Techbuzz China in Association with DealStreetAsia

Pinduoduo: From Zero to $23B in Three Years

Pinduoduo
The Pinduoduo logo. Photographer: Qilai Shen/Bloomberg

In this episode of TechBuzz China, co-hosts Ying-Ying Lu and Rui Ma tell the story of Pinduoduo. Starting with the company’s founding in 2015, they trace the growth of the fastest app in the history of Chinese internet to list on a major exchange.

What does the company’s IPO prospectus reveal about the intentions and vision of its founder, Colin Huang? In what ways is the app a combination of “Costco and Disneyland”– or not? The episode concludes by revisiting the insights of Mark Pols, currently Corporate Development at Facebook and previosusly an investor with GGV Capital, whose comments were originally played in Episode 2, in which Pinduoduo was briefly covered.

Few in the West realize that Pinduoduo started as two parallel entities: Pinduoduo, which was a marketplace, and Pinhaohuo, which sold fruit and other perishable items via direct sales. The former was intended to be a side project created with the purposes of testing which items would be best for group-buying, but ended up generating 99.8% of the company’s revenues by 2017. Indeed, in the last twelve months, Pinduoduo has sold $41.8 billion worth of goods across 7.5 billion orders, with 344 million active buyers– more users than JD’s 302 million, but behind Alibaba’s 552 million. However, how valuable are these juxtapositions, given that Pinduoduo is but a “3-year-old child” in comparison?

Listen to the newest episode of TechBuzz China and learn about what Pinduoduo actually does, how it works, and how it’s gained success. Decide for yourself: how will the backlash and lawsuits around counterfeit goods affect Pinduoduo’s long-term success? Just how sticky and sustainable are the app’s viral user acquisition efforts? And more importantly, what can the rest of the world learn from this incredible domestic growth story?

As always, you can find these stories and more at pandaily.com. Let us know what you think of the show by leaving us an iTunes review, like our Facebook page, and don’t forget to tweet at us at @techbuzzchina to win some swag!

Full Transcript

We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network.

We are a new weekly podcast focused on giving you a peek into what’s buzzing within the tech community in China. We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. TechBuzz China is a part of Pandaily.com, a new English language site that tells you “everything about China’s innovation.”

(Y: Ying-Ying Lu; R: Rui Ma; M: Mark Poles)

[00:01] R: All right, Ying Ying, check this out. (Rui singing the Pinduoduo song.)

[00:16] Y: Wow, Rui, are you singing the Pinduoduo song?
R: Yessss. Apparently, lots of mothers and kids love that song. It’s catchy eh? Pinduoduo took it from another pop song called “I miss you” which yes, is just as annoying as this one.
Y:Yes, that’s what netizens call the most effective brainwashing song of 2017. I think … ever.
R: Well, I’m glad you enjoy it. Our loyal listeners know that we actually covered Pinduoduo way back in Episode 2, when the buzz around this company, at least in English, wasn’t the crescendo it is today.

[00:53] Y: It was over three months ago, actually, in late April, but by then, there was already a lot of speculation that Pinduoduo was going to try to go public based on a blockbuster 2017.
R: Not just a blockbuster 2017, but a phenomenal Q1 2018. That quarter, it grew revenues more than 37times year-on-year. Do you know what that means? Let me take out my handy excel spreadsheet here — it means that’s the same rate of growth if you were doubling your topline every two and a half months. No. Two months and ten days!
Y: That’s growth every startup dreams of. But Pinduoduo was one of the very few who did it. For a company that barely existed three years ago … it’s now trading under the ticker PDD on the NASDAQ. That’s right, it raised $1.6Billion in a massively oversubscribed IPO on Thursday, July 26, 2018, that’s a few days ago, and surged 40% on its very first day of trading.

