without leaving the TikTok app. In June that year, Kuaishou introduced a similar feature that enables livestreamers to sell goods through an on-platform store.

Taobao Live features a wider range of products than its major rivals, including apparel, beauty, and parent-and-baby products, whereas Douyin is focused on the beauty and fashion sector. L’Oréal’s official Douyin account has over 121,000 followers, as of November 23, 2019. Livestreaming hosts on Kuaishou often help brands to clear inventories (in Chinese), as well as selling rural fresh produce and local handcrafts. The orange retailer “Home of Tangerines 471” (ganju zhi xiang 471), which sells local fresh tangerines, has 71,300 followers on Kuaishou as of December 5, 2019.

Even group-buying giant Pinduoduo is reportedly exploring adding livestreaming function to their platform, according to 36kr (in Chinese). Pinduoduo has posted job ads hiring a “live streaming celebrity manager” and a “creative video manager” on on Lagou.com (in Chinese).

How to use it

To some extent, livestreaming is a 21st-century iteration of television shopping. While lucrative for companies who sell products there, the latter has always been a niche retail channel: We estimate that television shopping channels accounted for less than 1% of total retail sales in the US in 2018, for example. By contrast, livestreaming may already contribute 1% of total retail sales in China, according to our analysis of estimates by Everbright Securities.

Brands and retailers should consider the most appropriate livestreaming platform depending on their product category. For instance, Douyin is the best channel for targeting beauty consumers, whereas Taobao Live offers greater category range, including apparel, beauty, and parent-and-baby products.

Even while livestreaming is helping to power e-commerce growth, history may suggest a natural cap on the impact of this channel. Livestreaming is still quite a small portion of retail, accounting for 1% at most of total retail sales in 2018. But we believe livestreaming is a good channel where shoppers look for deals and impulse buys, especially for categories such as fashion and beauty, food and home products.

But when livestreaming works, it does things traditional e-commerce doesn’t. Livestreaming works well with for certain kinds of e-commerce because it serves not only as a tool to showcase and deliver information about products, but also as a customer engagement channel in which shoppers can interact with the host. It gives customers feelings of a personal relationship.

This feeling of a relationship can help consumers overcome the confusion known as the “paradox of choice”: if shoppers have too many options, they might feel difficult to choose and end up not buying anything. A trusted host who gives shopping recommendations can help consumers to focus on one product and make purchasing decisions more easily.

Correction: An earlier version of this article wrote that the livestreaming e-commerce market saw estimated 71.2% growth from 2018 to 2019. The correct figure is 250%.

An earlier version of the chart “Taobao Live dominates livestream e-commerce by transactions” omitted the “other” category. It has been revised to include it.

Chinese social e-commerce site Pinduoduo said that the new livestream feature on its platform is a mere plug-in added as a concession for its sellers, according to a statement on Thursday.

Why it matters: The company recently began testing livestream and ticket-booking features on its platform, triggering widespread media attention, particularly because of the number of domestic competitors that already use the tools.

• E-commerce livestreams have become a major revenue driver on Chinese online marketplaces. Gross merchandise volume (GMV) earned through Alibaba’s livestreaming unit Taobao Live jumped 400% year on year to RMB 100 billion ($14 billion) in 2018.
• In addition, e-commerce platform Xiaohongshu rolled out livestreams this week after six months of testing.

Details: Pinduoduo said in its statement that it added the livestream and ticket-booking plug-ins in response to merchant and consumer demand.

• Sun Jing, a key opinion leader (KOL) using the nickname “Xiaoxiaobao Mama,” kicked off livestreams on the platform with a session on Nov. 27, engaging with more than 50,0000 shoppers during peak viewership.
• While rivals use livestreams to drive growth, Pinduoduo is testing livestreams to help merchants better manage their private traffic, the company said.
• Pinduoduo introduced a train ticket-booking plug-in on its app two months ago.
• However, the company said that there are no plans to launch fully integrated livestream and train ticket-booking channels.

“As a new consumer e-commerce platform, Pinduoduo is not going to clone or copy the existing business scenarios and models, but will satisfy the diversified demands of consumers.” 

—Pinduoduo in a statement on Thursday

Context: As of the third quarter of this year, Pinduoduo has 536 million total users, a massive base for new business expansion.

Pinduoduo may soon add livestreams to boost growth

Chinese e-commerce upstart Pinduoduo debuted its first livestreaming session on the platform on Wednesday night, signaling that it is looking to add the feature to revive growth after disappointing third quarter results.

Why it matters: Pinduoduo is stepping up efforts to capitalize on growing adoption of content-driven e-commerce after integrating a short-video feature earlier this year. 

• Pinduoduo rival Alibaba, which has 4,000 livestream hosts, saw gross merchandise volume (GMV) generated through its livestreaming unit Taobao Live jump 400% year on year to RMB 100 billion ($14 billion) in 2018.
• In addition to Alibaba, e-commerce platforms like Xiaohongshu as well as short video apps like Douyin and Kuaishou are trying to converge livestreaming and e-commerce in their fight for user attention.
• However, problems that dog mainstream e-commerce such as false advertising also shadow e-commerce livestreams. Chinese regulators have stepped in to regulate the flourishing sector.

Details: Sun Jing, a key opinion leader (KOL) using the nickname “Xiaoxiaobao Mama,” kicked off a livestream session at 8 p.m. on Wednesday, engaging with more than 50,0000 shoppers during peak viewership.

• Sun, a Forbes-certified expert on mother and baby care, introduced 16 products during the livestream ranging from cosmetics to health care products.
• Before the Wednesday livestream, Pinduoduo promoted the livestream on the platform beginning a few days ahead of the event, asking users to engage by making an appointment.
• Similar to its group purchase concept, users who made an appointment for the livestream can invite their friends to join by sharing a link or creating a poster to promote on mega chatting app WeChat’s social feed feature, Moments. Users and two friends who join the session using the invitation are given a 50% discount.
• Users can also join the livestream and complete purchases through Goods Purchase, a Pinduoduo-backed WeChat mini-program that it is testing.
• Pinduoduo did not immediately respond to a request for comment.

Context: China’s live-streaming e-commerce market is expected to be worth RMB 440 billion in 2019, according to report from securities brokerage Everbright Securities (in Chinese).

• Alibaba’s Singles Day data shows live-streaming is becoming an increasingly important means to boost sales.
• Xiaohongshu started testing a live-streaming feature in June this year to drive user engagement and boost e-commerce business.

Livestreams on Taobao Live earn RMB 20 billion in sales on Singles Day

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

In this episode, the guys are joined by Peking University finance professor, Carnegie-Tsinghua fellow, and Beijing indie-rock entrepreneur Michael Pettis for a hard look into the broader issues concerning the economy in China and around the world. Michael explains how outsiders should interpret China’s GDP numbers, the structural imbalances in the Chinese economy, and the underlying dynamics at the heart of the US-China trade war.

James an Elliott also discuss Pinduoduo’s Q3 earnings report, which sent the oft-volatile stock tumbling again, after its surge in recent months.

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping

Guest

• Michael Pettis @michaelxpettis

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• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Editor

• Peter Isachenko

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Amazon has opened a pop-up store on Chinese social e-commerce platform Pinduoduo that will run until the end of December, the company said on Monday.

Why it matters: The move, which TechNode reported on Sunday, will help Amazon boost its existing cross-border e-commerce business in China after shutting its third-party e-commerce marketplace business in April.

• Partnership with Pinduoduo, which says it has 536 million total users, will facilitate Amazon’s lower-tier market penetration in China.
• As Pinduoduo pushes further into higher-tier cities, the Amazon tie-up brings Pinduoduo much-needed support in repositioning itself as a reliable marketplace for finding high-quality, authentic products.
• Shares for Nasdaq-listed Pinduoduo, which sank more than 20% after it reported a wider-than-expected loss in Q3, is facing an uphill battle in its competition with rivals including Alibaba and JD.com.

Details: The new storefront, which went live on the Chinese social e-commerce platform at midnight on Monday, offers customers a curated selection of about 1,000 products imported from overseas, Amazon said in a statement sent to TechNode.

• Items offered include some of the most popular imported product categories from cosmetics to baby goods. Brand names such as Champion, Waterpik, and Enfagrow are among the offerings coming from countries including Australia, Japan, the US, and Germany.
• In its statement, Amazon reiterated its “strong” commitment to China and pledged to continue to invest and grow the Amazon Global Store business in China.
• “We will focus our efforts on cross-border sales in China and to keep improving the experience for Chinese customers,” the company said.

Context: Amazon’s cross-border e-commerce business in China, which sells “tens of millions products,” is accessible through its Chinese website Amazon.cn, the Amazon mobile app, and its WeChat mini program.

• In April, Amazon announced it would be shutting down its China third-party seller e-commerce marketplace to sharpen focus on its cross-border selling and cloud computing service businesses in the country.

Amazon marketplace resurfaces in China with store on Pinduoduo

Amazon will launch a storefront on Chinese social e-commerce platform Pinduoduo, people familiar with the matter told TechNode on Sunday.

Why it matters: While Amazon appeared to have drawn down its business in China earlier this year amid fierce competition with rivals such as Alibaba and JD.com, a partnership with e-commerce upstart Pinduoduo could help the US e-commerce giant to retain a presence in one of the world’s biggest consumer markets.

• The deal grants Amazon access to Pinduoduo’s 429.6 million monthly active users.
• A tie-up with Amazon, meanwhile, would be important for Pinduoduo to build a relationship with overseas retailers as well as expand its product categories. This could be particularly critical for the Tencent-backed social e-commerce app, which is feeling the squeeze from “forced exclusivity” in competition with other marketplaces for sellers.
• The Amazon brand helps boost Pinduoduo’s reputation as a platform for bargain-hunters as it moves to expand its presence in higher-tier markets.
• Pinduoduo’s users from first-tier cities spend well over RMB 5,000 ($710) per year, based on annualized figures for the third quarter of 2019, company founder and CEO Colin Huang has said.

Details: The new storefront will launch Sunday evening at midnight, according to the source.

Context: Amazon announced in April that the company would be shutting down its China e-commerce marketplace to sharpen focus on its cross-border selling and cloud computing service businesses in the country.

• Amazon China held less than 1% share of China’s total e-commerce market as of June 2018, according to market research institute eMarketer (in Chinese).
• “Amazon’s commitment to China remains strong,” the company said in a statement in response to the withdrawal in April.
• Pinduoduo posted weaker-than-expected third quarter earnings on Wednesday due to slowed revenue growth and wider losses, specifically citing heightened forced exclusivity practices in the industry.

Outpaced by local rivals, Amazon struggles to remain relevant in China

Shares of Chinese social e-commerce platform Pinduoudo sank more than 20% in pre-market trading after the company posted weaker-than-expected third quarter earnings on Wednesday.

Why it matters: After a strong Q2, the social e-commerce upstart’s rapid growth is slowing in the face of intensifying competition from rivals which are pushing aggressively into China’s lower-tier markets, Pinduoduo’s core customer base.

• While both Alibaba and JD consider lower-tier regions the driver for revenue growth, Pinduoduo is also trying to expand its presence in higher-tier cities.

“Contrary to what most people’s misconception is of our platform, our users from first-tier cities are spending well over RMB 5,000 ($710), based on annualized 2019 Q3 spending.” 

–Pinduoduo founder and CEO Colin Huang during the third-quarter earnings call

Details: The company’s total revenues increased 123% year on year to RMB 7.51 billion ($1.05 billion) in Q3 this year from RMB 3.37 billion in the same quarter of 2018, missing the analyst consensus estimate of $1.06 billion compiled by Yahoo Finance.

• Buyer growth is still robust. Pinduoduo’s monthly active users (MAU) jumped 85% year on year to 429.6 million in Q3 and rose 17.3% on a sequential basis from 366.0 million in Q2. It outpaced Alibaba’s 17.9% year-on-year jump in MAU but still falls well short of Alibaba’s 785 million total MAU as of the end of the quarter.
• Total cost of revenues were RMB 1.83 billion ($256.5 million), an increase of 137% from RMB 774.7 million in the same quarter of 2018. The increase was mainly due to higher costs for cloud services, and call center and merchant support services.
• Net losses more than doubled in Q3 to RMB 2.34 billion from RMB 1.10 billion in the same year-ago period.
• “Intensified” forced exclusivity efforts from rivals has had a “material impact” on the company, it said in a statement sent to TechNode, referring to pressure from shopping marketplaces on sellers to have stores on only one platform. More than 1,000 brand flagship stores were “affected,” and more than 10,000 small and micro merchants were forced to choose sides, it said.
• Monopolistic behavior makes sellers dependent on one platform’s traffic, and expose them to any unfair practices like commission rate hikes, resulting in higher prices for consumers, the company said.
• There were 220 million daily active users (DAU) on Pinduoduo’s platform during this year’s Singles Day shopping festival, second only to Taobao’s 460 million DAU, according to data intelligence firm QuestMobile.

Context: China’s market regulator addressed more than 20 e-commerce players earlier this month at a forum in Hangzhou, saying that forcing businesses into exclusive agreements with one marketplace is illegal.

Forcing sellers into exclusivity deals on marketplaces is illegal: regulator

Update: This story has been updated with net losses as stated in the company’s filing.

Sally Zhang is a Certified Lecturer at Alibaba’s Taobao University. In that role, which is not compensated, she teaches International Brand Communication in professional management classes across Asia and Australia.

Her employer, WPIC, is an approved partner of Tmall and Pinduoduo. The organization has been approved by various e-commerce platforms in China to activate online stores on behalf of brands.

This fall, Pinduoduo, China’s leading social e-commerce platform, released its financial report for the previous year, indicating strong performance across multiple metrics. After that earnings report was released, the company’s stock shot up 16% in one day.

Pinduoduo CEO Huang Zheng, also known as Colin, was quoted last month announcing that their platform’s Gross Merchandise Volume (GMV) has exceeded that of JD.com, making it second largest in China, behind Alibaba’s Tmall.

Alibaba clearly takes the challenge from Pinduoduo very seriously, as evidenced by the fact that they have gone out of their way on multiple occasions to highlight their performance in “lower tier cities”—Pinduoduo’s geographic stronghold—during the recent Double 11 shopping festival, which concluded earlier this week.

So, how did a platform targeting lower-middle class consumers achieve such strong growth—outperforming the industry by a factor of ten—in a supposedly slow economic environment?

First, it’s important to look at the current consumer trends in China. Media narrative has been suggesting that consumer appetite has declined this year. The data, however, suggests that consumer confidence in China is growing, not declining.

The Nielsen consumer trends index (CTI), which measures overall economic conditions, is composed of three main factors:

1. Market employment expectations, which reflects the confidence of the entire consumer market
2. Willingness to consume, which reflects stability—if you have a stable income, you’re more likely to spend
3. And the personal economic situation of consumers, which marks the depth of their pockets

If the CTI exceeds 100, it means consumption is growing. If it is lower than 100, it means consumption is negative. Neilsen calculated a strong 2019 Q2 index of 115, while the Q1 index in 2016, for context, was 105.

From 2016 to 2017, CTI rose quickly, while from 2018 to 2019, it was relatively stable. So it’s an exaggeration to suggest that consumption across the country is declining. In reality, consumption this year the same as it was in Q3 of 2017.

Where Pinduoduo has the largest runway for growth, however, is in the fact that the CTI in second-tier and third-tier cities is highest, and those are the regions where the platform has its highest penetration.

How is Pinduoduo performing?

According to Pinduoduo’s quarterly reports, during the 12-month period ending June 30, 2019, Gross Merchandise Value (GMV) on Pinduoduo reached RMB 709.1 billion (about $100 billion). GMV for the same period last year was RMB 262.1 billion, meaning the platform saw a YOY increase in GMV of 171%.

Meanwhile, in the first half of 2019, total online retail sales (representing the entire e-commerce industry in China) increased by only 17.8% YoY. In other words, Pinduoduo’s growth rate was nearly ten times the industry’s average growth rate.

Additionally, the number of active buyers on the Pinduoduo platform reached 483.2 million, an increase of 39.9 million (+41%) from the previous quarter. For context, the number of active buyers on JD was 321.3 million, and 674 million on Alibaba, meaning Pinduoduo is quickly catching up to and may soon surpass the industry titans.

In particular, users in lower tiered cities increased by 72.2 million, which exceeded user growth in the rest of the e-commerce ecosystem by 2 million.

Additionally, the average annual consumption of active buyers on Pinduoduo increased to RMB 1,467.5, up 92% from RMB 762.8 in the same period last year.

Although they have historically been perceived as a lower-middle class focused platform, PDD’s growth among high end consumers is remarkable. Today, the GMV of PDD’s first tier and second tier cities is growing and accounts for 48% of the platform’s GMV (up from 37% one year previous).

How have they grown their tier-1 city penetration? By leveraging the fact that Chinese consumers are looking for deals on disposable goods.

A Chinese shopper in the market for a handbag or a pair of designer shoes is willing to pay a “Tmall premium” in order to get the specific brand they want. However, for daily, household and disposable goods (packaged groceries, fruits, cleaning supplies, etc.), consumers with limited discretionary income- across all tiers- aren’t willing to “splurge” for brand name items that are not any better than the off-brand alternatives. Those are the items that Pinduoduo offers, at more competitive prices than Tmall.

