New Company of the Year 2018: Pinduoduo Got Hundreds of Millions Shopping Online, Just as Taobao Did 15 Years Ago

The question is whether it can solve its own problems in a far less forgiving climate.

Our new company of the year is the e-commerce giant that was founded a while back but has been listed in the US for less than six months. It is contentious, and impossible to ignore.

A man from Zhejiang started it. Riding the spread of new technology, it remade the logistics system and the way Chinese merchants large and small sell things, and got more than 300 million users into the habit of shopping online.

It grew fast, and it was doubted again and again.

Low prices were how it broke into the market: T-shirts for 9.9 yuan, rugs for 14.9 yuan, storage boxes for 5.9 yuan. Goods this cheap on a homepage would put you on guard in a physical store. But people who had only just come online discovered the pleasure of buying cheap things, and merchants found a new outlet for their goods on the new platform.

The bar to entry was loose, and opportunists brought counterfeits in with them.

In online communities, the arguments about those fakes and knockoffs never stopped.

Under pressure, it built a customer-service team thousands strong to settle disputes between buyers and sellers. It also handed a reserve-fund account to ICBC to hold in custody: if a buyer found something wrong after delivery, the merchant would not get paid, and might be fined as well.

Along the way it put ads on roadside billboards, in subway cars, even into movie scenes. Advertising makes a brand known; it was also how the company showed it had money behind it and could be trusted.

But the counterfeit problem was never solved, and it broke wide open after the US listing. Backed by an internet giant, the company burned through 1 billion yuan in three years, and even at listing it had no answer for how it would make money.

More than one brand sued. Muddy Waters, the Wall Street short-seller, took aim at it. And courting big brands to move the platform upmarket angered the merchants already there: 5,000 of them blockaded the headquarters, and staff were afraid to wear their badges to work.

Life after the IPO was rough — the stock broke below its offering price within a year. The long chase after GMV instead of actual revenue, and the doubts about the numbers game on Double 11, were problems too.

The company faces a serious challenge ahead, and a crisis if it handles that badly. It also faces a huge opportunity. It grew alongside the birth and growth of a new group of consumers. With the economy slowing and foreign trade weak, relatively cheap e-commerce may have more room to run.

Had QDaily picked a new company of the year at the end of 2014, all of the above would have been our case for Taobao. But nearly every line of it fits Pinduoduo too.

In 2018, with different technology, different ways of spreading, and a different set of people, Pinduoduo repeated the growth and the doubts that Taobao set off 15 years earlier.

Alibaba's growth, though, coincided with China's middle class appearing out of nothing and with the rise of consumption in the country. It caught the shift after the 2008 financial crisis, when China turned from a pure export economy toward domestic demand and a run of stimulus measures. Quietly, Taobao changed how hundreds of millions of people bought things, and how they lived.

Pinduoduo caught a similar turn. 4G smartphones brought the internet to residents of third-, fourth- and fifth-tier cities; a new group of people, and not a small one, could now shop on a phone; and new trade disputes hit the export factories, which needed somewhere else to sell.

Pinduoduo was born when everyone thought the e-commerce map had been drawn. As late as mid-2017, founder Huang Zheng still spent the first few minutes of every speech explaining what Pinduoduo was. Today, almost six months after its Nasdaq listing, 386 million people have placed an order on it in the past year — more than on JD.com, second only to Taobao. In this year's third quarter, its gross merchandise volume over three months was 118.5 billion yuan, roughly a third of JD.com's.

Because the infrastructure was different, Pinduoduo covered in three years the ground Taobao took 11 years to cross

Pinduoduo moved fast because Taobao had already walked the whole road and solved the basic problems of running an e-commerce business.

When Taobao was founded, goods mostly went out by surface mail, and an order often took a week to arrive.

Nobody yet knew how to run e-commerce without taking a cut of sales. In 2008, Taobao's Zhitongche ads moved the search-advertising model into e-commerce; today even Amazon and JD.com copy it.

Alipay, starting around 2003, connected to one bank after another for instant payment. Before that, buying online was not just risky but required awkward bank transfers, or even a trip to the post office to wire money and top up an account. For a long stretch, spending more than 500 yuan online in a day meant paperwork at a bank counter.

The buyers mattered more. When Taobao launched, fewer than 100 million people in China were online, and every one of them sat in front of a computer.

By 2015, when Pinduoduo was born on the back of smartphones and China Mobile's 4G, 600 million people in China were going online from a phone, a number now closing in on 800 million.