[01:57] R: Colin Huang, the CEO, with a 46.8% stake suddenly found himself worth $13.8Billion. Investors Banyan Capital, Sequoia and Tencent, from whom Pinduoduo raised $1.7Billion, each also stood to net $2-4Billion each. But even as we are recording this episode, lots of news are coming out about the company that has affected its stock price negatively, the government for example, just announced that they will be investigating Pinduoduo’s fake goods. and at one point this week, it was barely hovering above IPO price at $19.62.
Y: What are the challenges? Lots have been said about its success, but we are here to tell you the whole story. Afterwards, as always please tweet at us at @techbuzzchina what you think!

[03:10] R: Hi everyone! We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network!
Y: We are a new weekly podcast focused on giving you a peek into what’s buzzing within the tech community in China.
R: We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. So you can be smarter about the world of China tech.

[03:31] Y: TechBuzz China is a part of Pandaily.com, a new English language site that tells you “everything about China’s innovation.” I’m one of your two co-hosts, Ying-Ying Lu.
R: And I’m your other co-host, Rui Ma.
Y: Shoutout to our fans Natalie Baer, Elliot Zaagman, Mohamed Farid, Mike Bai– and to all those who continue to give constructive feedback.
R: If you enjoy listening to us, please take the time to leave us a rating or review on whatever you found on this podcast!

[04:03] Y: OK, early Techbuzz fans, you have already heard this story, but for those of you just tuning in, let’s go over it again. The founding story of Pinduoduo in early 2015, the fastest growing app in the history of Chinese internet, and now I think, probably the fastest ever to go IPO, at least on a major foreign exchange. Pin means to piece together, and duoduo is “much much,” so it’s been translated as “buying more together,” and it does exactly what you think it does — group buying.
R: If you are a true Sino-techno-phile, you know, China tech lover, like us here at Techbuzz, you will know that there was some weirdness going on around the founding. Because for the public at least, there were actually two companies. One was 拼多多 Pinduoduo, and one 拼好货, Pinhaohuo, which means piece together good goods. They both did social commerce, but Pinduoduo was a marketplace, whereas Pinhaohuo sold fruit and other perishable items via direct sales. But the weird thing was that both companies had the same legal representative, a gentleman named 孙沁Sun Qin, and the same investor, Colin Huang 黄峥. And in September 2016, the two merged.

[05:13] Y: Sounds confusing? Trust us, if you go back to media reports in 2016, everyone was very confused, so you’re not the only one. Many reporters dug out the incorporation information for all the entities involved, and still couldn’t figure out what was going on. Was Colin just an investor? Because that’s what the paperwork said.
R: And that’s what’s great about IPOs. Cuz all the stuff has to be clearly explained. If you read Pinduoduo’s IPO prospectus, you’ll see that there is no need to be confused. This was actually the same company. They have the same boss, who was Colin. It was just two different and parallel entities that were running adjacent businesses.
[05:53] Y: But why did it do that? Why did it maintain two separate brands? Now this is not in the prospectus, but the best theory I’ve seen is that Pinduoduo was originally meant to test which products would be best for group-buying. The data it got could then be fed into the Pinhaohuo platform, who does the direct sales. The best evidence for this is that early investors like Banyan actually invested into the Pinhaohuo entity, not Pinduoduo, which was run under a Shanghai registered company.
R: That’s not a theory though, Yingying, we actually have one of the co-founders of Pinhaohuo Wu Mei 吴湄 telling a reporter on the record that Pinduoduo was indeed a side project of Pinhaohuo, and that it was meant to discover what new products their core customers want to buy, Pinhaohuo’s core customers were mostly OLs, which stands for white collar office ladies, and they loved fresh fruits.

[06:47] Y: That’s the story we went by back in Episode 2, but why didn’t Colin set up an actual entity and just had it running out of his gaming company? By way of intro, Colin is a serial entrepreneur and had already been operating an e-commerce company and a gaming company for a while before trying his hand at Pinduoduo. So now I don’t really know what to believe.
R: I personally like the other version better. It’s not the first time that what was a support tool accidentally becomes the main flagship product. I mean just look at Slack. But that’s not the only part about Pinduoduo that has been confusing for people. I mean, that’s actually one of the main reasons Colin has given for going IPO so early. When people asked him – “Hey, what’s the rush?” He has responded, we are a team of engineers and we haven’t dealt so much with the media. In order to establish our credibility, we need to go public. Going public allows us immediately to become more transparent.