In short, across all cities, Pinduoduo has much more affordable prices for items where brands aren’t important. As a result, Pinduoduo is evolving, and becoming perceived as more of a universal platform across China.

How is Alibaba responding?

While Tmall continues to grow in tier-1 cities, Taobao is dropping prices on its average products this year, in order to catch up to Pinduoduo.

Additionally, Alibaba has restructured its social e-commerce division, making its Pinduoduo-rival, JuHuaSuan, an independent business. Clearly, Alibaba is positioning JuHuaSuan to take on Pinduoduo.

However, JuHuaSuan’s performance over the past two years has not been particularly strong. From running stores across multiple platforms, e-commerce practitioners like myself see firsthand that JuHuaSuan stores are not performing particularly well, despite Alibaba’s best efforts.

To address this, Alibaba is leveraging promotional days in an attempt to drive traffic to the JHS platform. For instance, last year’s 9/9 promotion was a disappointing event in terms of GMV, but this year, Alibaba has doubled down, marking the annual JHS 9/9 promotion at “S-level”, as a highest priority sale (S-level sales like 11/11 and 6/18 are the most important for Alibaba each year, followed by A-level and B-level).

Clearly, they take the PDD threat very seriously in Hangzhou.

What does all this mean?

Could Pinduoduo unseat the ultimate king in China e-commerce, exceeding Tmall in GMV and maybe even corporate revenues?

It’s tough to say at this point, but the social e-commerce app does have quite a tailwind at this point.

And according to the data, China’s lower tiered cities are likely to be the country’s growth engines over the next 2-3 years, which means these trends are unlikely to reverse.

Even with taxes due to the trade dispute with the United States, it’s likely that these are going to impact foreign imports, which are most prevalent in tier 1 cities like Beijing and Shanghai. The tier 3 and 4 cities, for now, seem to be sheltered from those slowdowns, which means Pinduoduo looks to be positioned strongly.

Long term, however, in order to keep growing, Pinduoduo will need to diversify its product offerings and revenue streams, the way that Alibaba and Tencent have masterfully done over the past decade.

China’s Singles Day shopping extravaganza came to a close Monday at midnight having posted 30% year-on-year growth in sales across e-commerce platforms, a modest recovery from last year’s figures which had marked a distinct shift in consumer sentiment.

Why it matters: Singles Day, the “Olympic games for merchants,” has helped catapult China’s retail development over the past decade and is seen as an informal bellwether for economic health.

• Overall sales growth for major Chinese e-commerce platforms during last year’s event slowed to 23.7% year on year from highs of more than 40% seen in earlier years.
• Although still far lower than before, this year’s growth figure is a sign that Chinese consumer confidence is relatively healthy given the impact of a slowing local economy amid trade tensions with the US.

Details: China’s overall e-commerce sales during the day increased more than 30% year on year to RMB 410.1 billion ($58.56 billion) across platforms, according to reports citing data from China-based data services company Syntun.

• Alibaba Group sold RMB 268.4 billion ($38.4 billion) in gross merchandise volume (GMV) on Nov. 11, 2019, an increase of 26% compared with GMV of RMB 213.5 billion in 2018, but slower compared with last year’s 27% year-on-year comparison.
• JD.com recorded RMB 204.4 billion in GMV over 11 days from Nov. 1 to 11, rising 28% year on year compared with last year’s RMB 159.8 billion GMV figure and faster than last year’s 26% growth rate.
• Pinduoduo does not reveal its Singles Day sales data, but Syntun data showed that Pinduoduo has overtaken Suning.com as the third-largest online sales platform during the festival, after Alibaba and JD.
• Suning.com, the omini-channel retailer, announced 76% year-on-year growth in orders. Sales through its newly acquired Carrefour China surged 43% year on year to RMB 312 million.
• The e-commerce giants have expanded the promotion across their ecosystem to include online travel, local services, and even healthcare.
• Alibaba’s sales include those from online travel platform Fliggy. JD reported that orders for its JD Internet Hospital for promotions on services such as health and dental checkups, vaccines, and cosmetic surgery, increased 45 times year on year in the first hour of of the event.

Context: Singles Day, a promotional concept first conceived by Alibaba and based on the single person’s version of Valentine’s Day, is heading into the second decade.

• The event generated more than 1.66 billion parcels this year, exceeding the size of the Chinese population, highlighting the significance of the shopping promotion for the e-commerce industry.
• Smartphone and consumer electronics, home appliances, and cosmetics were the most popular product categories.

After Singles’ Day’s dazzling first decade, what’s next for global shopping fest?

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

In this episode of the China Tech Investor Podcast powered by TechNode, the guys welcome David Liu, VP of Strategy for Pinduoduo. David talks about PDD’s success in breaking into the ultra-competitive e-commerce market in China, and how they have defied expectations in both their ability to raise capital and grow their user base.

Since this is the first time that the guys have had on a representative from a company on their watch list, they’d love to hear from listeners about what they think about this approach. Feedback is welcome, as always!

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping

Guest

• David Liu, VP of Strategy, Pinduoduo

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Editor

• Peter Isachenko

Podcast information:

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• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

Chinese social e-commerce upstart Pinduoduo announced on Wednesday it is planning to offer convertible debt up to $1 billion as it seeks to fund a rapid expansion into higher-tier domestic markets.

Why it matters: The fast-growing e-commerce platform is looking to raise more cash to cover rising expenditures amid intensifying competition, China’s slowing economy, and trade tensions with the US.

• Pinduoduo had 366 million average monthly active users in the second quarter, an increase of 88% from 195 million in the same quarter of 2018 and faster than Alibaba’s 19% year-on-year growth seen in the same period.
• To maintain growth, Pinduoduo spends heavily on marketing and discounts. During this year’s 618 shopping festival in June, Pinduoduo launched a joint “RMB 10 billion” subsidy plan with partners including premium brands like Dyson, Boss, Apple, and Sony.
• The company quickly gained traction in lower-tier cities with its budget-conscious products, but is expanding to tier one and two cities, which rose to 48% of Pinduoduo’s total GMV in June from 37% in January. While the higher tier city markets present significant opportunities, the landscape is much more competitive.

“The Company plans to use the net proceeds from the Notes Offering to enhance and expand its business operations, for research and development, to continue to invest in and develop its technology infrastructure, and for working capital and other general corporate purposes.”

⁠—Pinduoduo in a statement filed to the SEC

Details: The company is offering $875 million in convertible senior notes, with the option for initial buyers to purchase an additional $125 million bond within 13 days, bringing the total offering potentially as high as $1 billion.

• The company did not disclose a conversion price.

Context: The company made a secondary share offering in February with the goal of raising $1 billion, after a $1.6 billion initial public offering last summer.

• The company more than doubled it operating losses to RMB 1.49 billion compared with RMB 6.64 million in the same quarter in 2018.
• Pinduoduo shares dropped 8.4% to $30.99 apiece as of publication.

Chinese social e-commerce Pinduoudo reported its total revenue surged 169% on year in the second quarter of this year, paired with robust user gains over the past year.

Why it matters: Pinduoduo is the last of China’s top-three e-commerce sites to post earnings for this quarter. Strong growth for major e-commerce players show that e-commerce remains a bright spot for the country despite a slowing economy and trade tension with the US.

• Alibaba’s net profit more than doubled in the fiscal quarter ended June 2019 driven by the healthy expansion of its core e-commerce business and growing cloud services.
• JD’s Q2 earnings beat market estimations with net revenue surged 22.9% on the year to RMB 150.3 billion ($21.9 billion)
• Pinduoduo has shaken up China’s e-commerce duopoly between Alibaba and JD.com in recent years to become the second-largest shopping site for Chinese consumers in terms of daily active users, next only to Alibaba.

How Pinduoduo did in three years what took Taobao five

Details: The company’s total revenues in the quarter were RMB 7.29 billion ($1.06 billion), an increase of 169% from RMB 2.71 billion in the same quarter of 2018.

• Average monthly active users in the quarter were 366 million, an increase of 88% from 195.0 million in the same quarter of 2018, a QoQ net add of 76.3 million. That’s higher than Alibaba’s 19% year on year growth and 34 million quarterly user gains.
• The growth is driven by the company’s users-first strategy and the push from the 6.18 shopping festival campaign, according to the company.
• Gross merchandise volume in the twelve-month period ended June 30, 2019 was RMB709.1 billion, an increase of 171% from RMB262.1 billion from a year before.
• However, the operating loss was more than doubled to RMB1.49 billion compared with RMB6.64 million in the same quarter of 2018.
• First and second-tier city markets becoming a major driver for the company’s growth.

“Our GMV from Tier 1 and 2 cities as a percentage of total GMV has gone from 37% in January this year to 48% in June.”

–Pinduoduo founder and CEO Colin Huang in the second-quarter earnings call.

Context: Competition between Pinduoduo, a relative latecomer, and e-commerce giants is escalating, went from pure business rivalry to public spat in some cases.

• Company founder and CEO Colin Huang accused Alibaba of unfair competition in an open letter this April.
• Pinduoduo and Alibaba confrontation made headlines during this year’s 618 shopping festival. Home electronics manufacturer Galanz, which just inked a long-term partnership with Pinduoduo in June, accused Alibaba’s online marketplace Tmall of hiding its products from search results.
• JD.com is also doubling on social e-commerce by spinning off its Pingou group-buying business as a separate division this July.
• Pinduoduo reported surging losses on significantly higher promotional expenses in the first quarter of this year.

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Using social media as a platform, an increasing number of male beauty bloggers have emerged in the public consciousness, changing the perception of male beauty.

When interviewed by TechNode, some respondents were able to name bloggers like Aike Lili and Heima Xiaoming.

But by far the most widely-known male beauty bloggers among our respondents was Austin Li, who has amassed nearly three million followers on microblogging site Sina Weibo, as well as 5.8 million on Taobao Live and 28 million on short video platform Douyin.

After selling cosmetics on the side during his university days, Li became a full-time livestreamer on Taobao in 2017. Nowadays, millions of people tune in to his livestreams daily.

In one livestream, Li reportedly applied upwards of 380 lipsticks during a two-hour livestream session, selling a whopping 15,000 tubes in 15 minutes.

For many men, makeup is still a taboo. “The mindsets of many Chinese men are still not as open as men from other countries,” said one respondent.

However, times are changing. Makeup has never been a topic widely discussed by men, but an increasing number are embracing cosmetics.

The Chinese male beauty market is brimming with untapped potential. Male customers on average spent more on beauty products and sunscreen than their female counterparts on social e-ccommerce platform Pinduoduo, accounting for 40% of overall sales in the busy shopping season following the college entry examination period.

During this year’s 618 shopping season, JD posted record sales of male face masks and eye cream among other products. Male customers who purchased beauty products increased by 61% year-on-year, and masks, lipsticks, BB creams, eyebrow pencils were hot-sellers.

Most respondents felt that Generation Z—loosely defined as those born after 1995—were the most likely among men to buy cosmetics. According to JD, users born after 1995 accounted for 27% of 618 cosmetic sales. 18.8% of these males had the habit of using BB cream while 18.6% of them had the habit of using lip balm or lipstick.

Half of the customers who bought male cosmetic products were actually female, pointing to a possible reason for the booming demand: more women want their partners to care more about their appearance.

One respondent said, “It (makeup) could boost their self-confidence, and let other women know that they take care of themselves.”

“Makeup for men may not be widely accepted now,” said another respondent, “But it has become a trend, and society could become more accepting of it.”

Taobao doubles down on livestreaming with ambitious Taobao Live plan

This year’s mid-year shopping festival, commonly known as “618” in China, came to a close on Tuesday. Since the launch of the event in 2010, Chinese e-commerce companies have raked in billions of Chinese yuan during the buying frenzy.

For e-commerce players, 618, which ran from June 1 through June 18,  isn’t only about winning Chinese consumers’ hearts and money. Perhaps more importantly, platforms aim to spot the latest trends that could be valuable in molding their strategies in the second half of the year. The high-profile e-commerce event, and others like it, are showdown moments for Chinese companies and those at the helm.

But this year was different: It was the first time the next generation of young leaders shaping China’s largest e-commerce platforms went head-to head-during a major online shopping event. 

JD’s efforts were led by Xu Lei, the rumored creator of the 618 festival who became the new chief executive of JD Retail just months before CEO Richard Liu’s arrest in the US last year. At the same time, 34-year-old Jiang Fan—who, ahead of Jack Ma’s expected departure in September, has headed Alibaba’s Tmall and Taobao since March—led the e-commerce giant in the shopping festival. 

Meanwhile, Huang Zheng, founder and CEO of social e-commerce firm Pinduoduo, became the leader of a publicly listed company last July when Pinduoduo debuted in the US.

Statistics from this year’s 618 shopping festival highlight some changes that might shape future strategies for the industry, with China’s hinterlands driving consumption while e-commerce upstarts accused more establish players of “unfair competition.” 

Emerging growth in lower-tier cities

Consumption in China’s lower-tier regions, including third, fourth, and fifth-tier cities, is quickly catching up with that in Beijing and Shanghai. The trend points to a changing dynamic in the country’s gargantuan e-commerce sector, in which the country’s interior, and particularly the youth that live there, drive consumption.

While these mostly inland provinces are home to more than 600 million mobile internet users, e-commerce penetration is below the national average. E-commerce platforms see these areas as untapped markets as consumers have more access to disposable income and demand for high-quality goods is increasing.

The growing demand from lower-tier cities was evident across platforms during the 18-day event. Alibaba’s gross merchandise volume (GMV) from third- to fifth-tier cities grew by 100% year-on-year during the period. Beitun and Tumxuk, county-level and prefectural-level cities from China’s northwestern Xinjiang autonomous region, topped the of the 10 fastest growing areas during Alibaba’s 618 festival this year. Nonetheless, GMV in cities including Beijing, Shanghai, Guangzhou, and Shenzen was still unmatched by other areas.

Similarly, transaction volume growth was twice as high in lower-tier cities than the overall growth of transaction volumes on JD.com. Meanwhile, sales of 3C products, which include computers, communication devices, and consumer electronics, in lower-tier cities overtook those in their first- and second-tier counterparts. More than 70% of Pinduoduo’s physical goods during 618 were sold in lower-tier regions.

Behind the spike in sales is an expanding e-commerce userbase from lower-tier cities. Alibaba recorded a 100% year-on-year jump in the number of users from lower-tier regions on its platforms during the festival. Furthermore, the e-commerce giant recorded 654 million annual active consumers for the fiscal year ending March 2019, representing an annual increase of 102 million users. More than 70% of these were from lower-tier regions and below, the company has said.

These consumers are also “trading up,” showing greater interest in luxury brands and shopping experiences. According to Tmall, half of the newly launched products on the platform during the event were purchased by customers outside first- and second-tier cities.

“One of the interesting trends we’ve seen is premiumization–Chinese consumers’ preference for premium products, Carol Fung, president of JD’s fast-moving consumer goods unit, told TechNode. “This is particularly true in the lower-tier cities, where Chinese consumers are trading up for higher quality and valued goods.”

As a result, e-commerce platforms are adjusting their strategies. Pinduoduo has launched a joint “RMB 10 billion” subsidy plan with partners that include premium brands like Dyson, Boss, Apple, and Sony, shifting focus to where budget or even counterfeit commodities once prevailed.

Meanwhile, JD-Daojia, the on-demand delivery arm of JD, has brought its one-hour delivery system to more than 50 lower-tier since the second half of last year, bringing the total number of cities that offers this service to 91 during the 618 festival.

Interest in branded products is especially strong among younger generations from lower-tier cities, who have gained a newly coined moniker: “small-town youth.” The term refers to young residents living in China’s third-tier and lower cities, or prefectural and county-level urban centers, who benefit from China’s urbanization process. They are quickly adapting to premium urban lifestyles to fuel China’s next stage of consumption growth.

Sales of Tmall’s Luxury Pavilion, Alibaba Group’s dedicated site for high-end brands, more than doubled from last year, boosted by customers in emerging cities and shoppers born after 1995, according to Alibaba. Nearly 80% of Pinduoduo’s sales during the 618 campaign came from users born in the 1980s and 1990s.

“We believe this group of customers will continue to grow into a strong and sustainable force for brands who are looking at further developing the Chinese market,” said Jiang Fan, president of Taobao and Tmall, in an emailed statement.

“Forced exclusivity” practice persists

The fight for China’s upwardly mobile online population reached a fever pitch during 618. On June 17, home electronics manufacturer Galanz accused Tmall, Alibaba’s online marketplace, of hiding its products—200,000 home appliances—from search results, which Galanz claimed began on Monday afternoon.

Galanz said in a statement on Wednesday that Tmall requested the company to remove its listings from Pinduoduo in May, but it didn’t comply. During the same month, Galanz signed a long-term partnership with Alibaba rival Pinduoduo. Galanz said it was blocked from Tmall’s 520 shopping promotions in May soon after denying the company’s request.