Today, leaving out the very young and the very old, almost every Chinese person is a mobile internet user, and nearly all of them use WeChat. WeChat's social ties and mobile payments are what Pinduoduo was built on.

As a company launched in 2015, Pinduoduo also had far more money behind it than Taobao did 15 years earlier: several million dollars in startup capital at the outset, and US$3 billion raised by the time it went public. When Taobao started in 2003, China's internet was not yet used to businesses that lost money, and its early operating funds came entirely from Alibaba, which had just come through the dot-com bust.

Alibaba and JD.com, public and chasing higher margins, left a market open

When Pinduoduo launched, China had 688 million internet users, rural users made up only 28.4% of them, and the largest e-commerce company, Alibaba, had 423 million annual active buyers. Several hundred million internet users had never picked up the habit of shopping on Taobao. A large group was going unserved.

At the same time, social media already took up more than 40% of all time spent on the mobile internet, while Taobao and Tmall took much less. Alibaba and JD.com, both listed in the US and under pressure to show profits, were fighting over the higher-spending users.

Huang Zheng described the situation as a Pudong New Area with no shopping malls: "It is a bit like building the Pudong New Area in Shanghai — the roads, the bridges and the rest of the infrastructure are all built, the people have moved over, but there are no malls."

Alibaba did not work out how to solve this until 2016. Alibaba CEO Zhang Yong put it this way: Taobao had to become "more content-driven, more community-driven, more local-services-driven." Over the next few years Alibaba tilted more of its advertising resources toward content. He wanted users to find "the joy of discovery" on Taobao, and to turn Taobao into something people used to kill time.

Social features turned out to work. According to Zhang Yong's account in 2016, once Taobao added them, users opened the app seven times a day.

By then Toutiao had sorted out its dealings with media companies and copyright holders and was at its growth peak. The redesigned mobile Taobao replaced its careful category listings with recommendation feeds, as if a small Toutiao had been dropped inside.

Pinduoduo had users browse rather than search from the very start. Huang Zheng first described Pinduoduo as the Facebook of e-commerce, then switched to explaining it through Toutiao, the hotter Chinese app that had likewise copied Facebook's feed.

Subsidized sharing, no shopping cart, free shipping everywhere, cheap goods: how Pinduoduo caught the people Alibaba and JD.com missed

Pinduoduo's checkout is probably the simplest in Chinese e-commerce.

In April 2015 the company launched its first social shopping app. Called Pinhaohuo, it sold fruit and fresh produce in group orders: you invited friends through WeChat, Moments and other social platforms, and the order went through once enough people had joined.

In the second half of 2015 the company decided to turn group ordering into a platform, and in September the Pinduoduo we know today went live.

Almost everything Pinduoduo does is built around WeChat. Many people used it for the first time not in the app but through a price-cut or group-buy invitation sent by family or a friend in a WeChat chat window; goods that were cheap already got a few yuan cheaper if two people bought together. Plenty of users tapped the link, logged in with WeChat, finished registering and were Pinduoduo customers from then on. That stream of group-buy messages, which read like the spam of WeChat hawkers, was a big reason people sneered at Pinduoduo early on, but it worked — JD.com and Alibaba have both copied the group-buy model since.

Pinduoduo's goods are also strikingly cheap: across categories they run tens of percent below Taobao, itself known for low prices.

QDaily twice this year, in July and December, tallied the average price of the five best-selling items in different categories on Pinduoduo, Taobao and JD.com. Prices on Pinduoduo have risen as big brands have come in, but they remain far below its rivals'.

On Pinduoduo you almost never see an item that does not ship free, and the platform has no shopping cart. Both shorten how long a decision takes and how many steps it involves.

The shopping cart came from Taobao, where it let shoppers assemble enough items to qualify for free shipping, or buy several things at once. More and more goods now ship free on their own, but Taobao could never take the cart away: "clearing the cart" is now bound up with what shopping on Taobao means.

JD.com went the other way. Its app has no buy-now button at all; it pushes users to put everything they want in the cart and check out together. JD.com takes a cut of sales, so the more a user buys the more it earns, and one combined checkout also cuts delivery costs for its own logistics network.

One more detail shows how Pinduoduo pushes shoppers and shortens their decisions. The day before this article was published, Pinduoduo ran a promotion with Apple's Chinese distributors; the best-selling phone was the iPhone XS Max, cut by a flat 1,500 yuan. To manufacture urgency, Pinduoduo built a flash-sale countdown that runs in one-hour rounds. Open the page at any point in the day and the sale looks as though it will end in a few dozen minutes — and at the top of the next hour the countdown starts over.