[07:48] Y: He’s not wrong there. The prospectus doesn’t give us the history. But from a business perspective, they were just two different business units, and eventually one of them, Pinduoduo, won out. Pinhaohuo actually ceased operations in the first quarter of 2017. You can see this clearly in the financials. In 2016, 90% of the revenues were from merchandise sales, basically the Pinhaohuo fruit sales, and 10% from Pinduoduo’s marketplace operations. In 2017, 99.8% of the revenues were from the marketplace which is Pinduoduo.
R: In the last twelve months, Pinduoduo sold $41.8Billion worth of goods, that’s what we traditionally call Gross Merchandise Volume, or GMV, it’s done that across 7.5Billion orders. That’s means each order is about $6 on average. Pinduoduo now has 344million active buyers and over 1 million merchants on its platform. As everyone is fond of comparing, that’s more users than JD’s 302million, but still behind Alibaba’s 552million.

[08:54] Y: I think those are silly comparisons. JD and Alibaba have been around well over a decade, JD in particular has such a different business model, starting off as a e-tailer, not marketplace, and plus, Pinduoduo is, as Colin is fond of saying, just a 3-year old child compared to these mature companies.
R: Hey I’m with you, Yingying! But we are in the minority here unfortunately. It’s too bad, because I don’t see how Pinduoduo is at all comparable to either company. It’s also not at all likeVIPShop, which,by the way, is another company it’s always getting compared to, VIPshop, for those who don’t know, sells “discount” clothing to Chinese people.

[09:35] Y: You forgot Costco and Disneyland, which is what Pinduoduo put in its prospectus. That it was a combination of the well-known US discount retailer Costco and one of the most successful entertainment properties in the world, Disneyland.
R: OK, I gotta give Colin points for creativity, but that is pretty ridiculous. Yingying, please do our listeners a favor here and explain what exactly this love child of Costco and Disneyland actually does. I mean, does it have dancing hotdogs?

[10:11] Y: Hah. No. No dancing, no singing. Just deals. Lots and lots of deals. So the way it works is pretty simple. As we’ve explained before, the app offers merchandise that’s cheaper than market price by letting consumers buy directly from manufacturers, cutting out middlemen, advertising and other costs. They also add some gaming elements to the shopping experience, by giving out coupons and rewards. If a shopper recruits friends to join them in an eligible purchase, the entire group gets a discount. Often times, you only need to recruit one other person. Our friend Zara Zhang at GGV did a great walkthrough on Youtube. Go check it out!
R: Yeah, they also did a helpful Powerpoint on the company which we recommend you take a look at as well. But basically, it does exactly what Yingying just told you. But it claims to do it in a way that’s entertaining. Colin has said that Pinduoduo is Toutiao meets ecommerce. The first sentence in its prospectus says: “Pinduoduo dedicates itself to being a place where users can find the most value-for-money merchandise that meet their different needs and derive happiness.”

[11:23] Y: Well there’s plenty of people who believe that shopping brings you happiness.
R: Really though? Does buying 8 packs of 300-sheet facial tissue boxes for $1.40 make you happy? Cuz that’s what’s being sold on Pinduoduo. But when I think of shopping, I think of Carrie Bradshaw walking the streets of New York in Sex and the City. I don’t think of facial tissue.
Y: Well, what if there were hundreds of other people looking at the same facial tissue as you, ready to buy with you?
R: That’s even weirder. Why would I want to know that?

[11:55] Y: But some people do! That’s why Pinduoduo has been successful. They’re not targeting you, Rui, or me. Or probably most people we know. They are targeting people who will probably never go to New York, but do need facial tissue, and would rather get a great deal on it in a gamified format knowing that many others are doing the same thing as them. At the same time.
R: OK, so you are telling me that for people for whom 5th Ave. is out of reach, they’d rather be in this giant virtual flea market. But who are these people? I have had a full Wechat contact list for a while — that’s 5000 people — and I’m in hundreds of group chats. Not a single time have I been invited to join a Pinduoduo group buy.