The “forced exclusivity” tactic, also known as the “choose one of two” rule in China, is an unspoken edict that pressures merchants to choose a single platform on which to sell their products. 

In e-commerce, the practice dates back to 2012 when Alibaba registered trademarks for its “Double 11” shopping event. JD and other e-commerce companies also started launching sales promotions during the Alibaba shopping event. The resulting fallout left merchants in the middle of a battle between platforms, in which they were asked to “take sides,” and forced to sign exclusive partnerships during the shopping craze.

JD and Alibaba have quarreled over unfair competitive practices several times, but the competition in China’s e-commerce space worsened when Pinduoduo went public last year.

Pinduoduo’s Huang previously condemned the monopolistic practice, saying that the company’s strategy has never been to “disrupt a monopoly in order to create a new one.” Over the 618 shopping festival, Victor Tseng, vice president of International Corporate Affairs at Pinduoduo, said in a press release that the company had a successful 618 campaign, despite “unfair competition and circumstances.”

According to Tseng, these arrangements “ultimately hurt merchants, brands, and consumers and should be put to an end.” Many of those who participate in exclusive partnerships are young, fast-growing companies.

China passed a new e-commerce law last August, which officially came into effect this January, to prohibit e-commerce platforms from engaging in monopolistic practices to undermine competitors.

Forced exclusivity practices also plague other sectors. Food delivery platforms like Meituan and Ele.me would offer lower commission rates for restaurant owners that are willing to list exclusively on their platforms. Similarly, drivers on ride-hailing platforms would get a lower commission rate if they only work on through one app.

With contributions from Nicole Jao.

Pinduoduo share prices slid 8.5% to $20.78 on Monday after the Chinese social e-commerce platform reported surging losses for the first quarter of the year on significantly higher promotional expenses, while user engagement efforts gained traction.

The company recorded total revenue for the quarter of RMB 4.6 billion (around $677.3 million), an increase of 228% from RMB 1.4 billion in the same quarter of 2018, driven by growth in online marketing revenues earned from the platform’s merchants. Annual spending per active user surged 87% compared with Q1 2018, and monthly active users (MAU) jumped 74% year on year to 289.7 million, according to the statement.

However, heavy spending weighed, particularly sales and marketing expenses, which quadrupled from the same period a year earlier to RMB 4.9 billion (around $728.5 million) on promotional activities driven by on- and offline advertisements and promotions, according to the company. Pinduoduo sponsored the CCTV Spring Festival Gala, China’s biggest annual TV event boasting 1.2 billion viewers in 2019, and a series of online promotions leading up to the TV event.

The company booked net losses of RMB 1.88 billion, more than six times the RMB 281.5 losses in Q1 2018.

Pinduoduo’s total cost of revenues were RMB 873.3 million, an increase of 174% from RMB 318.7 million in Q1 2018. The increase was mainly due to higher costs for cloud services, and call center and merchant support services, partially offset by a payment rebate of RMB 339.2 million from Tencent.

Meanwhile, its gross merchandise volume (GMV) in the 12-month period ended March 31, 2019 was RMB 557.4 billion ($83.1 billion), an 181% year-on-year increase from Q1 2018, mainly driven by “the rapid growth in annual active buyer base and annual spending per active buyer,” according to Huang Zheng, Chairman and Chief Executive Officer of Pinduoduo. “These metrics reflect our success in increasing user engagement and improving user experience,” he added.

Similar to rivals Alibaba and JD the four-year-old e-commerce upstart known for its breakneck expansion is also facing slowing growth. Its Q1 total revenue growth signals a marked slowdown from the triple and quadruple growth figures seen last year.

In comparison, Alibaba and JD posted 51% and 20.9% year-on-year growth in Q1 2019, respectively.

“We are very confident of our long-term earning power. So I think at this stage, the best way to use the revenue proceeds is probably to investing R&D, investing in infrastructure,” company CEO Huang Zheng said during the earnings call.

Chinese social retail startup Beidian announced Wednesday it closed its first round of funding totaling RMB 860 million ($126 million), as another Pinduoduo challenger joins in on the e-commerce fray.

According to the company, it has attracted prominent venture capital funds as major investors, including Hillhouse Capital, Sequoia Capital, Sinovation Ventures, and Gaorong Capital, among others. The funding will be used to upgrade its supply chain management system to improve the shopping experience, led by influencers or key opinion leaders (KOLs) on the platform, said Beidian in an announcement.

A subsidiary of mom and baby-focused e-commerce website Beibei, Beidian was founded in August 2017 by Allen Zhang, a former Alibaba product manager in Hangzhou, the capital of Zhejiang province in eastern China. Beibei most recently closed a Series C in January 2015 from investors including Chinese equity firm New Horizon, as well as Capital Today, an early investor of online retail heavyweight JD.com.

In an open letter sent earlier this year, Beidian’s president Gu Rong touted the company’s “proprietary” e-commerce model, in which the platform forms partnerships with brands, manufacturers, and agri-food suppliers, and verifies the authenticity and quality of the products. The platform stocks and ships goods to customers, unlike Alibaba’s massive C2C platform, Taobao, which does not hold inventory.

“Merchants” act like product ambassadors and promote goods in their social networks, including friends and acquaintances, a company spokesman told TechNode. To encourage the social aspect, he added, buyers are offered discounts for promoting products to their social network.

The model addresses a key weakness in rival Pinduoduo at present: the issue of product authenticity. Beidian develops relationships with manufacturers and brands, then authenticates the goods itself, a strategy that Shanghai-based Pinduoduo is also adopting as its reputation as a platform for counterfeits has proven hard to shake.

Zhou Jiajun, Investment Director for Sinovation Ventures said in an announcement Thursday that despite the density of players in the e-commerce market, Beidian’s growth figures “was beyond our expectation,” (our translation). The China-focused tech VC had avoided investments in retail businesses, but now says that it expects a profit-making period for e-commerce players in the WeChat ecosystem. Beidian’s cost structure adds a margin of safety, it added.

China’s social e-commerce market has become increasingly crowded. Hangzhou-based Yunji plans to raise $200 million in an US initial public offering (IPO) filed last month. According to market research firm Questmobile, the number of monthly active users (MAU) from Beidian surged 550% year-on-year to 13.29 million in March, more than double that of Yunji (5.87 million), but one-twentieth the size of Pinduoduo (272 million).

Social e-commerce firm Pinduoduo announced Tuesday it will invest RMB 1.5 billion to shore up 100 heritage Shanghai brands that have seen sales dwindle in recent years, in response to a municipal government initiative to reinvigorate its consumer goods manufacturing industry.

The Shanghai-based online retailer said it would offer RMB 1.5 billion (around $222 million) as cash incentives to help declining local brands boost sales over the next three years. It will also offer an additional RMB 10 billion-worth of traffic resources, along with support in new product development, refining recommendation algorithms, and training sales staff.

A company representative from Pinduoduo declined to comment further on the program details when contacted by TechNode on Wednesday.

Shanghai’s municipal government is pushing to promote local heritage brands, which have declined in recent years. Shanghai-based Bright Dairy, a former top-selling Chinese dairy brand, recorded a 44.9% year-on-year decrease in net profit to RMB 342 million in 2018, and posted its first quarterly loss in nearly 10 years of RMB 52.05 million in the fourth quarter.

Warrior Shoes, another prominent homegrown brand, has ceded share to global giants Nike and Adidas in the Chinese shoe and sports equipment market, suffering losses totaling RMB 250 million from 2005 to 2008. It was not until 2012 when it opened its first online store on Alibaba’s business-to-consumer marketplace Tmall that the company’s business made a turn for the better. Its sales revenue from the Tmall shop exploded to RMB 200 million in 2018 from RMB 3 million in 2014, reported The Beijing News (in Chinese).

In a document released in April 2018, the Shanghai government announced plans to revitalize 50 time-honored brands with the goals of higher margin and global recognition by 2020 as part of a three-year initiative to establish itself as a hub of commerce and trade.

As a major corporate taxpayer and high-profile Shanghai-based tech firm, Pinduoduo’s plans featuring double the number of brands included in the government initiative is a proactive response. Li Qiang, Shanghai’s Communist Party secretary, visited the company in February and asked Pinduoduo to “fulfill its duty as a social enterprise” in government programs including anti-poverty and brand revitalization, according to Jiefang Daily.

The Shanghai government has been offering assistance to poverty-stricken areas for decades as part of a central government initiative. Since 1995, the municipality has spent RMB 9.87 billion on poverty alleviation in China’s southwestern Yunnan province as of end-2018, reported The Paper.

Pinduoduo and other e-commerce platforms have leveraged rising consumer demand to purchase fresh produce online for delivery by tapping such government initiatives. In April 2018, the company announced it would invest RMB 10 billion in a program aimed to bring produce from 10,000 impoverished Chinese farmers to sell on its platform, reported state-owned media People.cn (in Chinese).

However, the heritage brand program may also be a savvy move to improve the e-commerce company’s tight finances as well as address its reputation as a platform for counterfeit goods.

“As one of the most important consumer markets in China, Shanghai should ride the wave to leverage online and offline distribution channels for the establishment of homemade brands,” (our translation) Chinese media reported citing Sun Yi, a China business consultant with Ernst & Young, as saying.

According to the company, only a few of the 222 officially recognized heritage Shanghai brands have full-fledged e-commerce strategies, thus presenting enormous growth potential, especially in second- and third-tier cities.

Additionally, authenticity is a non-issue with such brands. “There is strong appeal and high confidence from customers when it comes to heritage brands,” (our translation) the company said in the announcement. The rate of return customers for some Shanghai-made brands are actually higher than some globally recognized brands, it said.

Bee & Flower, a shampoo brand established in 1985, has grown its revenue 400% on Pinduoduo since December, the retailer said.

Amid a general slowdown in the Chinese e-commerce sector, Pinduoduo reported operating losses of RMB 3.96 billion in 2018, a more than eight-fold increase from its RMB 469.2 million losses in 2017.

Included in social e-commerce company Pinduoduo’s annual report released Wednesday was a letter from its founder and CEO Huang Zheng which sought to reassure shareholders about the company’s recent troubles including continuing allegations of peddling counterfeit goods.

Pinduoduo, Huang said, is like “when Yao Ming just started in elementary school. He might have been quite tall, but was nevertheless only an elementary school student,” referring to the platform’s outsize success despite only being four years old.

The company, Huang added, like China’s most famous professional basketball player, “needs adequate nutrition, appropriate training, and life experiences” as it contends with getting “pushed onto the court to compete head-to-head with adult players.”

Huang also appeared to make a plea for understanding when it came to the company’s investment decisions. “It is probably not a good idea to put our money ‘in the piggy bank’ into a fixed deposit at this stage,” he added.

Pinduoduo shares fell 2% following the report, closing at $23.94 on Wednesday. Its market value was around $27.6 billion after going public in New York last year, around 65% of JD.com ($42.9 billion) and one-twentieth the size of Alibaba ($481.29 billion).

The already intense online retail rivalry between Pinduoduo and the country’s dominant player, Alibaba, is heating up. The Chinese e-commerce upstart has voiced concerns beginning late last year that it was contending with monopolistic advantages on the part of Alibaba, which began compelling merchants to choose between the platforms with a “forced exclusivity” policy.

Third-party merchants were reportedly forced to speak publicly about Pinduoduo as a fake seller and then rewarded with more traffic on Tmall, Alibaba’s proprietary e-marketplace, reported Tencent Tech citing Pinduoduo co-founder Dada as saying. Alibaba denied the claim at the time according to local media, and was not available for comment when contacted by TechNode on Thursday.

Shanghai-based Pinduoduo is struggling to rid itself of its reputation as a counterfeit seller. Chinese media reported previously that Apple asked several distributors to suspend their partnership with Pinduoduo, or risk losing coveted distributor status. The company defended the authenticity of iPhones available on the platform, saying it sourced inventory from Apple’s authorized offline distributors.

“The current “forced exclusivity” is likely to persist for some time,” Huang said, adding that Pinduoduo will continue to invest “proactively” for the long-term value of the company. It recorded RMB 471.6 billion ($68.6 billion) gross merchandise volume (GMV) in 2018, a 234% year-on-year increase from the year prior. However, net losses in 2018 ballooned nearly 20 times to RMB 10.22 billion compared with a year earlier.

Social e-commerce firm Pinduoduo is providing digital solutions to coffee bean farms in China’s southwestern Yunnan province as part of a broader collaboration between the Chinese government, domestic tech giants, and farmers to assist poverty-stricken regions.

Pinduoduo announced on Monday a digital package solution dubbed Duoduo Nongyuan (directly translated: Duoduo Farms) is helping with digitizing sales and distribution channels. The company plans to launch 1,000 initiatives in eight provinces in China’s western region over the next five years.

Pinduoduo and other major tech firms have been tapped by the government to leverage technology and provide support for farmers in provinces defined by high poverty rates. A total of 792 farmers from Conggang and Nankang villages in Baoshan city in Yunnan province have been connected to an online distribution system operated by Pinduoduo. Last month their yield of more than 42 tons were purchased six merchants on the e-commerce platform, the company said.

Baoshan city is one the major coffee-producing areas in the Yunnan province owing to a farmer named Hu San, who received training from a British missionary in the 1930s. Nearly 99% of coffee made in China in the past five years is produced in the southern Chinese province, reported Xinhua citing an industry researcher. However, coffee grown in Yunnan has a poor reputation for quality and is most often sold below the futures market price and distributed in instant coffee form by foreign enterprises.

“There are a total of 88 counties considered high-poverty in Yunnan province, and Beijing has asked the Shanghai municipal government to help lift 74 of them out of poverty,” (our translation) Zhou Xingjun, deputy secretary-general of the Baoshan municipal government said in an announcement. The officials expected Pinduoduo to lead the digital transformation of the local agricultural industry, “retaining profits and talents to the area.”

The Shanghai-based e-commerce giant recorded sales revenue of RMB 65 billion in 2018 from its anti-poverty program, which comprises 140,000 produce suppliers from impoverished areas, including the southwestern region of Tibet, and Xinjiang and Gansu in northwestern China.

Another Chinese tech company partnering with local governments in alleviating rural poverty, Alibaba previously announced that sales of produce from high-poverty areas exceeded RMB 63 billion on its e-commerce platforms.

The central government in 2015 allocated a special fund totaling RMB 2 billion to support e-commerce development in the central and western regions of the country. The policy was tightened in May 2018 to avoid misuse, then was reduced to RMB 1.54 billion that year after national treasury department restrictions stipulated that no more than 50% of the total financial assistance offered in bringing local produce to the market could come from this government subsidy.

China Tech Talk is an almost weekly discussion of the most important issues in China’s tech. From IPOs to fake data, from the role of WeChat to Apple’s waning influence, hosts John Artman and Matthew Brennan interview experts and discuss the trends shaping China’s tech industry.

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Free cash flow is cash a company can use for whatever they want. If Pinduoduo is free cash flow positive they’ll likely be able to continue their growth spend and get even larger. If its free cash flow negative, the growth plan will put too much strain on their cash position and, it will eventually fail. To say it simply: the stakes are high.

This week, we’re joined by James Hull, professional investor and co-host of the China Tech Investor podcast, to take a look at Pinduoduo’s actual financial health.

Links

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• 43: The e-commerce platform becoming a threat to Alibaba with Thomas Graziani
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• James Hull, @jameshullx

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• John Artman, @knowsnothing, TechNode
• Matthew Brennan, @MattyBGoooner, ChinaChannel

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China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

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In this episode of the China Tech Investor Podcast powered by TechNode, hosts Elliott Zaagman and James Hull talk about Tencent’s Q4 earnings report, as the company attempts to prepare investors for their shifting business model.

This episode also features part 2 of an interview with AgencyChina’s Michael Norris, as they discuss future growth opportunities for companies such as Pinduoduo, Meituan-Dianping, and Didi.

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD.com
• Pinduoduo
• Meituan-Dianping

Guests:

• Michael Norris – LinkedIn

Hosts:

• Elliott Zaagman – @elliottzaagman
• James Hull – @jameshullx

Producer

• Peter Isachenko

Podcast information:

• iTunes
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• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

Can’t see the player? Check us out on iTunes or Spotify!

In this episode of the China Tech Investor Podcast powered by TechNode, hosts Elliott Zaagman and James Hull discuss live streaming, Pinduoduo’s results and cash flow conundrum and Meituan’s 2018 performance.

Michael Norris joins to share his insights on the companies we follow and his article “Growing in a mature market: Six directions for China’s tech giants”. Michael Norris is research and strategy manager at Agency China and a Technode contributor.  This is first of two parts of the interview.

The discussion should not be construed as investment advice or a solicitation of services. Please note, the hosts may have positions in the companies discussed.

Links

• Growing in a mature market: Six directions for China’s tech giants
• Check out TechNode’s network of podcasts

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD.com
• Pinduoduo
• Meituan

Guests:

• Michael Norris – LinkedIn

Hosts:

• Elliott Zaagman – @elliottzaagman
• James Hull – @jameshullx

Podcast information:

• iTunes
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• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

Pinduoduo share prices tumbled 17.5% on Wednesday after disclosing heavier-than-expected losses and skyrocketing operating expenses in the fourth quarter of 2018.