Rock-bottom prices, no need to compare, no side-by-side items in a cart, and not even a search box on the homepage the way other shopping apps have one. All of it lowers the barrier to shopping on a phone.

The point is to get people to buy the moment they see a low price, and to squeeze the deciding down to nothing. No thinking required: see it, tap it, order placed. That is how Pinduoduo's users came to buy often and spend little per order.

JD.com also offered free shipping early on and still sets free-shipping thresholds, but under pressure to run a profitable operation it does not want orders too scattered, and every part of its product design discourages casual ordering. Design is not the whole of it: JD.com does not sell tissues and other household basics in small packs either, so shipping takes up less of the price.

One app encourages impulse buying, the other holds it back, and the difference in habit compounds day by day.

Merchants went to Pinduoduo for lower marketing costs, then pulled in more users by selling cheap

Here is the difference from JD.com: on Pinduoduo, merchants pay for the free shipping and the low prices.

They accept that because selling on Pinduoduo costs less than selling on Taobao or JD.com.

In 2015 Alibaba's advertising revenue was 37.5 billion yuan against GMV of 3.092 trillion yuan, meaning merchants spent an average of 1,213 yuan on advertising for every 100,000 yuan of goods sold. A year later the same 100,000 yuan of sales took 1,391 yuan of advertising. By 2017 the figure had jumped to 1,657 yuan.

In 2017, Pinduoduo switched from taking a commission on sales to Alibaba's model, charging merchants for advertising and service fees.

Cheap goods and heavy order volume rest on a delivery rhythm unlike Taobao's or JD.com's.

Take 28 packs of tissues for 29.9 yuan. Shipping works out to 0.125 yuan a pack and production to 0.91 yuan a pack, leaving less than 0.9 yuan of profit per order. What the merchant is after is thin margins on very large single batches.

Chen Jing, founder of the tissue brand Zhihu, once told QDaily that when the brand joined Pinduoduo in March 2016, it had not expected volume to explode the way it did. "It blew up all at once. Our factory couldn't keep up, and the couriers couldn't adapt that fast. We used to ship 5,000 or 6,000 orders a day, or 10,000, but after we got on Pinduoduo it was 100,000 a day."

To cut production costs, the tissue brands Zhihu and Kexinrou both moved their factories inside the pulp park of their raw-material supplier, Lee & Man, so the material would not have to travel.

Buyers of cheap goods also do not expect fast delivery. In first-tier cities JD.com has squeezed delivery down to ordering in the morning and receiving in the afternoon, and Taobao is getting close to speeds only SF Express could manage a few years ago.

On Pinduoduo a group has 24 hours to fill, and merchants must ship within two days. So in Pinduoduo's early days a bulk order went out at best three days after the buyer paid. That lets merchants use the cheapest couriers, and gives them a clear read on how many units to expect.

By the end of this year's third quarter, Pinduoduo's annual active buyers had passed JD.com's 305 million. Even on Double 11, Alibaba's home turf, Pinduoduo grew more than any company outside Alibaba.

Fruit is one of Pinduoduo's best-selling categories. Unlike what a fruit shop sells, it ships straight from the growing region, cutting out the middle steps, which makes it cheaper than a fruit store or Hema. Taobao has many merchants like these too; the difference is that Taobao also has to push the pricier fresh produce on Tmall Supermarket, while Pinduoduo only has to push cheap goods.

The merchants are not fundamentally different from Taobao's, and neither are the goods. What matters is that Taobao's mechanics push the merchants who can spend more on advertising. Those are usually not the cheapest sellers, but they are the most profitable ones for Taobao. Pinduoduo, a new platform that started at the bottom, carries none of that baggage.

During Double 11, third-party measurements showed Pinduoduo growing more in absolute terms than any e-commerce company except Alibaba, and ranking fourth in overall size. Pinduoduo did not release its GMV, but made a point of saying that more than 200,000 of the newest iPhones had been sold on the platform.

Around low prices, Pinduoduo's users have largely formed their habits. Measured by time spent, the gap with Taobao is no longer wide: the average active user spends 4 hours and 20 minutes a month browsing Pinduoduo, close to Taobao and ahead of every other Chinese shopping platform.

In the most recent quarter, the cost of acquiring a new Pinduoduo user rose sevenfold from a year earlier, to 89.71 yuan — still far below what Alibaba and JD.com pay for one. Sellers on the platform likewise pay less to find a customer than they would on Taobao or JD.com.