[12:38] Y: Nope, that’s because most of your friends are not third and fourth-tier city residents whose average monthly disposable income is only $160 or so. That’s also why Pinduoduo is often referred to as ecommerce for those outside the 5th ring. 五环外的第一电商。For those who are unfamiliar, the higher the number, the farther away you are from city center. So if you’re living outside the 5th ring … that means you’re poor.
R: OK, so we are talking about Pinduoduo’s users, who are, to put it nicely, not China’s economic elite. They are also 70% female, and mostly between 25 and 35 years old. That’s prime Taobao demographic.Which is why one of the headlines at Pandaily in April was “Alibaba’s worst nightmare” — Pinduoduo.

[13:29] Y: But is it? Has it built itself an insurmountable lead? Is their model of group buying, or as they say, “team purchases,” so disruptive that it’s … un-disruptable?
R: Well, no. The group-buying function is actually rather easy to copy. While it’s true that Pinduoduo has so far been extremely successful off of WeChat, WeChat doesn’t really provide it with any real protective moats. Other players, including long-time ally JD, can do the same thing, and in fact they’ve already started to do so.

[14:02] Y: JD actually started their group buying product back in 2016, but only really started to push it this year, probably after seeing the success of Pinduoduo. 淘宝特价版, or Taobao Special Deals, was launched in March. The thing is, with JD拼购, you get the same service levels with these discounted items as those on its main site. That means very fast logistics, 99 RMB free shipping, and 7 day exchanges and returns.
R: How cheap can the products be then? Between the big ecommerce players, JD is known as being the premium shopping experience. Them and Tmall. JD’s AOV is 400 RMB or 12 times that size of Pinduoduo’s.

[14:46] Y: That’s exactly right. The prices are cheaper, but it’s not that much cheaper. This is because JD supposedly still needs to approve of the quality. Unlike on Pinduoduo, whose 1.7mm vendors decide what they want to sell and at what price. Apparently, in order to drive volume, merchants will sometimes decide on some ridiculous prices — such as the wristwatch recommended to me for $1.00, yes, $1.00 — then find a manufacturer that can make it for the price they demand. Or maybe they are that very watch manufacturer, that has some excess capacity, and want to sell directly to consumers. It’s known that Pinduoduo has salespeople directly recruiting these manufacturers and showing them how to set up shop on the app.
R: Yes, Colin has actually referred to this as the “supplier’s insurance”, meaning the suppliers are already assured of the demand, then of course they can give the consumers a better deal, and remove all of that uncertainty and also all the need for the middlemen. Frankly, he makes it sound a little bit like crowd-funding. It’s unclear to me how many of Pinduoduo’s products are actually made this way, meaning after the orders have been placed, but Colin has definitely used the concept of “pre-ordering” — or what he calls “connecting the maker directly with the user” — as an example of how the platform works.

[16:12] Y: Either way, how can you make a watch for $1.00, you ask? Well. It’s easy. Simply “modify” the item until it doesn’t lose you money. Like in the case of this wristwatch … you can see quite a few angry reviews below that the watchface is much smaller than a normal watch. That will definitely save you as a supplier on costs.
R: What are people expecting for a $1.00 watch? The fact that it even works is mindboggling. But if you go through Pinduoduo’s inventory, you really do start to have appreciation for the creativity of the Chinese people. I mean, you see phone cases for $0.40, shoes for $1.35. As they say in China these days about Pinduoduo merchants – 只有你想不到,没有它做不到。Which I roughly translate as, you are only limited by your imagination, not by what they can make.