The social e-commerce company grew explosively in 2018, with full-year revenues surging 652% to RMB 13.1 billion ($1.9 billion) compared with the previous year. Gross Merchandise Volume (GMV) also grew 234% year-on-year to RMB 471.6 billion in 2018, driven by rapid user growth and average user spend doubling, said Huang Zheng, Pinduoduo founder and CEO.

However, 2018 operating losses soared more than eight-fold to RMB 3.96 billion in 2018 compared with RMB 469.2 million in 2017, more than half of which (RMB 2.1 billion) was recorded in the fourth quarter, a seasonal high point due to important shopping promotions. Chinese e-commerce companies usually burn more cash to boost sales and compete for users during the 11.11 shopping festival in November and year-end sales, vice president of finance Xu Tian stated during the earnings call.

The company reported earning losses of $0.24 per share for the fourth quarter, missing analyst estimates of $0.22. It did not offer guidance for the first quarter of 2019.

“It should develop its own living products like Muji rather than spending huge money on marketing events,” a netizen named Daniel Yue said on online trading platform, Fufu. Another investor who asked to be identified by his surname, Huang, commented that the company’s stock price was vulnerable to slowing growth, and expressed concerns about future performance.

Chinese e-commerce giants face increasing concern from global investors that an economic downturn will slow growth. Pinduoduo’s fourth quarter growth in monthly active users (MAU), while nearly doubling to 272 million, was marked deceleration from 495% year-on-year in the second quarter and 225% year-on-year in the third quarter of 2018. In late February, its rival JD.com said that it expected revenue growth would further slow after declining for two consecutive quarters.

Employees of Chinese e-commerce firm JD.com have publicized its directive to “make full contributions” to the company by working 12 hours a day, five days a week as competition in the e-commerce sector heats up.

A number of JD.com employees posted on Chinese professional networking service Maimai on Tuesday, claiming that the company is adopting a compulsory “995” working schedule, which refers to work schedules on weekdays starting at 9 a.m. and finishing at 9 p.m. Netizens cited by Chinese media questioned whether this new initiative was part of the company’s layoff strategy, forcing resignations for employees reluctant to work mandatory overtime.

Liu Li, a director in JD.com’s public relations, responded on Maimai on Wednesday, saying the company was not making overtime compulsory, but rather encouraging efficiency in hopes that all employees make full contributions and create value for customers and for themselves, as well. “Devotion and passion are in JD.com’s DNA, and we have no better choice but to work harder for the future of the company,” Chinese media cited Liu as saying.

Any work hours beyond eight hours per day, 40 hours per week is considered overtime under Chinese labor laws. Employees who refuse to work overtime cannot be disciplined or fired for this reason. Regardless, the number, 996, is well-known shorthand for working hours at top Chinese technology companies, referring to 12 hours a day, six days a week.

JD.com is stepping up efforts to boost vitality within the organization amid slowing growth and mounting challenges. Last month, the company announced that it would be slashing the bottom-performing 10% of its executives by year-end.

In 2018, the US-listed e-commerce giant recorded total revenues of RMB 462 billion (around $69 billion), posting 27.5% year-on-year growth compared with 40.3% year-on-year growth in 2017. The company expects growth to further decelerate in the first quarter of 2019 to 18% to 22% year-on-year.

The push for performance comes as competition heightens in the sector. Analysts view JD.com rival, Pinduduo, as “best-positioned to benefit from growth” in late adopters to online shopping, according to a report from Swiss investment bank UBS report dated Mar. 5. Pinduoduo revenues rocketed 697% year-on-year in the third quarter of 2018. UBS analysts forecast that new shoppers in lower-tier cities could drive 24% growth in users in 2019.

Chinese social e-commerce platform Pinduoduo said on Tuesday that it earned sales revenue of more than RMB 65 billion (around $9.7 billion) in 2018 from a special program that sells farm produce from poverty-stricken regions. The report on the program is a timely response to announcements made during the central government’s annual Two Sessions meetings, promoting new poverty relief initiatives with the help of information technologies.

Annual sales revenue from the program totaled RMB 65.3 billion in 2018, a 233% increase from 2017, according to the report. Perishable products worth more than RMB 16 billion were sourced from 140,000 suppliers living in regions with high poverty rates, including those in the western Chinese provinces of Xizang, Xinjiang, and Gansu. Products sold on the platform include melon, garlic, yellow ginger, and Hunan-style pickled vegetables.

The government has been working to lift large rural areas out of poverty amid economic headwinds. Chinese premier Li Keqiang announced that one priority this year is “more efficient poverty alleviation” during his annual report on Monday in Beijing during the Two Sessions meetings, according to (in Chinese) state-owned media Xinhua Agency.

Rural dwellers should be encouraged to run businesses helped by “technological revolution and innovation,” as the fight against poverty reaches “a crucial stage,” Premier Li said. In response, municipal governments from 21 local provinces pledged to promote e-commerce in rural areas in their annual reports, reported (in Chinese) The Economic Observer.

“The main focus of e-commerce enterprises in the help-the-poor efforts is to exercise our leverage in internet services, so as to accelerate the circulation of produce and help farmers achieve more profits,” Huang Zheng, Pinduoduo founder and CEO said at the World Internet Conference in Wuzhen, a city in the eastern province of Zhejiang, in November.

Pinduoduo rival, gaming giant Netease, is also responding to the government’s call for action. Chinese media reported Netease CEO Ding Lei’s proposal during the Twin Session meetings that the government offer more services to support e-commerce initiatives targeting rural areas. One such idea, Lei suggested, could be introducing technical experts and business coaches to help local merchants create their own brands built on the enhanced quality of their special farm products.

Social e-commerce platform Pinduoduo is expanding into China’s booming cross-border e-commerce business in an effort to meet growing consumer demand for quality goods, according to Chinese media citing people familiar with the matter. The company launched into the e-commerce stratosphere by appealing to consumers seeking lower prices by offering social tools for discounted group buys on its main selling platform.

An invitation-only version of the platform, dubbed Duoduo International, has been up for select merchants already on its main platform as well as prospective sellers. There are four store types, including a hypermarket format for sellers with at least 35 registered brands, and a flagship store for merchants with exclusive brand distribution rights.

A company spokesperson confirmed the project with TechNode, but would not elaborate further.

The platform is charging zero commission at present for key accounts including consumer brands and online retailers. Global FMCG giants including Nestle, Unilever, and Beijing-based Japanese consumer goods retailer Wandougongzhu have filed their applications and are waiting for approval.

Pinduoduo unveiled the platform in November during the China International Import Expo in Shanghai, detailing plans for 500,000 small and mid-sized global merchants to join the platform over the next three years, said company vice president Li Yuan, according to Chinese media.

While cross-border goods sell at a discount compared with goods imported through conventional channels, it appears Pinduoduo is expanding its portfolio to capture higher-ticket sales than goods on its main site, which are sold at striking discounts through a combination of group buys, coupons and other incentives.

The expansion comes as Chinese e-commerce giants are raising stakes in their globalization initiatives, aiming to bring in more imported products – seen as higher quality – to increasingly selective customers. Alibaba pledged in November to import $200 billion worth of goods into China over the next five years to satisfy consumer demand, said CEO Daniel Zhang.

JD.com announced in September that it will build supply chain sites in 30 countries including Russia to support 48-hour international deliveries. NetEase’s e-commerce affiliate Kaola, meanwhile, is reportedly in negotiations with Amazon to combine their cross-border businesses to provide consumers a wider range of products and more inventory.

Imported goods sell at a premium to domestic goods, though savvy shoppers have quickly grasped that goods sold on cross-border platforms are cheaper than goods imported through conventional channels.

As I wrote previously, China’s digital economy has reached a turning point.

Before, new user growth could offset digital businesses’ strategic and commercial missteps. Double-digit or triple-digit MAU growth could mute criticism of flimsy unit economics, absent strategy, dodgy investments, or lackluster monetization efforts.

Now, internet user saturation within China’s consumer class makes it harder to avoid scrutiny with eye-popping user growth. Companies like Meitu, JD, and Zhihu are facing tough questions: shareholders and investors want to whether these platforms can turn their impressive scale into profits.

Weaker players might have a hard time meeting impatient investors’ demands for return on investment, but China’s digital giants are adapting. They are repositioning themselves to adjust to new market dynamics, developing strategies to take advantage of enduring opportunities as mature businesses.

Previously, China’s internet companies grew by latching onto investment frenzies in a particular product or industry vertical, known as fengkou (literally “a gap where a strong wind blows”) in Chinese startup lingo. These rapid influxes of capital and speculative behavior are so notorious that leading Chinese executives have joked that investors could pump in enough money to make pigs fly.

Investment frenzies have reshaped markets, delivered exponential growth, and minted some of China’s internet success stories. Meituan, Didi, and VIPKID were built off all the back of them. These companies identified white space, shaped user behavior, and benefited from oodles of capital to achieve scale and outlast a slew of competitors to win winner-take-all or winner-take-most positions. However, as the mobile internet’s white space shrinks, these investment frenzies are more volatile and less conducive to value-creation.

The recent struggles of live-streaming, bike sharing, and automated convenience stores illustrate the danger of relying on speculative investment flows. My own analysis estimates 80% of live-streaming players with Series-A funding didn’t last two years. ofo, a bike-sharing firm, has gone from a $2 billion valuation to the verge of bankruptcy. There are now serious doubts that Bingo Box, the automated convenience store darling backed by GGV Capital, can survive long enough (Chinese link) to make a meaningful dent in China’s retail landscape.

Six durable white spaces

China’s digital giants—Baidu, Alibaba, Tencent, Bytedance, Meituan, Didi, Pinduoduo, and JD—are looking for something more durable than spaghetti-against-the-wall investment flows.

When they first burst onto the scene, today’s digital giants were a thin, interfacing layer between consumers, products, services, and attention. Now, being a thin, interfacing layer isn’t enough. The giants are making themselves thicker in a way that adds new users, gives depth to existing offerings, deepens competitive advantage, and creates new revenue streams.

The giants are pursuing six avenues to growth:

New Tech R&D: China’s digital giants can develop or apply technology to existing or new operations. Leading players, such as Baidu, Tencent and Alibaba are developing leading capabilities in artificial intelligence, big data, and cloud computing.

Industry digital transformation: They can also offer new products and services to industry. Having shaped consumers’ digital behavior, China’s digital giants are lining up to lead the digital transformation of traditional industries such as retail, hospitality, tourism, and agriculture, packaging software and platforms as services.

Overseas expansion: They can seek growth overseas. China’s digital giants consider themselves well-placed to service mobile-first emerging markets, such as India and South-East Asia. These markets also have the growth prospects associated with relatively low existing internet user penetration.

Lower-tier cities: They can develop products, services and experiences for consumers in lower-tier cities. The stunning rise of Pinduoduo, Qutoutiao, and Kuaishou have shown that existing e-commerce, news, and entertainment apps don’t always meet the needs of users in China’s populous third, fourth, and fifth-tier cities.

Local services: They can further penetrate and digitize food, accommodation, shopping, and transportation markets. The size of the local services market and its potential for further digitalisation means the competition between “super-apps” like Meituan, Ele.me, Didi, and Alipay is just getting started.

New mediums: They can also explore new ways to search, connect, shop, and get informed. Innovations in newsfeeds, multimedia messaging, gamified reading and social commerce present opportunities to unseat incumbents in search, social media, and e-commerce.

Who’s playing where

Each of China’s digital giants has restructured in the last two years. That’s no coincidence. China’s digital giants are re-orienting themselves for future growth. If you cross-reference each restructure’s relationship to the above growth directions, you get a pretty good sense of who’s playing where for future growth.

Alibaba and Tencent’s investments, products and proxies will fight for market share across all six growth avenues.

Baidu continues its push to be relevant beyond search through artificial intelligence investments and applications.

Bytedance plans to take its content creation and recommendation products into lower-tier and overseas markets. At the same time, its recent tinkering with e-commerce integration and social messaging shows that it’s thinking about next-generation video commerce and social media.

Meituan hasn’t abandoned its ambition to be a super-app but has doubled down on services to restaurants and retailers on its platforms, with new features like order-management systems.

JD will strengthen its core business through investments in smart logistics, expand its offline retail partnerships and open up its logistics network to third parties.

Didi’s quest to become the world’s largest transport platform in 10 years continues unabated with overseas expansion, investments in developing markets’ ride-hailing services and autonomous driving tests.

Pinduoduo, China’s newest force in e-commerce, will improve merchant quality and test the upper limits of user growth.

As China’s digital economy has reached a turning point, China’s digital giants haven’t stood still. They’re seeking out durable sources of future growth. In so doing, they’ve set the stage for a new wave of intense competition.

In this episode of the China Tech Investor Podcast powered by TechNode, hosts Elliott Zaagman and James Hull talk about Tencent’s investment in Reddit and the potential for China’s adoption of common reporting standards to pay the way for more open capital flows. They also discuss Xiaomi’s continued success in India, Pinduoduo raising more cash, and Chinese tech giants’ big spring festival hongbao giveaways.

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

· Tencent

· Alibaba

· Baidu

· iQiyi

· Xiaomi

· JD.com

· Pinduoduo

Hosts:

· Elliott Zaagman – @elliottzaagman

· James Hull – @jameshullx

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· Music: “Hey Ho” by Steve Jackson, Royalty Free Music

Markets in China’s largest cities are slowing and increasingly saturated. Many tech entrepreneurs are now pushing out into third- and fourth-tier cities and rural areas for future growth. As they do, enter a world where the texture and tempo of life can be quite different. Companies that want to thrive in small-town China must adapt to local logic. Those that do succeed are worth watching: they’re pioneering the strategies that are most likely to work in the emerging online markets of rural Asia and Africa.

Interest in this “other China” has grown in recent years with the rise of budget e-commerce platform Pinduoduo. Over 65% of its users come from third-tier cities and beyond, where incomes of less than RMB 3,500 (about $522) per month are the norm. Many are recent arrivals to e-commerce, buoyed by growing incomes, smartphone penetration, and 4G coverage.

Business media have dubbed this the “market outside the fifth ring road” (wuhuanwai shichang), referring to a Beijing orbital highway that draws a mental line between metropolitan China and the land beyond. In many ways, they are a world apart from the urban middle class that drove the first wave of e-commerce in China. The average spend on Pinduoduo is $6, compared to $60 on Jingdong.

As Pinduoduo CEO Colin Huang put it last year: “The new consumer economy isn’t about giving Shanghainese the life of Parisians. It’s about providing paper towels and good fruit to people in Anhui,” referring to a largely rural inland province. Alibaba has also got in on the act, launching a low-price shopping platform called Taobao Tejia.

Aside from shopping, a range of other apps have emerged catering to the needs and price points of small town and rural China. Short video app Kuaishou has become a channel for rural China, featuring family feasts on plastic stools and skits performed in farmyards. Compared to the more airbrushed, luxury aesthetic of rival Douyin, Kuaishou’s earthy (tuwei) feel is more relatable to its users, over 70% of whom earn less than RMB 3,000 a month.

Where there’s more time than money

The drop-off in income and education levels beyond the Fifth Ring is widely recognized. Less appreciated is a variable that slopes the opposite direction: free time.

Research by the Chinese Academy of Social Sciences (CASS) estimates that daily leisure time for residents of Guangzhou and Shenzhen has now fallen to around two hours, less than half that in the UK and US. Shanghainese and Beijingers fare little better.

Moving outside the Fifth Ring, a separate study by Professor Sun Jinyun at Fudan University found that working adults in lower-tier cities in Anhui, Jiangxi, and Zhejiang had an average of 5.8 hours leisure time each day. The typical lunch naptime was 55 minutes and over 20% of those surveyed played on their phones for over six hours a day.

Much of small-town China has a dearth of options for work or play, leaving residents underemployed, bored, or both. Across China, millions sit day and night in little corner stores (xiaomaibu) waiting for customers. It is little wonder then that apps aiming beyond the Fifth Ring are often designed to fill time, or even better, to monetize it.

News apps such as Qutoutiao and Huitoutiao that pay users through games that reward reading and sharing content. Pinduoduo entices budget-savvy consumers by incentivizing (and socializing) time spent shopping through group discounts. Damas (“big mamas”) in small-town China spend hours searching out bargains and rallying friends to save a few yuan on washing powder.

Younger peers in first-tier cities probably wouldn’t bother. Indeed, most apps for metropolitan China come with the underlying promise to help you save time (or at least feel like it); apps for chores, errands, getting around and planning your life. This efficiency imperative has also fueled demand for apps such as Dedao, which offers busy urbanites relief from “knowledge anxiety” (zhishi jiaolü) by squeezing the latest must-read book into a 15-minute audio summary.

Virtual stratification

Fed by disparities in free time and wealth, the emergence of a distinct constellation of apps for small town China reflects deep divides in Chinese society.

It seems natural that real-life inequalities are reproduced and refracted online. What is notable in China is that this virtual stratification is playing out vertically, through the emergence of distinct platforms, in addition to the horizontal sorting process that occurs between interest groups on the same platforms. This latter dynamic is more familiar in the US, where filter bubbles on social media have become a much-discussed topic.