Meanwhile, despite several rounds of investment from Tencent and a newly granted slot in the nine-square grid of third-party services in WeChat Wallet, Pinduoduo's relationship with WeChat remains delicate.

By the first half of this year, half of Pinduoduo's traffic came from its own app. Pinduoduo's product links can by default only be shared to WeChat, QQ and Qzone, but opening one of those links inside WeChat leads to a Pinduoduo web page, not to a mini program as with JD.com or Mogujie. It is still pushing people to download the app rather than stay inside WeChat.

All of it is Pinduoduo getting users to open its own app often enough to make shopping a habit.

Tolerating fakes was one reason Pinduoduo grew so fast; listing so soon left the trust problem fully exposed

Compared with Tmall and JD.com, Pinduoduo is easy to join: an individual seller faces no requirements at all, and a registered business faces very low ones, between 1,000 and 10,000 yuan. That brought a flood of merchants in a short time, and with them the counterfeit problem, which will raise compliance costs now that the company is public.

"Vivi," "vovo" and "Xiaomi New Product" were once popular brands on Pinduoduo. Even after the criticism, when Pinduoduo shut thousands of stores and started selling proper brand-name goods, the comments under its listings are still mostly arguments about whether the item is genuine.

Since 2017 Pinduoduo has advertised heavily, as Taobao once did, and put its name on variety shows, but none of it has offset the mistrust that fakes and knockoffs created. Huang Zheng's own view — that the media confuses counterfeits with knockoffs — has not helped win users over either.

Public less than three years after it was founded, Pinduoduo repeated the counterfeit crisis Alibaba went through after its own IPO. Doubts about the truth of Alibaba's GMV figures and about fakes on its platform surfaced over the year after that listing, and Alibaba's share price lost half its value in the same period.

The precedent was there, but Pinduoduo has far less time to absorb the blow. Every problem arrived at once.

Huang Zheng has said Pinduoduo will not build a Tmall-style business — not now, not later. "That model doesn't work for us," he said. "I have to find some other way to do this so-called brand upgrade. It should be different."

In practice, though, Pinduoduo is courting big brands the way Taobao did. The recent iPhone deal, which broke with custom by discounting a phone two months after its release, is the example. Once the big brands arrived, the lookalike knockoff labels on Pinduoduo largely vanished. Those sellers had brought Pinduoduo its first users, and were cleared out as the platform moved upmarket. History repeats itself with unnerving precision.

Alibaba, meanwhile, is adjusting too.

On the surface, Alibaba and JD.com have both rolled out their own group-buy schemes. But the effort that actually competes for attention is the content-driven shopping Alibaba started long ago. Users stay longer and longer, and Taobao recently plugged in content from Xiaohongshu, all so that people will browse. To slow the drift of small and mid-sized merchants toward Pinduoduo, on its most recent earnings call Alibaba announced that it would delay making money from its recommendation feed so merchants could do better business. All of it is a fight with Pinduoduo over merchants and users.

Today the average Pinduoduo active buyer spends 894.4 yuan a year on the platform. Alibaba's figure for the same fiscal year is 8,732 yuan. That difference in spending is the distance between the two companies, and also the difficulty for Alibaba in chasing Pinduoduo's users: persuading investors to accept ever-lower spending per user is always the harder argument.

Pinduoduo's turn is the more urgent one. Problems that took Alibaba more than a decade to build up and a year after listing to burst have hit Pinduoduo inside a few months.

The density of trouble it has run into matches the speed at which it grew.

Before the summer of 2017, Pinduoduo was a company the press barely bothered with. Going public put it under the lights all at once.

As a public company, Pinduoduo will feel the consequences faster and more directly if it cannot fix these problems. Nor does it have Alibaba's luck. Alibaba listed in 2014, took its knocks, and then caught a US bull market that ran for years, raising money cheaply and pouring it back into e-commerce and even the war over offline retail.

In 2008, Taobao, five years old, rode the spread of the internet alongside China's growing middle class. Export trade was shrinking and the government was stimulating consumption, and Taobao grew for years on that, becoming one of the forces that shapes how the whole country shops today.

In 2018, Pinduoduo, three years old, rides the spread of mobile internet alongside the growing consumers of third-, fourth- and fifth-tier cities. Export trade faces trouble again, but after years of property-driven growth and rising debt, consumption is harder to stimulate than it was ten years ago, and Chinese optimism about the future is nothing like what it was then. Can Pinduoduo solve its own problems in that climate and remake how hundreds of millions of people spend?

Charts and data: Luo Cong, Feng Xiuxia

Cover image: Tang Yunlu /

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