[17:12] R: We’d like to share two other China-focused podcasts with our listeners. The first is China Business cast, a podcast “from the front lines of business in China.” Co-hosts Shlomo Freud and Michael Michelini interview entrepreneurs and business people who’ve built their businesses in China. They dig into the details so listeners can learn from real, on-the-ground accounts of how business actually gets done there.
Y: The second is The Harbinger, a Q&A podcast with China’s top VCs and tech company founders hosted by Adam Bao. Both podcasts have great content that complements what we produce here every week. We encourage you to check them out by searching wherever you get your podcasts.

[18:00] Y: Where were we, Rui? Right. The backlash against Pinduoduo. Yes there are some lawsuits against the company for fakes, such as people hawking Louis Vuittons and Yeezys on the app — but most of the ten million problematic listings that the company pulled from its app last year are complaints are from more “accessible” consumer brands like Pamper’s or Siemens. Pinduoduo merchants are known for selling shanzhai goods. You know, Pampero diapers with suspiciously similar packaging as Pamper’s. Siemens electronics but spelled with an extra vowel or two and selling for a tenth of the price.
R: Indeed, most of the shanzhai goods aren’t going after high end brands. They’re hurting brands like 创维 Skyworth. Skyworth is sort of mid-market electronics brand in China that had just set up a store on Pinduoduo last month but suddenly shut down operations this week. It made waves this week when it demanded that all counterfeit Skyworth goods be removed from the platform and threatened legal action. Colin was quick to blame it on all the white label manufacturers.

[19:10] Y: Shanzhai makers have also gone after small merchants. There have been many organized protests against Pinduoduo’s listing, which you can click through and see in our transcript. Anyway, I kind of want to point out to Colin that this is the opposite of the Costco experience. Costco is not known for shanzhai. It’s known for high quality!
R: Yes, but the argument is that if the diaper doesn’t leak, and the electronics work, if you are a consumer with limited means, what if you just don’t care what the brand label says? In fact, people have combed through some of the user photos and reviews on the Pinduoduo platform and have noted that the photos show “unimaginably humble” homes. An euphemism for extreme poverty. Unfortunately, we can’t show you the photos here but if you go through our transcript, we will include the links. I really suggest you take a look if you’ve only been to the tier-1 or 2 cities in China. I’ve traveled to the very rural places in China and I can say that it really does look like what they show in the photos.

[20:15] Y: But Rui, there’s been a lot of snarky articles like that lately, and I think it’s actually a little out of control. Mostly along the lines of “so you think China is rich? Look at how poor we are and how crappy most of our citizens live.” It’s a very divisive issue currently. Some people argue — you might be outraged they’re not getting a real Skyworth TV, that’s because you live inside the third ring road and have lost touch with reality. These people are pragmatic, they know they’re buying a shanzhai or fake Skyworth TV, and they’re buying it because that’s all they can afford!
R: Yeah, I can see both sides. I mean, some people think these people are so disadvantaged, how can you exploit them further by selling them such crappy stuff? Others think just like what you said — these people are well aware the goods are shanzhai, but they have no choice, they just can’t afford the real thing.

[21:09] Y: And by giving them a knockoff, even though it’s not the “real thing,” at least it’s something. Whereas before they had nothing.
R: That’s assuming the product is just a little bit “crappier” though. There is another risk. There are some products for which the quality is so poor, or the “modifications” so severe, that it’s basically unusable. I tweeted a photo the other day of a “face mask” that yes, you can put on your face, but is actually the size of your palm and covers maybe half of your forehead. Or another guy who reviewed an electric toothbrush that after disassembling it, he realized, there’s no way to turn it on. And back to our watch example, how many times are you going to buy a watch made for a baby before you realize, maybe save that $1 instead of throwing it away?