Apps like Pinduoduo and Kuaishou may also give a glimpse of the future of the global internet. The International Telecommunication Union estimates that half the world will be online by the end of 2019. People in rural Asia and Africa make up most of the remaining 50%. As they come online—there are 16 million new connections a month in India alone—Chinese firms are already chasing them. Many of these new arrivals may relate more to the world outside the Fifth Ring than to global metropoles like Shenzhen or San Francisco.

China’s Pinduoduo Reports Theft Worth Millions of Yuan – Caixin Global

What happened: Hackers have exploited a loophole in social e-commerce giant Pinduoduo’s platform allowing them to steal around RMB 10 million ($1.5 million) in online discount vouchers. The company said it has since fixed the bug reported the incident to the police. Users found that they were able to apply a free RMB 100 voucher to any product on the company’s platform. Large amounts of coupons were redeemed within the space of a few hours.

Why it’s important: The incident marks the second time in the past three months a technical problem has been found on the e-commerce giant’s platform. In November, the company had its app temporarily removed from Apple’s China App Store as a result of a bug. The company didn’t provide any further details. Following the recent incident, Pinduoduo denied any systematic security loopholes, saying that the collective exploited a loophole in its operating rules, though it didn’t elaborate.

Chinese social e-commerce platform Pinduoduo has vowed to protect consumers’ rights and cut down on fake goods by increasing its oversight of merchants on its platform, reports Chinese media.

The company will evaluate sellers through business operations appraisals, comments from users, and credit information from government sources. The new set of policies will be implemented on Jan. 1, 2019.

The company was not immediately available for an official response, but a member of its hotline staff confirmed to TechNode that the policy is now available to all storeowners within the Pinduoduo app.

The company claims that merchants with bad evaluations will be put on a watchlist, downgrading their products in search results or even forbidding them to be sold on the platform. In severe cases, untrustworthy storeowners can be blacklisted by the company and reported to market regulation authorities.

Pinduoduo, which listed on the Nasdaq in July, has been cracking down on merchants since its IPO, following lawsuits and investigations into the proliferation of fake goods on its platform. According to reports, in compensation for selling counterfeits, discredited merchants would pay up to 10 times the historical sales revenue from a problematic product.

Since July investors have filed lawsuits in the US against the company claiming that they had been misled ahead of its IPO. The filings followed an investigation into Pinduoduo by Chinese regulators after it was accused of selling fake goods. The announcement caused the company’s share price to plummet, resulting in losses for investors.

Following the increased scrutiny, 14 storeowners protested outside the company’s office in Shanghai, claiming that the company had infringed upon their rights through improper evaluation standards.

The Chinese e-commerce giant has followed a similar path to its rival Alibaba-owned marketplace Taobao, where a flood of fake goods culminated in government intervention in 2015. The company was censured by the State Administration for Industry and Commerce after 60% of its products were identified as being fake.

This week, John and Matt talk with Shai Oster, Asia bureau chief for The Information, about the rash of Chinese IPOs in a down market, looking at Tencent Music, Xiaomi, Pinduoduo, Meituan Dianping. We also talk about the possibilities for Bytedance and Ant Financial IPOs in 2019.

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• Music: “Theme from Penguins on Parade” by Lee Rosevere, Music for Podcasts 3

Download this episode

拼多多推出“新品牌计划” 扶持1000家拼工厂品牌 – Sina

What happened: Chinese group-buying and budget shopping platform Pinduoduo has launched a project to support around 1,000 Chinese original equipment manufacturers (OEMs). The e-commerce platform will offer the factories perks such as traffic and brand exposure. To respond to consumers’ concern over product quality and brand reliability, the factories have installed live streaming equipment to broadcast production process on Pinduoduo.

Why it’s important: The project reflects a rising client-to-manufacturer (C2M) trend in China’s e-commerce market. With huge numbers of small to midsize manufacturers, particularly those that collaborate with global giants, the C2M model will help them establish their own sales channels and brands, while also allowing consumers to purchase quality goods at lower prices. However, intellectual property and long-term R&D issues are still challenging. Apart from Pinduoduo, NetEase Select and Taobao Xinxuan are testing similar models with offline stores.

In the 6th episode of the China Tech Investor Podcast powered by TechNode, hosts Elliott Zaagman and James Hull discuss the G20, how Trump likes his steak, party committees, and look at the cash burn (negative free cash flow) at four watchlist companies. Here’s the cash burn spreadsheet.

They are also joined by Fulbright University professor and Bloomberg Opinion columnist Christopher Balding to discuss the Trump-Xi G20 meeting and party committees in Chinese companies.

The discussion should not be construed as investment advice or a solicitation of services. Please note, the hosts may have positions in the companies discussed. Full disclosure: James is currently considering a long position in JD.com.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD.com
• Pinduoduo

Guest:

• Chris Balding – Bloomberg Opinion – @baldingsworld

Hosts:

• Elliott Zaagman – @elliottzaagman
• James Hull – @jameshullx

Podcast information:

• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

In this episode of the China Tech Investor Podcast powered by TechNode, hosts Elliott Zaagman and James Hull discuss the good, the bad, and the ugly from the series of Q3 earnings reports published last week, with a special focus on watchlist companies JD and Xiaomi.

They are also joined by Sixth Tone business and technology reporter Xue Yijie as they add Pinduoduo to the watchlist, and discuss the rapidly-growing e-commerce firm whose founder describes as “Costco and Disneyland.”

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD.com

Guest:

• Xue Yujie – Sixth Tone – @Yujiexuett

Hosts:

• Elliott Zaagman – @elliottzaagman
• James Hull – @jameshullx

Podcast information:

• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

Chinese social e-commerce platform Pinduoduo is among around 700 apps removed from Apple’s China App Store after the latest version of the PDD app was found to contain a technical bug, our sister site is reporting.

No details have been provided indicating the nature of the bug, but the company says it has been in contact with Apple and the app will be back online after the issue has been resolved. The removal only affects buyers on the platform and not its merchant’s app. Users of numerous Chinese Android stores also remain unaffected, as well as iOS users who have already downloaded the app.

Update: The app reappeared in the App Store around 11 pm on November 27.

Pinduoduo is not the only online platform impacted by the purge. B2C car maintenance platform Tuhu, Soguo Maps, and Sogou Navigation were among those also removed. According to reports, 718 apps in the Chinese App Store were suspended.

This is not the first time this year Apple has initiated removals of this kind. In May, more than 10,000 apps were dropped, some of which were relaunched up to two days later. A vast number of these apps did not meet Apple’s standards for in-app purchases, which allow users to buy virtual goods within in-app or game.

Pinduoduo has had a turbulent year. Shortly after listing on the Nasdaq, the company found itself under investigation by Chinese regulators for listing fake goods. The news led to a spate of lawsuits in which investors claimed the company had misrepresented or concealed in its listing documents, resulting in financial losses after its share price plunged after going public.

The company responded by closing 1,000 stores and removing four million listings that it said contained fake goods. It also reported 36 companies to the market regulator in Shanghai’s Changning District.

The company has seen momentous growth in the past few years. The company claims it exceeded a gross merchandise volume of $100 million in 2017, just three years after being founded. The same milestone took Taobao five years and JD.com 10 years to reach.

拼多多试水医药电商 上线“医药健康馆”-SinaTech

What happened: Chinese social e-commerce giant Pinduoduo has launched a health channel to sell medication on the platform. The channel now sells products under three categories: birth control, Chinese traditional medicine, and contact lenses. Local media also pointed out the company is actively recruiting for the business.

Why it’s important: Despite the huge market demand, Pinduoduo’s expansion into the online pharmaceutical sector is subject to several uncertainties. Different from the “one size fits all” approach that finds popularity among daily groceries and garments, medication needs more personalized service. So it might not be a perfect fit for Pinduoduo’s group-purchasing model. Chinese netizens expressed concern over purchasing medicine from Pinduoduo, which has got a controversial reputation for selling fake goods. What’s more, pharmaceutical e-commerce is already a crowded market where incumbents like Alibaba and JD have laid out in the sector for several years.

四川邮政与拼多多举办服务电商合作峰会 – News Sichuan

What happened: The Sichuan arm of the national postal service, China Post, and e-commerce platform Pinduoduo held a summit on October 16th where they pledged to deepen collaboration in logistics and supply chain finance. Officials from local government also expressed their desire to see more products from the southwest Chinese province feature on Pinduoduo.

Why it’s important: The cooperation illustrates Pinduoduo’s strategic shift to mainly rural, less developed parts of the country such as Sichuan. While the province’s capital Chengdu is among China’s most prosperous cities, the province is less developed relative to many coastal provinces in terms of GDP and consumer purchasing power. China Post also offers courier delivery services that are cheaper than other providers such as SF Express, which could help Pinduoduo rein in costs.

Chinese social e-commerce platform Pinduoduo has injected an undisclosed amount of funding into high-end groceries platform Chongma Linli Group (虫妈邻里团), local media Ebrun reports (in Chinese).

The lesser-known Chongma Linli Group was established in 2012 by three community neighbors in Shanghai. The founders who are from affluent families set up their social commerce model in 2014 after selling fruit alongside their newly-purchased top-gear Tesla. The move increased community members’ trust in their products and attracted around 30 members per day to join their enterprise WeChat group.

Pinduoduo’s investment in Chongma Linli might be a signal of Pinduoduo’s next moves will be in premium products even though the company is commonly known for lower-end and even knock-off goods.

Slowly growing into a community grocery leader, Chongma Linli remains local but has expanded its businesses to over 100 high-end residential and corporate communities in Pudong District, the finance and economic zone of Shanghai.

Chongma Linli’s current services include delivery of fruit, snacks, vegetables, dairy, homemade delicatessens, and other groceries from factories and farms to families. The business has also set up community pick-up stores to display products and enhance consumer experience and is targeting around 1 million families in Shanghai.

According to latest data (in Chinese), the average expense a consumer spends on Chongma Linli is roughly RMB 300 ($43.8) per purchase, and around RMB 10,000 per year. The company hopes to increase that amount to RMB 20,000.

Chongma Linli’s model has taken a different path than other fresh food e-commerce ecosystems such as Alibaba’s Hema’s. On September 18, Hema released its operation data for the first time. Its 64 offline stores across China have served over 10 million consumers. Though Hema released good performance data such as the RMB 800,000 daily revenue per store which has been set up for over one year and a half, there were fiscal summary on costs to evaluate any loss or profit situation.

Pinduoduo has set up a model of social e-commerce which giants including JD.com also wish to follow.  The company went public in Nasdaq on July 26. Even though the company has landed itself in trouble over fake goods and even found itself under investigation by US lawyers, its stock performance is currently around 21.1% better than the $19 initial pricing.

拼多多三天累计涨40% 黄峥身家超越雷军和丁磊 – Beijing News

What happened: Shares of Chinese newly listed e-commerce platform Pinduoduo have jumped more than 40 percent in the last three days. The market value of the company reached $33.2 billion, more than that of NetEase. The net worth of Huang Zheng, founder and CEO of the company, jumped to $15.5 billion, surpassing that of Xiaomi’s CEO Lei Jun and NetEase CEO Ding Lei.

Why it’s important: According to analysts at Goldman Sachs, in terms of revenues, Pinduoduo is the fastest-growing company in the world. Pinduoduo was founded in September 2015 and is especially famous for the group buying model that allows customers to purchase products at very low prices. However, it has been accused of selling substandard products.

与网易严选合作浮出水面 拼多多周二股价大涨19%– Sina Tech

What happened: The share price of Chinese social e-commerce company Pinduoduo surged 19.4% on September 11 after a recent app update that brings its former low-profile partnership with NetEase Yanxuan to the spotlight. NetEase Yanxuan set up its flagship store on Pinduoduo in the second half of 2017, but it only gained attention now after Pinduoduo rolled out pavilions for individual brands.

Why it’s important: Operated by NetEase, which is generally known as a video game publisher, NetEase Yanxuan sells unbranded “private label” products that are purported to be identical to their branded counterparts. NetEase Yanxuan and Pinduoduo share a similarity in their business model in sourcing directly from the makers of premium goods and selling to customers so as to lower the costs. But different from Pinduoduo, Yanxuan managed to build up a more solid reputation for providing cost-effective, quality products. Pinduoduo’s share jumped on prospects that the partnership could bring more quality products to Pinduoduo. Given the counterfeit claims surround Pinduoduo, NetEase Yanxuan, which may be affected by the problem as well, is not proactive in promoting the partnership. A company spokesperson told local media that the cooperation is just testing the waters and the company hasn’t put much effort into it. As a friend of Pinduoduo’s founder Huang Zheng, NetEase CEO William Lei is an early state investor of Pinduoduo.

Is NetEase’s Yanxuan the new trendsetter for China’s e-commerce industry?

Two lawsuits against social e-commerce firm Pinduoduo alleging that the company misled investors have been accepted by US courts in California and New York.

The cases were filed as a result of investors losing money due information they claim was misrepresented or concealed in Pinduoduo’s listing documents, according to local media.

Shortly after Pinduoduo’s Nasdaq listing, Chinese regulators launched an investigation into the company for selling counterfeit goods. The announcement caused the company’s share price to plummet, resulting in losses for investors.

This marks the third suit against the company that has been filed in the US. In July, a case was accepted by a New York court before Pinduoduo’s listing. Chinese firm Daddy’s Choice planned to sue the company for knowingly selling products that violated its trademarks. The company said it had informed the e-commerce giant of the problem over the course of a year but received no response.

Additionally, after Chinese regulators announced their investigation, a group of law firms said they would be looking into whether Pinduoduo withheld information from investors and whether the company and its representatives violated US federal laws.

Pomerantz LLP, one of the firms that were involved in the investigation, is now representing investors in the latest round of lawsuits. Other firms include Wolf Haldenstein Adler Freeman & Herz LLP. Also, an as of yet uncertified class action suit has been filed against the company by the Schall Law Firm.

This week, Pinduoduo said in an open letter that between August 2 and August 9 it had removed over 4 million listings of counterfeit goods and closed more than 1,000 stores on its platform. The company announced it had also reported 36 companies to the market regulator in Shanghai’s Changning District.

“We are fully aware that problems that existed in the past should not continue to exist in the future,” the company said in the letter, laying out plans to combat counterfeit goods in the future.

However, as losses have already been incurred and with three lawsuits having been accepted by US courts, the company’s intended changes may have come too late.

What took Taobao five years, and JD.com 10 years, Pinduoduo has achieved in only three years.

Founded in 2015, Pinduoduo stated in their IPO prospectus in July that it achieved RMB 141.2 billion gross merchandise volume (GMV) in 2017, surpassing the RMB 100 billion milestone. Chinese e-commerce giants JD.com and Taobao were founded in 2004 and 2003 respectively. That’s when China’s e-commerce market began to grow, and more companies joined the competition.

Now, a decade and a half later, Alibaba, owner of T-mall and Taobao, makes up 58.3% of the e-commerce market in terms of sales volume, JD makes up 16.3%, and the young Pinduoduo somehow successfully grabbed 5.2%, according to WalktheChat’s analysis.

One of the most distinguishable features of Pinduoduo is how deeply the success of the platform is rooted in social networks. Thomas Graziani, co-founder of WalkTheChat, demonstrated the social networking strategy in front of the crowd at TechNode’s “Pinduoduo and E-commerce in China” event in Beijing.

There are two prices for a single product on Pinduoduo; one is the full price and the other is the “Group Buy” price, lower than the full price. If the customer wants to purchase a product at the “Group Buy” price, they can initiate a group buy by sharing the link of the product with their friends on WeChat or join an existing “Group Buy” already in progress.

Usually, WeChat discourages links that would direct users to non-Tencent apps or even disables them, but Pinduoduo isn’t concerned as Tencent has been investing in Pinduoduo since June 2016 and owns 18.5% of the company, according to its prospectus.

There are other promotional campaigns in the app, but all of them include interacting with people’s connections on Tencent-owned WeChat or QQ. Graziani said that when he first subscribed to the Pinduoduo official account, Pinduoduo spammed him with 15 messages within the first 48 hours of registration, and all of the messages were curated for him based on his activities on Pinduoduo.

However, when considering the time devoted to buying the relatively cheap product, the spammy messages may only work for people who are really looking for bargains, said Graziani. One of the reasons that Pinduoduo has such momentum in China is the country’s sizable wealth gap.

“I think the point with China is that part of the country is extremely developed, and there’s also part of the country which is mostly rural, about 50%…so you see a population that really needs these bargains,” he said.

Apart from the spammy promotions, another issue has drawn public attention is the considerable volume of fake products sold on Pinduoduo. Graziani said Pinduoduo is using a very polished answer to this problem: it’s impossible to solve in a short period, but they are resolved to clean fake products throughout the platform, starting with sensitive areas like baby and maternity products.

Pinduoduo released an open letter on August 22 saying it has started a campaign against counterfeits after China’s State Administration of Market Regulation asked the company to resolve the issue. From August 2 to August 9, the platform took down 4.3 million products, shut down 1128 stores, and intercepted 450,000 links of fake products. The company said it would keep fighting against counterfeits, violations of intellectual property, and other illegal activities.