[21:55] Y: Yes, exactly. And let’s not go into how dangerous that can be if we are talking about ingested items like baby milk powder! People reported that Pinduoduo had milk powder for sale for $1.10. The headline has since been cleared up as simply misleading advertising, but it touched many nerves because there was a big scandal that killed babies a decade ago and so people are extra sensitive about that stuff. And while misleading advertising is against Pinduoduo’s rules, does it really have that much incentive to enforce it super strictly? Not really. It makes 70% of its revenue off of “marketing services” or fees from the vendors and most of the rest in the form of commissions, which are just 0.6%. In other words, yes GMV is great, but what Pinduoduo really cares about the most is vendors paying for advertising.
R: Yes, if there are too many fake goods and consumers start leaving the platform in droves, there will be no sellers either and no more revenue, but you have to wonder how much it cares about the user experience when even today, after it has already IPOed, there is no way to leave a star rating on either the product or the vendor. If you scroll through the app, there are plenty of angry comments. But they’re pretty well hidden from view. You have to click a bunch of times to even see them. Anyway, all you can see is actually the number of transactions. That’s not the only complaint though.”

[23:24] Y: Nope. That’s the bulk of it. But yup, there are plenty of other complaints.
R: Sometimes the goods don’t even arrive. And in the beginning, Pinduoduo’s product experience was so poor, you couldn’t even report that you hadn’t received the item.
Y: And sometimes, customers received a notice that their item was delivered and signed for when they never even saw it. Now I don’t know where things went wrong, if the merchant was just committing fraud through and through, but the issue for the customer is that it’s a lot of hassle to file a complaint when the average order is just $6 to begin with.
R: But what do you expect out of a giant flea market?
Y: Except this is a giant flea market where you don’t bargain on the price by yourself. You bring a whole gang of friends to do it with you.

[24:11] R: Ah, you’re talking about their 砍价 or price slice function! I didn’t see that covered much in English. It’s actually since been copied by other merchants like Ctrip. I just helped my friend Jaime hack down her hotel price.
Y: I’ll explain it for readers who don’t know, but basically, some deals on Pinduoduo can be discounted — to free — if you invite enough friends to “cut” the price for you. Literally, they get an invite from you, and you click it, and agree to “slash” the price by a randomly generated amount, and your friend gets a new discounted price. You can see who else has also helped in the “slashing,” and you feel good about helping your friend save money. Plus all you had to do was click!

[24:53] R: Well, all you have to do is register, you mean. Because this is really Pinduoduo’s way of getting your info. In wechat, if you get such a link, this usually means that you have now just authorized their miniprogram. Otherwise you can’t do any slashing. As I study Psychology, I think this is just ingenious. Most people think you have to give your friends some free money or credits like Paypal did way back in the day to get them to sign up. Little do they know, it actually works equally well or maybe even better to just ask them to help you instead. That’s because we are creatures of social obligation, and it’s very hard to say no to your friend. I mean, am I really going to say:”no, Yingying, I refuse to click on this link and help you save money.”
Y: Although you may not be saving me very much money, Rui! Apparently, the way Pinduoduo makes sure they don’t lose too much money is by first marking up the price. So that $5 item you want is now $25. Your first friend easily cuts the price down to $20. So you start thinking, I can just invite four more friends and I’ll get this for free! But not so fast. You’ll quickly find that the slashes go down exponentially. Your next friend is going to do probably $3 of damage, then $1, and soon, you’re looking at $0.02 per friend.

[26:10] R: Yeah, most people give up before getting to free. Probably actually before they even get to the real market price of that item.
Y: Exactly. It’s not a real deal. It’s a game. But there’s another gamification trick they’re known for too, right?
R: Yeah, the lottery function. Pinduoduo has these special deals where you might need a few dozen, say 39 other friends, to join you in a 40 person groupon for a super great deal. We are talking about like maybe winning some Airpods. All of you pay a 5 RMB deposit for a chance to win this great item. If you don’t get to 40 people, you don’t enter the drawing and you get your money back. If you get to 40, you enter the drawing. If you win, then you get the item … for just 5 RMB. If not, you get your money back, and even some credit to spend in the app. What a deal, right, you’re thinking? You lose nothing, and you get a shot at this amazing price.

[27:08] Y: Does that sounds too good to be true? Indeed. Obviously, there is a trick here, because Colin Huang did not become a multibillionaire by squandering his VC funding. This is actually a highly efficient way to acquire customers, because in order to be in the drawing, you need to pay that deposit, which means that you need to enter in your payment information and mailing address. Bingo! Pinduoduo now has everything it needs from you, and not only did you give it willingly, but you got 39 of your other friends to do so, too. Thank you, loyal customer!
R: That doesn’t remind me of Disneyland … nor does it fit Colin’s narrative that the company’s advanced AI tech that is what’s driving all the user growth. Anyway, going back to the raffles, there’s a story here. Colin didn’t actually go to the NASDAQ bell ringing in New York himself he sent instead one of these “lucky” customers who won an iPhone for 1 cent in one of these drawings. Let’s talk about that. He made huge headlines in China for not going to the bell ringing and holding a remote ceremony in Shanghai instead.

[28:12] Y: Yup. He was teased for trying to copy Bezos, who didn’t show up for the anniversary bell ringing of Amazon a few years ago. Although he denied that, Colin did channel Bezos a lot when he kept on saying that going public was really not that important, that this was just the first step of many for Pinduoduo.
R: Honestly, as much as we’ve been kind of trashing his product, Colin comes off like a nice guy. He was basically like … all these bell ringing ceremonies, they are silly. If someone really wants me there, they can just photoshop me in. I think what’s more telling of his character though is his decision not to increase the IPO offering price, because when he was offering subscribed by 13 times, he actually had the opportunity to increase the price by 20%. But he said he decided not to, because it wasn’t the right thing to do.

[29:04] Y: Yeah Colin is all about 本分 ben fen, the concept of doing the right thing and the honest thing. It’s even written to the beginning of the prospectus. “We may not always be understood, but we always do things out of goodwill and do no evil.”
R: He has acknowledged that he pulled it straight out of Google’s motto, “do no evil.” Google was where Colin worked after getting a master’s at Wisconsin-Madison in the US, and he always refers to how much he was struck by the company’s values. Although we know of course that earlier this year Google actually removed these words from their code of conduct.

[29:37] Y: But we don’t really have any real reason to suspect Colin doesn’t truly believe in this. It’s well known that he has a famous mentor, the Chinese entrepreneur Duan Yongping 段永平. In China, Duan is regarded like a god. That’s because while you may not have heard of his company BBK Electronics or 步步高, you most certainly have heard of their subsidiaries – Oppo, Vivo, and Oneplus. Those are all him. He also has a big stake in Netease. And in fact, supposedly it’s Netease’s Ding Lei who introduced Colin to Duan, maybe because both of them went to the prestigious Zhejiang University.
R: Duan is known as the reclusive billionaire and almost never gives interviews. But you know who he loves? Warren Buffett. Actually I’m not jealous of Colin at all except that Duan apparently brought him to lunch with Warren when he was just 26 years old. Duan is a huge proponent of creating value and thinking through business problems deeply, just like Buffett. So, maybe it is believable that this whole thing about having principles and being patient isn’t just an act, but something that’s actually really rubbed off on Colin from his mentor. There is no doubt at least that compared to other Chinese internet entrepreneurs, he is actually considered to be extremely low key.

[30:58] Y: Well, our twenty minutes are up. That ended up being a really long story, because let’s face it, Pinduoduo is complicated. Let’s wrap this up and leave our listeners with some thoughts to chew on. Pinduoduo bulls, like our friend Mark Pols back in episode 2, believe that there will always be a great deal of the population who love deals. Honestly, it was so good, I think we should just play it here again:
[31:25] M: Pinduoduo is actually really interesting to me because it’s one of these business models that simply would not have been possible even a few years ago. And that’s because it leverages a large social graph, in this case WeChat, to bring together consumers, to discover and participate in finding deals, for goods. They aggregate interest at a scale that was previously not possible. You have to remember these sort of business models, group-buying physical goods, was among the first in commerce that were actually tried, back in the mid to late 90s, but they simply could not scale because your audience wasn’t large enough, you couldn’t aggregate interest by using machine learning, through social mechanisms, etc. What Pinduoduo taps into is what I think an enduring human need, to find deals, right? Now people get a dopamine rush when they feel they scored a dealIf you look at the top shopping apps in the Android store, in particular, but also on iOS, it’s the coupons or rebates related apps that are among the top, that are at least three out of the five top apps consistently. And this is not about saving a lot of money, this is saving small amounts of money, relatively speaking, people love deals! I don’t think that’s ever gonna change.