Recently-listed social e-commerce giant Pinduoduo has closed 1,128 stores and removed nearly 4.3 million listings from its platform in response to concerns over the sale of counterfeit goods.

The company issued an open letter stating that the removals were made between August 2 and August 9. Representatives at the company said that in light of recent public grievances, they had realized that the platform has many problems including lack of attention to intellectual property protection.

“We are fully aware that problems that existed in the past should not continue to exist in the future,” the company said.

According to the letter, Pinduoduo has already reported 36 businesses that infringe on copyrights to the Changning District Market Supervision Administration in Shanghai. It said Pinduoduo would continue to report suspected illegal companies to the relevant local market supervisor.

Pinduoduo said while it upgrades its merchant verification system, it would be manually verifying stores on its platform. It also said that it would continue investing in technology and its workforce and that it plans to set up an intellectual property service center while encouraging merchants to apply for trademarks.

This is not the first time the company has launched a crackdown on counterfeit and low-quality goods. In  June, it found itself at odds with storeowners after freezing the accounts of stores it found selling fake products. Merchants responded by protesting at the company’s headquarters in Shanghai.

Since its Nasdaq listing, Pinduoduo has faced increased scrutiny from regulators, investors, and law firms. Audio-visual equipment manufacturer Skyworth demanded the company remove all listings of counterfeit Skyworth products from its platform. This eventually led to the State Administration for Market Regulation ordering Shanghai’s Industry and Commerce Bureau to launch an investigation causing the company’s share price to tank.

As a result, seven US law firms launched an additional investigation on behalf of investors who incurred losses shortly after the IPO. The firms’ focus is on whether Pinduoduo misled and withheld information from public investors and whether the company and its representatives violated US federal laws.

Pinduoduo’s IPO has also started conversations about income inequality in China, with a vast majority of its users being low-income earners, highlighting the need to tailor business models to this bracket of the population.

“Pinduoduo, Pinduoduo, the more you group-buy, the more you save. If you wanna group-buy, go Pinduoduo; every day, every time Pinduoduo. Pinduoduo.” This song repeatedly appeared in celebrity reality show Go Fighting sponsored by the company. To many Chinese consumers, particularly those in the middle class, Pinduoduo exists in this song, not their lives. For those with lower means, the story is different.

Interestingly, the show’s previous top sponsor was Tmall. The new sponsorship quickly made Pinduoduo’s brand well-known in China’s mainstream market. Though the show’s fans didn’t know the exact reasons behind the sponsor change, they believed Pinduoduo must be powerful—at least the sponsorship fee they paid should be equivalent to Tmall’s.

Pinduoduo’s IPO made the company famous overnight. As criticism of its business, products, and operation rose, debates have gone beyond Pinduoduo to issues of China’s retail business, legal principles, and social fragmentation. Some say Pinduoduo is a shameful business. Some say it is Pinduoduo who has drawn public attention to low-income consumers.

A rice cooker uncovers a divided market

A rice cooker priced at RMB 20 ($2.93) has become one of the main targets of the debate. Mainstream consumers doubt if it’s even possible to produce such a cheap cooker. If not, the seller is likely luring customers with fake product information. If yes, it would be wrong to allow selling such a low-quality rice cooker.

On Tmall, Alibaba’s quality guaranteed e-commerce platform, the lowest price for a rice cooker is RMB 52 while on Alibaba’s other platform, Taobao, the lowest price is RMB 38.

Mainstream consumers may find such cheap rice cookers hard to accept: the best selling rice cooker with 54,000 monthly sales costs RMB 189. One reason behind this is the unfamiliarity with manufacturing costs but there is another hidden issue. Middle-class consumers and Pinduoduo’s target users have different lifestyles with the first group often lacking an understanding of low-income buyers’ conditions.

“In this world, the number of poor people is larger than that of the rich.”

This is the phrase that opens an article titled The Truth behind Pinduoduo’s $27 billion: Winning the Poor is Winning the World that went viral in the midst of the Pinduoduo debate. If investigations into unfit products are the state’s duty, the mass demand supported by Pinduoduo’s 343 million users is a social issue, states the article (in Chinese) published under the WeChat account Big Cat Finance (大猫财经).

Responding to Pinduoduo users’ complaints of poor-quality clothing on a local community forum (in Chinese), one netizen wrote: “Very cheap products often mean poor-quality things. You should have known this before you confirm any purchases on the platform.”

But reality suggests purchases made on Pinduoduo are not always a choice. According to official state figures, in 2017, the annual per capita disposable income of urban residents was RMB 36,396 while for rural residents it was only RMB 13,432.

The numbers are also reflected by China’s Gini Coefficient, the reference index for inequality. In 2017, that number rose to 0.467, according to China’s National Bureau of Statistics. The closer the figure is to 1, the higher the likelihood of real social inequality.

Legal framework remains an issue

While trademark disputes and fraud have clear legal frameworks, products that have their own brands but are still copying other products are another problem.

Wang Xing, founder and CEO of Meituan, said on mini blog platform Fanfou on July 29, “A lot of people are criticizing Pinduoduo, but they don’t ask how [Alibaba’s] Taobao rose to power. What a forgetful society!”

The comment was reposted by media on China’s Twitter-like Weibo and soon went viral. Wang’s words met with plenty of criticism but some have noted that Pinduoduo’s products simply represent a part of China’s current retail landscape.

“I have been in China’s retail industry for decades, and products with no production date, no qualification, or no manufacturer account for around 60% of all items produced,” said one of the commentators.

Another comment, directly responding to Wang’s words, says, “You should have known that times have changed. The time now is no longer the time when Taobao was building up its business.”

Although times are changing, China’s e-commerce industry has few legal references for protecting intellectual property in cases where one brand simply copies the design of another brand. The country has seen some tough cases from angry foreign companies.

Some believe that the launch of a strong legal framework is intentionally being delayed or at least watered-down to give local brands more time to redefine themselves from learners to future masters of innovation. Xiaomi is one example—previously berated as Apple’s copycat, it is now one of China’s powerful companies with other Chinese companies trying to copy their brand, including one clever one.

Retail with Chinese characteristics

While the copycats are clearly a problem for most, many are showing an ambivalent attitude to products without clear trademark regulation violation.

To them, Pinduoduo’s fast expansion and successful IPO imply a diverse and even hugely fragmented Chinese consumption market that breeds remarkable potential. This is the unique situation in China that businesses relying on mass consumption are more than familiar with.

Liang Ning, often known as the No.1 female tech talent in Zhongguancun, China’s Silicon Valley, believes that the low-income needs are there and someone has to be there to fill the vacuum.

“Will our accusation of Pinduoduo clean up all fake products? Can pushing Pinduoduo to the corner bring TVs to rural residents? Will all this upgrade rural residents’ material situation? I believe it’s right for media to blame Pinduoduo for allowing some fake products. But we need to think, is it the fake products that have made Pinduoduo the Pinduoduo it is today? Try finding a platform that has no fake products at all. They are a common phenomenon in China, and [in nature] China’s social problem,” Liang says.

She also believes that any one of the questionable products on Pinduoduo has the potential to become another Xiaomi leading to a more equal experience for both rich and poor consumers.

Ma Zhankai, the father of Sogou Keyboard, published his thoughts (in Chinese) on building startups in a consumption landscape marked by Pinduoduo.

“Serving basic needs with bold and innovative ideas is a common development pattern discovered in many successful [user-oriented] startup cases,” he says. Ma holds positive attitudes towards Pinduoduo’s basic model and study of user profiles.

“It is Pinduoduo that has allowed 200 million people to experience the convenience of portable TVs. Is receiving purchased parcels not a happy thing? But 500 million people have never experienced it before,” Ma said. Allowing low-income families to upgrade their consumption and enjoy new products is one of the cores of Pinduoduo’s business in smaller cities, he explained.

A widely accepted truth seems to be that a social need for cheap products exists despite the fact that many middle-class consumers ignore it. Though regulators will deal with trademark disputes and fraud, the low-price products and blurred lines between copycats and those who want to learn from the best will long be shadowing the industry. And at times it will be the fuel for some retail businesses’ fast expansion and strong growth.

What deserves close attention is not just any final decision made on Pinduoduo, either in China or overseas. Whether the case will set up new standards in the industry is of more importance. A trend that modifies or shifts current business models to tailor to lower-income markets will also grow strong.

The success of the newly-listed e-commerce platform  Pinduoduo seems to have alerted other established online shopping platforms. Alibaba’s mobile payment application Alipay has quietly launched a new group buying function together with its online shopping platform Taobao. Alibaba is hoping to catch up with the trend of social media-enabled group buys at low prices which made Pinduoduo one of its most notable rivals.

The new function named Pintuan (拼团) is located at the bottom of Alipay’s homepage, where users can access daily deals ranging from groceries to electronic devices. The function was launched in late July and it is still in beta testing.

Alipay is not the first one to go after Pinduoduo’s group buying market. Netease set foot in the similar business in 2017 but the merchandise it offers targets much wealthier groups. Taobao’s main rival JD.com launched a group buying function in June. JD’s group buying slogan is “Low prices don’t mean low quality” which seems to be mocking Pinduoduo’s counterfeit problems.

After China’s State Administration for Market Regulation announced Pinduoduo will be put under investigation, the company’s counterfeit problems have gained attention overseas. Seven US law firms have launched investigations on whether Pinduoduo misled and withheld information to public investors.

The incredible rise of Pinduoduo, Tencent’s most powerful Taobao rival

TechNode found that Pinduoduo’s platform is still full of fakes. On Pinduoduo’s mother and baby product page, five imitations of the famous diaper brand Pampers are sold at around below RMB 30 per pack, while the authentic ones of the same size and volume are worth more than RMB 130 on JD or Taobao. The imitations are named Parmebos, Paonmepors, Parmepas, Puobanrs, and Pampermes. They all use similar color schemes and typeface like the real Pampers.

Alipay’s Pintuan has taken a somewhat different approach from Pinduoduo. Unlike Pinduoduo which has group buy deals all day long, Alibaba launches its deals at 9 AM, 2 PM, and 7 PM every day with a limited number of products available.

The deals usually offer more than a 50% discount and require two people to form the group. All of the products come from Taobao but are offered at lower prices. For instance, one dress was priced at RMB 18.8 for a group purchase, and RMB 49.4 if customers decided to buy it individually. Most products are eligible for a return within 15 days of purchase, similar to those on Taobao.

Reports of trade tensions between China and the US in the past few months have been hard to ignore. In early July, the US imposed $34 billion on Chinese goods, prompting the Shenzhen Component Index, dominated by technology and consumer product stocks, to fall to its lowest point since 2014, igniting fears among investors.

“The US tariffs, coupled with a falling yuan, will significantly increase the cost for many Chinese technology companies that rely on imported raw materials, such as semiconductors, integrated circuits, and electric components,” Zhang Xia, an analyst for China Merchants Bank Securities, told the South China Morning Post.

Additionally, the US’s commerce department announced yesterday it will place an embargo on 44 Chinese companies—including the world’s largest surveillance equipment manufacturer Hikvision—for “acting contrary to the national interests or foreign policy of the United States.” The move caused the companies’ share prices to fall by up to nearly 6%.

However, the focus has shifted to more than just the trade war. And a number of big Chinese tech companies have seen their share prices plummet for other reasons.

Pinduoduo, China’s latest e-commerce giant to list on the Nasdaq, found that an initial public offering (IPO) is not a panacea. Conversely, its listing has drawn attention to the company’s counterfeit products. And investors are not happy.

Tencent’s shares have nosedived by over 25% since its peak in January, erasing $143 billion in market value over the past seven months.

Search giant Baidu also hasn’t been immune. The company’s stock price dropped by nearly 8% this week (August 2) following news that Google plans to re-enter the Chinese market.

Government crackdowns

While IPOs are usually a cause for celebration, Pinduoduo has proven this past week they can also be bad for business. The company—which has integrated e-commerce and social media—caters to low-income consumers living outside first and second-tier cities. It has been plagued by accusations of facilitating the sale of counterfeit low-quality goods.

Just days after going public, the company’s share price tumbled by 16%, falling below its offer price of $19. The drop was, in part, initiated by requests made by television maker Skyworth to remove counterfeit listings of its products from the e-commerce firm’s marketplace.

The company announced this week that it had removed 10.7 million listings of problematic goods (in Chinese). However, this did little to assuage concerns from investors and regulators after the latter launched an inquiry into Pinduoduo’s product listings. It’s stock price dropped to 30% below its closing price on its first day of trading, wiping out over $9 billion in value.

This is unlikely to be helped by the fact that seven US law firms have launched investigations into the company on behalf of its investors. The statement issued by the firms shows that investors suffered financial losses after Chinese regulators began looking into the company’s dealings. The company met today (August 3) with regulators and agreed to improve its products’ vetting procedures.

However, it’s not only e-commerce platforms that have been affected. Video streaming service Bilibili has seen its stock price drop by almost 21% since July 20. The decline comes amid renewed efforts led by the Cyberspace Administration of China (CAC) to crack down on what it deems to be “vulgar” or “inappropriate” content.

The company has subsequently had its app removed from app stores in the country for one month. Nasdaq-listed Bilibili responded by saying it is “in deep self-review and reflection.”

Rumored competition

Baidu, which runs China’s biggest search engine, found that even unconfirmed competition can cause stocks to tumble. In a move which could mark its re-entry into the Chinese market, news broke this week that Google has plans to launch an Android app that could provide filtered results to users in China.

Baidu currently commands nearly 70% of China’s search market, while Google shut down its search engine in China in 2010 over censorship concerns, giving up access to a vast market. China’s online population now exceeds 770 million, double the entire populace of the US and more than that of Europe. An attractive prospect for the US-based tech company.

Baidu’s revenue is still highly dependant on ad revenue, which increased by 25% in the second quarter. Google’s return is clearly seen as a threat, causing Baidu’s stock price to fall from $247.18 on July 31 to $226.83 on August 2. This marks the most significant fall since the company announced the departure of its chief operating officer Lu Qi.

Steady decline

Nonetheless, all losses seem insignificant in comparison to Tencent’s. The company saw its stock price increase by 114% in 2017, reaching a record high in January 2018. However, since then, the price has dropped by nearly $130 per share, eviscerating a considerable portion of its market value. In July alone, its stock price fell by 9.9%. The company’s devaluation tops Facebook’s $130 billion rout following its earnings call last month.

In April, the company lost over $20 billion in value after South African investment and media firm Naspers announced it was trimming its stake by 2%. Additionally, Martin Lau, the company’s president, sold one million of his shares in the company. This, added to the Naspers sale and warnings of margin pressure, led to a loss of $51 billion in market value.

“Investors are increasingly pricing in lower expectations for Tencent’s interim results,” Linus Yip, a strategist at First Shanghai Securities in Hong Kong, told Bloomberg.

Yip expects the downward trend to continue, and not just for Tencent. “Overall, tech companies are facing a similar problem. They have been enjoying fast profit growth in the past few years, so it will be difficult for them to maintain similar growth in the future as the competition grows and some segments are saturated,” he said.

As Chinese e-commerce platform Pinduoduo faces a massive stock price drop following investigations into peddling fake goods, Alibaba appears to be gloating. Alibaba’s Anti-Counterfeiting Alliance announced on August 3^rd that it now has over 100 members, NetEase reports.

Alibaba’s Taobao is known to offer fake goods itself: in January, the US Trade Representative put the platform on its blacklist for the second year in a row. This prompted the e-commerce giant to launch the Alliance the very same month. Alibaba’s anti-counterfeiting partners now include brands from 16 countries and regions covering 12 industries.

The company is working with Microsoft, Apple, Luis Vuitton, and other brands—an important step for a platform well known for its rich offering of knock-offs, especially Luis Vuitton-themed bags, watches, and random objects such as trash cans.

Over the past year, Alibaba has helped bust 247 counterfeit goods sellers with more than 300 people arrested by law enforcement agencies involving nearly RMB 1 billion of goods, the report states. The change has also been noted by many ordinary shoppers (including the author of these lines) who are having a hard time finding good knock-offs on Taobao.

Meanwhile, the company that shook Alibaba’s confidence in the e-commerce market is under investigation from the Shanghai’s Industry and Commerce Bureau ordered by China’s State Administration for Market Regulation (SAMR). Pinduoduo stock prices have dropped prompting seven law firms representing US-based investors to launch their own investigations and evaluate if the company’s officers and/or directors have violated US federal securities laws.

The SAMR also announced today that any third parties or companies doing business on an e-commerce caught selling fake goods on platforms such as Pinduoduo would be disciplined. SAMR called on companies to crack down on the sale of counterfeit goods, trademark infringements, and illegal advertisements.

China steps up crackdown on counterfeit goods – People’s Daily 

What happened: In the wake of Pinduoduo’s fake goods scandal, China’s State Administration for Market Regulation (SAMR) has called for companies to crack down on the sale of production and sale of counterfeit goods, trademark infringements, and illegal advertisements. It said that companies involved in the supply chain of sub-standard or counterfeit products would be subject to an investigation.