[32:09] R: Okay, my neuroscience professor will definitely take issue with Mark’s use of the words “dopamine rush,” but I agree with him that customer need has always existed and it wasn’t until recently that the social function could work at scale. This is also something that Chinese analysts have pointed out. Group buying consists of two functions, after all. Forming a group, and then buying. Buying from the internet has deep penetration in China thanks to Jack Ma and Alibaba. But it really wasn’t until Wechat that the group-forming part got easier. Pinduoduo just built the right product at the right time.
Y: Yup, some investors have told us that if anything, Pinduoduo just showcases the power of Wechat and social. But, on the other side are people like Kathy Xu, the most famous retail investor in China and founder of Capital Today, who really questioned Pinduoduo’s value. Was it to bring happiness to consumers because they like buying in groups? Was it to save 25 cents on a 1 dollar purchase? Was it to provide an entertaining experience for consumers who wanted to be distracted? Kathy didn’t think any of these were “revolutionary” enough for a truly great business.

[33:22] R: I think it’s because Kathy sees a fundamentally different opportunity in China. She is in the camp of 消费升级, or “consumption upgrade,” is this notion in China that the hundreds of millions in the middle class are in the process of upgrading their lifestyles. Yes this can mean that they are going to be spending more money, but it also means that they have higher expectations of quality, and are looking for a more pleasant end-to-end experience. This is the trend we both saw very clearly while living in downtown Shanghai and Beijing.
Y: Whereas people like Colin Huang and his mentor Duan Yongping probably see a different side of China. They see what is now being called 消费下沉. 下沉 literally means sinking, but here it’s referring to consumption seeping into the “lower-tiered” cities. Maybe better translated as consumption creep? The government is actually trying to push for a lot of things to 下沉, such as health services, so this is not a new concept. It’s also, as we mentioned, given birth to plenty of other unicorns we’ve covered such as livestreamer Kuaishou, and seems to be one of the main strategies of last episode’s Hellobike.

[34:29] R: While one has the word “upgrade” in it and the other “sink,” they are actually not opposite, it’s not incompatible, and they are both formidable trends in today’s China. I actually think they are mutually reinforcing. But you might choose one over the other as your dominant strategy depending on where you believe the strengths of your team or product lies.
Y: For now though, Pinduoduo has a heavy burden on its shoulders. Except for JD and Alibaba, most of the Chinese ecommerce players – the so-called Seven Sisters that went public a few years ago — Dangdang, Jumei, Lightinthebox, etc. — have not done so hot in the public markets. Colin keeps on saying, whatever Alibaba had gone through, referring to its scandals with fake products, we will go through, and we’ll eventually come on top. Will it though? Will it be an Alibaba? Let us know what you guys think!

[35:32] R: We’d like to give a shoutout to our partners at SupChina. In addition to our podcast here with Pandaily, they publish the excellent Sinica podcast, a weekly discussion of current affairs on China with journalists, writers, academics, policy makers, and business people.
Y: So while we only focus on tech, they really give you the entire overview. Go and check them out!

[35:59] Y: OK, that’s all for this week folks! Thanks for listening. We really enjoyed putting this together, and are always open to any comments or suggestions. You can find us on twitter at thepandaily, @thepandaily, and my personal Twitter account is @ginyginy.
R: And my twitter is spelled @ruima. We’ll be back here same time next week!
TechBuzz China by Pandaily is powered by the Sinica Podcast Network. Pandaily.com is a new English language site that tells you “everything about China’s innovation.” Our producers are Carol Yin and Kaiser Kuo. Our intern is Ska Du and Menglu Wang.