Why it’s important: Pinduoduo, the social e-commerce giant which went public in the US earlier last week, has been subject to greater scrutiny since its IPO. The SAMR said earlier this week that it would be launching an investigation into the operations of the company. However, it will not only be Pinduoduo that will be punished. The SAMR said that any third parties or companies doing business on an e-commerce platform such as Pinduoduo would be disciplined.

Pinduoduo might soon find itself under US regulators scrutiny after seven US law firms have announced investigations against Chinese e-commerce platform Pinduoduo on behalf of the company’s investors. The statements issued by the firms show that the investigation launched against Pinduoduo by Chinese watchdog for selling counterfeit goods has caused the company’s stock price to plunge and investors to suffer losses, Beijing News reports.

In less than one week after its strong debut on Nasdaq, shares of Pinduoduo slumped on August 1st after China’s State Administration for Market Regulation ordered Shanghai’s Industry and Commerce Bureau to launch an investigation. The company has come under attention after reports of third-party vendors using the company’s platform to sell counterfeit goods.

The law firms’ investigation will focus on whether Pinduoduo misled and withheld information to public investors. It will also evaluate whether Pinduoduo and certain of its officers and/or directors have violated US federal securities laws, according to the report. The seven law firms include Bronstein, Gewirtz & Grossman LLC, Schall Law Firm, Rosen Law Firm, Pomerantz LLP, Glancy Prongay & Murray LLP, Faruqi & Faruqi LLP, and Law Offices of Howard G. Smith. All of the firms have published investor alerts.

Pinduoduo’s shares are currently trading at $19.66. Its opening price on Nasdaq on July 26th was at $19.27. On August 1st, shares dropped to $19.28 which is 30% less than its first day’s closing price of $26.70 losing nearly $9 billion of market value.

At the time of its Nasdaq debut, Pinduoduo was raised to the status of Alibaba’s Taobao most powerful rival. Similar to its Chinese rivals, the company offers a wide range of products from daily groceries to home appliances. Pinduoduo’s strength lies in its integration of social components into the traditional online shopping process, which the company describes as the “team purchase” model.

The company came under attention for selling fake goods on the platform which cater to the need of low-income users in rural China. Talks about the quick rise of IPO has sparked deeper thoughts on the widening inequality of wealth distribution in China.

The incredible rise of Pinduoduo, Tencent’s most powerful Taobao rival

Pinduoduo Tumbles Below IPO Price Amid Fake Goods Probe– Caixin Global

What happened: In less than one week after its strong debut on Nasdaq, shares of Pinduoduo slumped more than 16 percent on August 1 to 18.68 apiece, falling below the offering price at $19 amid the rising concerns about counterfeit goods.

 Why it’s important: The heat surround Chinese online bazaar Pinduoduo is taking a negative turn shortly after its blockbuster IPO and strong debut on Nasdaq last week. The company is in a whirlwind for selling fake goods on the platform which cater to the need of low-income users in rural China. Talks about the quick rise of IPO has sparked deeper thoughts on the widening inequality of wealth distribution in China.

创维发严正声明：要求拼多多停止售假 – Caijing

What happened: Chinese audio-visual equipment manufacturer Skyworth has asked social e-commerce company Pinduoduo to remove and stop selling any counterfeit Skyworth products on its platform. The company requires Pinduoduo to stop the sale of these products with immediate effect. It said it has the right to pursue those who were infringing upon its products.

Why it’s important: Pinduoduo has long had a reputation for selling cheap low-quality products and therefore led crackdowns on counterfeit products in the past. These prohibitions have caused outrage among the platforms merchants, who at times, have said the company’s assessment criteria were unfair. Earlier this year, sellers even went as far as protesting at the company’s office in Shanghai. Nonetheless, Pinduoduo will have to remain vigilant and risk upsetting its merchants in the coming months to limit the sale of counterfeit products, particularly after its US-based IPO.

Pinduoduo founder and CEO Huang Zheng’s wealth soared to $14 billion with the public listing of his social e-commerce app, local media is reporting (in Chinese). At the age of 38, Huang is now one of the youngest tech moguls in China and is ranked the 13th wealthiest billionaire in the country.

The Tencent-backed Pinduoduo made its public debut on the New York Stock Exchange on Thursday. The startup priced its IPO at $19 per share a day prior to its public debut. Its stock jumped more than 40% on the first day of trading, closing at $26.70.

According to the latest reports, the company have raised $1.6billion in the IPO and is currently valued at over $60 billion. The deal is said to be one of the largest Chinese tech IPOs of the year in the US.

After closing on Thursday, Huang’s—who owns a 46.8% stake with aggregate 89.8% voting power—net worth was at $14 billion, surpassing JD.com founder Liu Qiangdong’s $1.08 billion.

The incredible rise of Pinduoduo, Tencent’s most powerful Taobao rival

Huang said in a recent interview that Pinduoduo’s success can be attributed to the rise of social network and mobile payment. “People are spending a lot of time of mobile phones and apps, like WeChat and QQ, and also you can easily pay money using a cell phone. So, the infrastructures are ready, and these are the fundamentals of PDD’s success.”

Prior to launching Pinduoduo, Huang founded several ventures including consumer electronics e-commerce site Ouku.com, marketing service Leqi, and a WeChat-based game startup.

The three-year-old Pinduoduo enjoyed a quick rise to popularity when it launched in 2015. Dubbed as the “Groupon of China,” Pinduoduo’s unique business model sent a wave of disruption to the existing online retail market, which was largely dominated by Alibaba and JD.com.

As of the end of March, the company had tallied over 295 million active buyers and 103 million active monthly mobile users on its platform. According to consulting firm Jiguang, Pinduoduo’s daily active users (DAU) surpassed that of JD.com in January. Pinduoduo’s DAU has reached 55.9 million in June, coming closer to rival Alibaba’s online marketplace Taobao’s 172 million.

From Alibaba to JD, China is not short of e-commerce powerhouses. Although the country’s e-commerce market is highly consolidated, it’s not impossible for startup teams to crack this market as long as they are solving the right problems for the right group of customers.

Chinese social e-commerce platform Pinduoduo just proved this. The Shanghai-based company filed for a massive $1.6 billion IPO on the US stock market on July 16th, making it one of the largest deals of the year. Excitement is quickly intensifying surround the company, which managed to boost its sizeable success in China’s highly competitive e-commerce market within three years.

What is Pinduoduo and what has it done right?

Like Taobao and JD, Pinduoduo is an e-commerce platform that offers a wide range of products from daily groceries to home appliances. Pinduoduo’s twist lies in its integration of social components into the traditional online shopping process, which the company describes as the “team purchase” model.

By sharing Pinduoduo’s product information on social networks such as WeChat and QQ, users can invite their contacts to form a shopping team to get a lower price for the commodity. The mechanism keeps the users motivated and better hooked for a more interactive and dynamic shopping experience. Coupled with other incentives such as cash, coupon, lottery and free products, Pinduoduo managed to acquire users at a very low cost. Together with the extra satisfaction of scoring a good deal with your friends as a team, Pinduoduo soon went viral in China.

Extremely low prices are another compelling attraction of Pinduoduo. The discount is usually up to 90%, including everything from RMB 10 bed sheets to RMB 1000 PCs. But the bestsellers are daily groceries at unbelievable low prices. More than 6.4 million units of tissue paper were sold at RMB 12.9 for 10 boxes and 4.8 million umbrellas were purchased at RMB 10.3 apiece.

The company’s bulk-selling model easily creates huge orders for the sellers and leaves them more room to cut prices. At the same time, Pinduoduo’s app is designed to facilitate this, an expert explained to local media: “Taobao’s interface is search-based and centered on multiple product displays, while Pinduoduo’s is more similar to a news feed and thus gives more exposure to a single product and easy to create “爆款” [baokuan, meaning viral items]. Taobao has more products listed, but Pinduoduo put its focus on fewer bestsellers that attract more buyers.”

Pinduoduo’s C2B model allows it to ship directly from the manufacturers eliminates layers of distributors, not only reduces the price tag for buyers but also raises the profit of manufacturers. This approach is particularly effective for the sales of perishable agricultural and fresh products, where the speed for matching supply and demand is critical.

Lesser-known brands were chosen over famous brands to erase any premium that comes from branding. Additionally, the costs for advertising and marketing are also lowered through user sharing to social media. The approach is both cost-saving and effective. Through social sharing, users are sending the product information precisely to friends and groups that may have similar income and consumption preferences. Viral marketing is a more clever way to build the identity of all the lesser-known brands on its platform. Financially, the platform could even out part of discounts with less marketing budgets.

China Tech Talk 43: The e-commerce platform becoming a threat to Alibaba with Thomas Graziani

Price and social features are not only the only paths to Pinduoduo’s meteoric rise—spotting the right user profile is the last piece to the puzzle. Operation director of Chinese mobile e-commerce platform Chuchujie, Yang Lin shot to the core of the problem in an interview with local media: “Taobao has over 500 million users while WeChat has over 1 billion, the gigantic missing group between two of China’s giant apps is distributed in third- or lower-tier cities, mostly senior citizens. This group, which only recently came online and depends on the ubiquitous WeChat as the chief source of information, is the target users of Pinduoduo.”

Data from research institute Jiguang shows that users from third- and lower-tier cities account for around 65% of Pinduoduo’s total user base, while JD’s users in first plus second-tier cities and the rest of China were half-and-half.  Additionally, females account for 70% of Pinduoduo’s user base. They are responsible for family purchases and more price sensitive. This guarantees more active sharing and purchases.

Consumption upgrade, a trend in which affluent Chinese customers are increasingly willing to pay for quality, has dominated China’s e-commerce industry in the past few years. Taobao and JD’s globalization initiatives to bring overseas quality products, the boom of cross-border e-commerce sites like Red and NetEase Yanxuan and Kaola are all based on the consumption-upgrading backdrop.

But the growth of Pinduoduo has sparked an argument focusing on whether the platform represents consumption downgrading. Maybe consumption upgrading or degrading isn’t the key problem. It is just one more piece of evidence for how big and segmented the Chinese market can be. Rising income may give part of Chinese urban citizens the freedom to vote for quality, but RMB 1 difference in price tag may still be a big concern for their countryside counterparts, who have been neglected so far.

Cost performance is still the most important factor to consider for consumers. A higher price tag does not necessarily represent the better quality or vice versa. The huge potential in this often-overlooked market is luring more competitors. Taobao launched Taobao Tejia, a dedicated app for China’s low-end users.

Pinduoduo didn’t invent the social e-commerce model. Groupon pioneered the group-buying concept years ago. But it is succeeding thanks to a new ecosystem consisting of super app WeChat, mobile payment infrastructure, and mobile-first users.

Can China’s fastest growing e-commerce startup find similar success in Southeast Asia?

Pinduoduo’s history and major milestones

Founded in September 2015, Pinduoduo is the fourth startup of Colin Huang, an ex-Googler who once worked on early search algorithms for e-commerce. His previous startups include consumer electronics e-commerce site Ouku.com, Leqi, e-commerce platform marketing agent service and a WeChat-based role-playing game company.

With experiences in both e-commerce and gaming, Huang founded Pinduoduo with a vision to combine the secret success recipe of both Alibaba and Tencent, the two Chinese internet giants known for their e-commerce and gaming /social dominance respectively. “They don’t really understand how the other makes money,” Huang said to Bloomberg.

Huang seems to be right about how the two industries can work together. Pinduoduo’s annual GMV (gross merchandise volume) surpassed RMB100 billion in 2017, that’s around two years since its inception. To hit the same milestone, Taobao took five years, VIP.com took eight years and JD ten years. Pinduoduo now claims more than 343.6 million active buyers with an annual GMV of RMB 262.1 billion.

A huge turning point occurred in the third quarter of 2017 when the weekly active rate, penetration rate, and open rate of the Pinduoduo app all surpassed those of JD. Compared to the previous year, it reaches up to 1000% year on year growth according to Jiguang’s data.

Steep growth trajectory lured financial backings. In 2015, Huang launched Pinhaohuo, a social commerce platform for fruits, with the team from his second startup Leqi. His gaming startup incubated Pinduoduo.

Four months after Pinduoduo received undisclosed A round from IDG and Lightspeed China in March 2016, the company secured over $110 million in Series B financing four months later from Baoyan Partners, New Horizon Capital, Tencent, and others. In April 2018, Pinduoduo completed a new round of financing raising $3 billion at a valuation of nearly $15 billion. Given Pinduoduo’s WeChat-based ecosystem, Tencent joined the round as a returning investor.

Given the history between Pinduoduo and Pinhaohuo, then of the two largest players in the social e-commerce sector, the two companies merged to form one dominator.

Another counterfeit heaven in China?

“If you close your eyes and visualize the next stage for Pinduoduo, it would be a combination of ‘Costco’ and ‘Disneyland’, driven by a distributed network of intelligence agents,” Huang said in his letter to shareholders. Huang’s comparison was thus interpreted as a combination of “value for money” and entertainment, but many are questioning whether or to what degree Pinduoduo can live up to the founder’s expectation.

Although Pinduoduo claims to have several channels to lower product prices, increasing product quality and counterfeit complaints still raise concerns for a possible low-cost and low-quality association. The percentage of complains on Pinduoduo is 17.87%, and the user satisfaction rating is only 1 star, according to the 2017 National User Satisfaction Survey of Major E-commerce Platforms released by the China E-Commerce Research Center. Complaints mainly target at the problems of poor quality, slow delivery, misleading ads, etc.

In addition to mounting domestic complaints, the Chinese shopping app was hit by a trademark infringement lawsuit in the US, shortly after filing for a US IPO. Alongside Alibaba and JD’s efforts to remove fake goods on their platforms, fake goods are flooding to emerging e-commerce platforms like Pinduoduo and Weishang, according to Alibaba.

As Pinduoduo prepares for a listing, the firm is following the e-commerce giants in cleaning up the platform. According to the company’s annual consumer rights protection report for 2017, it has taken down 10.7 million problematic listings, blocked 40 million suspicious external links, representing 95% of the fake good sellers from the platform. The company set up an RMB 150 million fund to deal with after-sales disputes.

But tightening regulation is causing more friction between Pinduoduo and its merchants on the platform. In June, fourteen store owners who sell products on Pinduoduo protested under the company’s office building claiming that Pinduoduo conducted improper product-quality checks which damaged the owners’ rights. Company founder Huang insisted Pinduoduo’s decision and punishment of the owners is just and fair.

Many also questioned the validity of entertaining features in Pinduoduo’s value proposition. “We have observed that a few users find shopping on Pinduoduo to be very entertaining, which is attributable to its extremely low pricing and interaction among Weixin users,” according to research institute 86 Research.

IPO and beyond

Pinduoduo went public on NASDAQ market on July 26 and raised more than $1.6 billion with a valuation of $60 billion. However, shareholders should still be concerned about the company’s fundamentals

Financially, the company is still in the red. Pinduoduo suffered a net loss of RMB 292 million and RMB 525.1 million in 2016 and 2017, respectively. Its net losses reached RMB 201.0 million in the first quarter of this year. The net loss is expected to be widened, mainly attributable to investments in branding and ads. Over 88.4% of Pinduoduo’s RMB 1.2 billion Q1 revenue was spent on marketing. This could be translated as a sign of difficult traffic acquisition.

The most typical Pinduoduo users are price sensitive women that reside in low tier cities. Merchants are selling at a low price to appeal to this group. But how to maintain these users and its growth momentum is a big challenge for Pinduoduo now given rising product quality complaints.

“The retention rate is a big challenge of Pinduoduo, implying potential GMV slow down. Pinduoduo will have difficulty in upgrading to a marketplace of premium products because of its user demographics and brand image,” according to 86 Research.

When the sun shines on the land of United States for a new day, the country’s stock exchanges will welcome three Chinese companies celebrating their IPOs: data solution firm Aurora Mobile Limited (NASDAQ: JG), price-for-value social retail platform Pingduoduo (NASDAQ: PDD), and Cango (NYSE: CANG), fintech solution provider for the car industry.

Aurora released its IPO details earlier today, confirming the offering of 9,060,000 American Depositary Shares (ADS) at $8.5 per share for a total size of $77 million. Aurora’s clients include Baidu, Tencent, Didi, and Bilibili.

Pinduoduo, boosted by 20-fold oversubscription and high market valuation, confirmed today to set the IPO price at $19 per ADS. The price hits the top of expected IPO price range, and will allow Pinduoduo to raise around $1.6 billion. The very positive feedback from Pinduoduo’s pre-IPO could have allowed it to raise the IPO price to $22.8 per ADS.

Meanwhile, Cango, originally planned to offer 12.5 million ADSs at a price range of $10-$12, decided to cut the offering to 4 million ADSs about 24 hours before the scheduled IPO time. The change is going to bring down around 68% financing Cango could have raised if the previous file plan was successful. Cango now expects to raise $44 million. The company’s investor before IPO include Tencent and Didi.

What is interesting is not Chinese firms’ aggressive moves in global capital markets. Considering the common billion-size financing in China’s tech industry, Cango’s $44 million expectation is not a mission impossible in China. Meanwhile, China’s state government released clear signal to encourage Chinese tech and fintech companies to file for IPO in mainland either by issuing regular stock shares or China Depositary Receipt (CDR).

However, domestic liquidity problems and both individual and institutional investors’ shortage of money are shattering companies’ IPO and fundraising confidence.

According to a phone conversation record an individual stock investor kept, during his conversation with a staff from China Securities Regulatory Commission, the investor said introducing a bunch of heavy-capital stocks that can easily fluctuate stock indices will be too much for ordinary investors.

Meanwhile, he said, “There is not much money in the stock market. I wonder how companies will get sufficient funding, particularly when you introduce many new stocks at a time.”

The record went viral but was deleted soon. A manuscript (in Chinese) is available on China’s leading investment information platform Xueqiu.

For institutional investors, higher valuation and flexible operation options outside mainland China are more attractive, and more convenient for early investors to exit and profit.

By 24:00 July 27 EST, 19 Chinese companies will have been listed in the U.S. in 2018. Meanwhile, the Chinese finance market believes the state central bank is going to loose monetary policy and lower deposit reserve ratio to encourage capital supply and market liquidity.

Social e-commerce platform Pinduoduo’s (拼多多) share price has been set at $22.80 ahead of its US initial public offering (IPO) tomorrow (July 26), giving it a market value of  $28.8 billion, according to local media.

The company’s submission to the Securities and Exchange Commision in the US shows shares were expected to be priced between $16 and $19. However, due to oversubscription, sources say the company decided to raise the price.

Pinduoduo, which was founded in 2015, has quickly become one of the fastest growing e-commerce giants in China. As of April 2018, the company had over 300 million users. In 2017, the three-year-old e-commerce startup’s gross merchandise volume (GMV) exceeded RMB 100 billion–a point that took Taobao five years and JD 10 years to reach.

The company was rumored to have received funding to the tune of $3 billion from Tencent and Sequoia Capital in April. Pinduoduo was of strategic importance to Tencent, which has been expanding into online retail.

Its success has primarily been due to its cheap products and target market. The company mainly focuses on lower-tier cities and low-income users, who have mostly gone ignored by tech giants until recently.

However, despite the company’s quick rise, it has not been immune to controversy. In June, Pinduoduo faced backlash from store owners over who believed it had executed improper standards when evaluating their products after the company conducted a quality audit. The company froze the accounts of shops whose products were deemed to be of low quality. The move eventually led to protests at the company’s office in Shanghai.

China isn’t limited to just censoring content-generating platforms within the country. Pinduoduo, the social e-commerce upstart, launched a cleanup campaign to remove all the products that are related to violence or pornography, local media is reporting.

The purge follows an investigation published by state-backed legal media, which reveals that lots of violent and pornographic products are on sale on the platform, such as lethal knives, pseudo base stations, erotic games, and sex dolls.

Before the media coverage, Pinduoduo has been seeking to address this issue, according to the company. As of May this year, the firm screened merchandise from 2180 stores that may sell “illegal” goods and have placed sanctions or shut down the relevant retailers, the company told local media.

“Since our establishment, Pinduoduo has been asking our retailers to comply strictly with the laws. We have launched a 24-hour automatic monitoring system to remove illegal products. The system is coupled with human monitors to guarantee a real-time response.” according to an official announcement from the company.

China’s new and stricter cybersecurity laws come to effect last year, which would pressure private entities to censor content the government deems prohibited. The effect of this law, or the country’s general intention towards a more stringent local regulation, is instant. Upcoming giant ByteDance bares the brunt of this trend with all the dramas in Toutiao, Douyin and Neihan Duanzi. Other top services like Kuaishou, Meipai also suffered from the blow. But most of them are platforms that generate contents or social media apps so far. It seems the censorship is gradually penetrating other areas.

Updated 12:26 am 8th June 2018: The post is updated to clarify that China’s new cybersecurity law was adopted by the NPC in November 2016 and came into effect in June 2017.

Chinese e-commerce upstart Pinduoduo (aka PDD) has a hefty RMB 10 billion ($1.58 billion) to help the marketing and promotion of agricultural products from 500 production origins within this year. The company will use the funds to create brands for these products and build logistics networks.

The move comes after a $3 billion Series C, which valued the social e-commerce site at $15 billion this month. Founded in 2015, Pinduoduo has been gaining momentum quickly, especially among low-income users and lower-tier cities. The platform has accumulated around 300 million users on its app since its release.

The three-year-old startup is seen as the black horse to upend China’s e-commerce industry. As of April 26, 2018, PDD ranks #3 overall in the Chinese iTunes app store ranking for free apps, after popular apps like Tik Tok (aka Douyin) and hit photo app developed by Meitu, and ahead of other shopping apps like Taobao and JD.

Pinduoduo’s quick rise comes from providing easy access to cheap product sourcing, which enables extra-low prices. This caters to the demand of lower-income users who are usually price-sensitive.

The special user profile means that agriculture goods are among the most popular product categories on the platform, among other daily commodities like food, clothes, and groceries.

Since China’s launch of “Internet Plus” strategy, which has an agriculture component, online trading of agriculture goods surged quickly and it is forming a new trend among local e-commerce platforms. Top e-commerce like Taobao and JD all launch similar features to help farmers sell their products online as a major part of their expansion to rural areas.

This week, John and Matt talk with Thomas Graziani, founder and CEO of WalktheChat, a company that specializes in helping foreign organizations access the Chinese market through WeChat.

Links

• Pinduoduo: a Close Look at the Fastest Growing App in China Video: Alibaba’s Hema supermarket is changing China’s retail game
• Pinduoduo rumored to have raised $3 billion in new funding round led by Tencent
• Can China’s fastest growing e-commerce startup find similar success in Southeast Asia?
• Taobao takes on Pinduoduo with roll out of Taobao Tejia

• Thomas Graziani – LinkedIn

• John Artman, @knowsnothing, TechNode
• Matthew Brennan, @MattyBGoooner, ChinaChannel

• iTunes
• RSS feed
• China Tech Talk.com
• Music: “Theme from Penguins on Parade” by Lee Rosevere, Music for Podcasts 3

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Shortly after the launch of family account feature to go after the senior citizens’ market, Alibaba’s online marketplace Taobao recently launched a dedicated app named Taobao Tejia (淘宝特价meaning Taobao Discounts) to target China’s lower-end users who are more price-sensitive, local media is reporting.

The app covers a variety of popular categories that include clothes, baby and maternal care, cosmetics, and home appliances. Most of the items are priced between RMB 5 to RMB 30. On top of that, users can collect extra coupons by click on the red envelope button in the app.

With more emphasis on social features and rock-bottom prices, Taobao’s recent moves are widely translated as a measure to fend off the intensifying competition from Pinduoduo, China’s upstart social e-commerce company.

Read More: Can China’s fastest growing e-commerce startup find similar success in Southeast Asia?

Alibaba dismissed the speculations.”The diversification of customer demands leads to the diversification of products. We launched Taobao Tejia because there’s a huge user demand for cost-effective products,” said an Alibaba spokesperson to local media.

With the economic growth, China’s e-commerce market is dominated by the concept of consumption upgrading, where people would like to pay more for quality products. Sometimes, the lower-end market, for which price is still a top concern, is ignored.

Pinduoduo (PDD) has filled in the gap and has recorded exponential growth over the past few years. As of Feb 21, 2018, PDD ranks #3 overall in the Chinese iTunes app store ranking for free apps, after popular apps like Tik Tok (aka Douyin) and WeChat, and ahead of other shopping apps like Taobao. PDD went from 100 million yuan ($16 million) GMV a month in early 2016 to 4 billion yuan ($630 million) GMV a month by 2017, putting it in fourth place behind Alibaba, JD, and Vipshop.

Although Alibaba dismissed the speculations, the two services do share a similar demographics in users from third-to fourth-tier cities and the elderly.

Editor’s note: This was contributed by Sheji Ho, the Group Chief Marketing Officer at aCommerce, an end-to-end e-commerce enabler in Southeast Asia. Currently based in Bangkok but having previously worked in China, Sheji writes about e-commerce, tech, the internet, and how Southeast Asia is the next China.

Pinduoduo, or PDD, is a social commerce app founded by Colin Huang, an ex-Google engineer, in September 2015. Only a couple of years old, PDD has become the fastest growing e-commerce company in China. It raised $100 million in 2017, is backed by China’s Banyan Capital and Tencent, and valued at a whopping $1.5 billion.

As of Feb 21, 2018, PDD ranks #3 overall in the Chinese iTunes app store ranking for free apps, after popular apps like Tik Tok (aka Douyin) and WeChat, and ahead of other shopping apps like Taobao. PDD went from 100 million yuan ($16 million) GMV a month in early 2016 to 4 billion yuan ($630 million) GMV a month by 2017, putting it in fourth place behind Alibaba, JD, and Vipshop.

How does Pinduoduo work?

Users can download the PDD app or access it within WeChat. Like any e-commerce platform, PDD offers products across a wide range of categories from food to fashion. However, unlike Tmall and JD, PDD incentivizes users with discounts to invite friends to buy in groups.

For example, one container of Similac Advance Infant Formula Powder costs RMB 59 if you buy alone but only 35.5 yuan if you can get one other person to buy it too. In the screenshot below, a total of 1,822 pairs have “group-purchased” this item already.

In addition to group discounts, PDD also incentivizes customer acquisition. Getting users to follow the PDD WeChat Official Account, install the app, and sign up via WeChat login will earn them free products.

PDD also offers cash hongbao worth RMB5-20 to users for each friend they get to download the app and register. The entire system is then gamified through a public leaderboard.

Wait, is this new? Didn’t Groupon invent social commerce?

Groupon did arguably pioneer the group buying concept. In its early days, a certain number of users had to sign up for the same deal in order for everyone to receive the voucher. But unlike PDD, there wasn’t a direct incentive; users had to sit back and wait for anonymous users to tip the scale.

This mechanism was quickly abandoned to scale faster with minimum thresholds that acted more like gimmicks.

Groupon was labeled “social commerce” at first but in its later years, lost its social aspect.

Let’s take a step back and look at the definition of social commerce, according to ConversionXl:

 “Social commerce is defined as the ability to make a product purchase from a third-party company within the native social media experience.”

Groupon emerged in the pre-mobile age of 2008 when most consumers still transacted via desktop, especially in the company’s US home market. Back then, less than 1% of e-commerce transactions were via mobile acquisition channels.

In addition, the company’s main distribution channel was email newsletters, a slow and high-friction medium and payments weren’t seamless either as users relied on a credit card or PayPal.

Now looking at 2016 in China—PDD’s first full year in operation—WeChat was the country’s dominant “super app” and leading medium to socialize online with 889 million Monthly Active Users (MAUs) by year-end.

71% of e-commerce now takes place on mobile, creating a flattering backdrop for the rapid rise of PDD, which started out as a mini program on WeChat.

Paying for products on PDD is also remarkably easy because the app makes it automatic. After the first payment, users can opt for one-click payment via WeChat Pay that doesn’t require passwords.

Desktop usage, clunky email newsletters, and credit card payments limited Groupon’s true social commerce potential. Where Groupon failed, PDD is succeeding because of an ecosystem of mobile-first users and WeChat’s features that make it a super app.

Will PDD come to Southeast Asia?

Why not? Southeast Asia e-commerce is already being carved up by Alibaba and Tencent. Lazada and Tokopedia, two companies owned and invested in by Alibaba, dominate the B2C and C2C space at one end and Tencent-invested JD, Shopee, and Go-Jek are at the other end.

With Southeast Asia’s horizontal e-commerce market being consolidated into a few properties like Lazada, Tokopedia, JD, and Shopee, there isn’t as much opportunity in the space as before.

New e-commerce players have to focus on dominating a specific, vertical category or provide a competitive advantage through means other than outspending peers in advertising and/or coupon subsidies.

This is where a model like PDD fits snuggly.

It also helps that one of PDD’s biggest investors is Tencent, which already has its eyes set on the rapidly growing Southeast Asian market.

Will the PDD business model work in Southeast Asia?

To determine if the PDD model would work in the region, we need to identify the criteria that were conducive to its success in China:

1. Lack of distribution channels / expensive distribution channels

If you strip away all the hype, PDD’s competitive advantage is in its customer acquisition strategy. Instead of relying on expensive channels like display advertising or paid search (e.g. Baidu ads), PDD is paying its users to get more users. For example, CPCs alone on Baidu can range from 5 to 25 yuan. Note these are clicks, not even users acquired.

Southeast Asia (excluding Singapore and Malaysia) is very similar to China in terms of lack of channels, due to a similar “no-tail” ecosystem. Whereas entrepreneurs in China had to pick their poison between Baidu, Sina and Sohu back in the day, startups in emerging Southeast Asia are limited to Facebook Ads, Google Search, and portals like Detik in Indonesia and Sanook in Thailand.

Early entrants like Lazada took advantage of low cost-per-clicks (CPCs) back in 2013 but given the raging e-commerce “bloodbath”, online ad CPCs have gone through the roof.

Having saturated online channels, Lazada started exploring offline advertising channels like TV and out-of-home media.

Others like Pomelo Fashion tapped into physical stores as a more cost-efficient way to acquire users and simplify last-mile logistics.

PDD social and viral customer acquisition strategies could work quite well.

1. High mobile commerce penetration

The majority of e-commerce transactions in China now take place on mobile. In 2016, 71% of e-commerce GMV was on mobile. In the US, this number was only 20% in 2016.

In Southeast Asia, companies like Lazada and Shopee today see over 65% of their orders coming from mobile (with 21.6% using both mobile and desktop to shop), according to a recent survey by ecommerceIQ.

Needless to say, high mobile penetration in Southeast Asia along with high mobile e-commerce usage will provide a fertile ground for a business model like PDD to gain traction here.

1. Frictionless mobile payments

One of the drivers of PDD’s success is its seamless payments through WeChat Pay.

This will be a challenge for PDD in Southeast Asia as only Singapore and Malaysia are credit card dominated whereas the rest of the region is mainly a cash-on-delivery market.

Despite efforts to come up with a universal mobile payment standard, no one has succeeded as of today. Efforts like Sea’s AirPay, Ascend’s True Pay, and LINE Pay have hit a wall due to lack of distribution, lack of use case, and a plethora of other issues.

Right now, most eyes are on Go-Jek’s Go-Pay, which has a massive distribution channel by leveraging Go-Jek’s 40 million install base and 10 million Weekly Active Users (WAUs). In addition, and more importantly, Go-Jek addresses emerging Southeast Asia’s unique lack of both credit card and bank account penetration — users are able to top up their Go-Pay accounts by handing cash to Go-Jek drivers that essentially act like mobile ATM deposit machines.

While still a poor man’s WeChat Pay, Go-Pay offers hope for business models like that of PDD to thrive in Southeast Asia.

1. Attachment to popular social platform

Without the WeChat ecosystem, PDD wouldn’t have been the company it is today. Being embedded in WeChat, PDD was able to quickly get massive distribution by tapping into the potential 889 million MAUs of WeChat.

In Southeast Asia, Facebook, Instagram, WhatsApp, and LINE are highly popular, however, none are considered super apps that offer seamless integration.

The closest to WeChat in Southeast Asia would probably be Indonesia’s Go-Jek.

While Go-Jek hasn’t entered e-commerce yet (it’s positioned only as a services marketplace and offers delivery for partners through its GO-MART product), it wouldn’t be surprising if PDD decided to leverage the Go-Jek platform, given the similarities to WeChat in China. Like PDD, Go-Jek also counts Tencent as an investor.

With an estimated third of e-commerce in markets like Thailand happening on Facebook, Instagram and LINE, the user behavior of buying through social channels already exists.

1. Access to cheap product sourcing

If you browse through PDD, you’ll notice that most of the products sold bear similarities to many of those sold on Taobao. In other words, a lot of “mass” and non-branded products. PDD thrives in China because of easy access to a supply of these products manufactured locally.

However, in Southeast Asia, these kind of products (typically sold on social media and C2C platforms) are imported from China, which leaves less margin for PDD to play with in terms of discounts and customer acquisition.

To sum up, emerging Southeast Asia meets several of the criteria behind PDD’s success in China but poses some unique challenges:

PDD success drivers: China vs. Emerging Southeast Asia

What will happen next?

In the analysis, we’ve identified some of the drivers of PDD’s rapid rise in China and also their presence in emerging Southeast Asian markets at an earlier stage.

Given this opportunity, we can expect the following scenarios to play out over the next few months and years:

Local and Chinese entrepreneurs will launch PDD clones across the region

Ever since opening up to the world in the 80s, we can describe China having gone through the following three stages, with the third one still progressing as we speak:

1. Made-in-China (1980-2000)
   China perceived as manufacturing base for (often cheap, low-quality) export products
2. Copy-to-China (2000-2015) Chinese entrepreneurs, some foreign educated, bring back models that worked in the US, e.g. Search (Google -> Baidu), Portals (Yahoo -> Sina, Sohu)
3. Copy-from-China (2015-2030) Birth of unique Chinese Internet business models (e.g. dockless hire bikes, payments, live streaming, social commerce, O2O). Increasing media focus on Chinese tech innovation and locals outside of China looking for Chinese models to copy