The rise of Pinduoduo and Temu: profits and secrets | FT Film

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When you start looking at Pinduoduo you very quickly realise this is not a normal company.

So there's a lot of mystery around the company with a great deal of secretiveness around how it runs.

PDD went from zero market share to, we think now, slightly over 20 per cent of the market.

Its numbers suggest a reimagining of what people once thought was possible in the world of complex, retail logistics.

It's incredibly cheap, and it's also fun.

But at the same time there are lots of questions about it, the way it was founded, the way it's structured, the way it interacts with investors. And those questions, some investors might see as red flags.

Pinduoduo is essentially an online marketplace, and it's really pioneered being an online dollar store, having all different types of goods, no brands, all cheap prices.

It's grown by just bringing these cheap prices to consumers that can't afford branded and other goods. Back in 2020, during the height of the mini internet bubble, they had a market cap of nearly $200bn, which they are at again today.

Pinduoduo has come into focus now with the launch of its overseas app, Temu.

They expanded into this overseas venture, call it September 22. And now they've expanded into almost 50 countries globally, essentially leveraging domestic light manufacturing to sell all sorts of things to the rest of the world.

I mean, the reason why FT readers are so intrigued by Temu is because just suddenly, they've seen their children, their friends, changing their shopping habits almost overnight.

So Temu is special. This is probably the most important thing to happen to global e-commerce in quite a long time.

So I came across Temu through social media. I have ordered children's toys, pre-school toys, Montessori toys, and stuffed teddy bears. I have ordered novelty socks. I have ordered Taylor Swift jewellery.

There's no denying that Pinduoduo and Temu are selling huge amounts of merchandise to huge numbers of people around the world. The problem is, I can't see how, given the lack of information about the company, anyone on the outside can really claim to properly understand it.

They don't court Wall Street equity analysts like the other Chinese e-commerce giants do.

There are 56 Wall Street analysts who cover PDD Holdings as a stock, and 53 of them recommend that their clients buy it. They think it's great. The weird thing is, they don't really have very much information to go on.

PDD is known to be minimally communicative as far as the business is concerned. They've yet to break out any kind of financial detail on, for example, Temu versus the domestic business. And generally, it is a very secretive business by nature, by culture. They tend not to give too much away on earnings calls and such.

Nobody can tell you how big PDD's marketplace is. Two years ago it was worth almost $400bn in what we call GMV, gross merchandise value. And using some reasonable assumptions you can get a pretty, let's say, ridiculous range of estimates.

Is PDD as big as Amazon, or is it as big as Amazon plus Walmart? And if you want to get really carried away, you can kind of take some of the numbers which they publish and haven't explained, run that forward, and hey, maybe PDD is actually as large as the Italian economy. And that's kind of bonkers, right?

When we do our work on PDD and Temu the job is essentially an exercise of triangulation between different data points. We talk to merchants. We talk to a lot of the logistical providers that help both PDD and Temu in the international market.

We speak to different industry contacts that are in the e-commerce trade, both domestically and cross-border. And we do get some management access on top of that, where they can talk in qualitative terms and give you some idea of what they're trying to achieve high level. So it's not completely opaque, but yes, it's less hands on when it comes to investors than, for example, some of my other companies that guide quarterly revenues and earnings and so on.

So Pinduoduo is listed on NASDAQ, but unusually, as all these other Chinese companies have done, these homecoming listings to list in Hong Kong and kind of lessen some of their US risk, Pinduoduo has always held off.

Having a listing in China gives you access to Chinese investors, who you would think know your business better than anyone else. I think the question for PDD is, why don't they want a second listing? Glossing over details of your business when you're a start-up is to be expected. When you're a $200bn public-listed company, investors kind of expect clarity on basic matters like, hey, where's your headquarters?

I'm Jude Webeber and I'm the Ireland Correspondent for the Financial Times. The first floor of this building behind me in the centre of Dublin is what PDD Holdings has been telling US regulators since March 2023 is their principal executive office.

There's a plaque on the wall outside the office, but in fact, the company that's registered in Ireland is not Temu or PDD Holdings, but another company completely, WhaleCo Technology Limited. I wanted to go and visit them, and I tried to get up to the first floor. But they have no reception there, and I was asked to send an email.

They're the only major Chinese internet company to move their headquarters abroad, at least on paper.

There are definitely reasons why PDD might want to be in Ireland. Ireland has a low corporate tax rate, and that's helped attract other global tech companies like Apple and Meta and Google. And that also means there's a pool of tech talent available here in Ireland. Ireland's also an English-speaking country, and it's based in the EU. And the EU is a crucial market if it wants to expand globally.

China also has a cordial relationship with Ireland. New Chinese Premier Li Qiang visited Dublin in January 2024, and big Chinese companies like TikTok and Huawei and WuXi Biologics all have operations or offices in Ireland.

But really, we know deep down, this is a Chinese company. It's headquartered in Shanghai. That's where all the staff and management are. So what exactly is it we're dealing with here?

Well, that's complicated. Temu says it was founded in September 2022 in Boston. WhaleCo was incorporated in Ireland in July 2022, but WhaleCo isn't mentioned in any of PDD's official filings to the US regulator. Meanwhile, Temu tells European customers to get in touch with the Dublin office that we went to, and data protection queries should be sent to the same office, but addressed to WhaleCo.

You do usually have to have some sort of assets or important staff where you're claiming your headquarters are, and it sort of points to this bigger question about PDD. What is it that American stockholders are actually buying? Because you have this complicated system where what they own is a stake in a Cayman Islands company. That company has some contracts with operating businesses in China.

In China, all their operating companies are owned by various people. That could be a problem if there's any dispute between shareholders and the people who own all these companies that produce the majority of their revenues.

The origin story of Pinduoduo is also confusing, but what it does show is that the founder, Colin Huang, has this history of muddying the waters around who exactly owns what to do with his companies.

Back a decade ago, Colin Huang, who was this ex-Google engineer, was running a series of companies in this one building in Shanghai. And they just basically sold cheap stuff to Americans. Although Colin Huang was behind them, he didn't own any of the companies on paper. In China, this is known as using white gloves, or baishoutao.

I followed the address on business documents to the home of one of these shareholders, and he was a 65-year-old man. And he answered his door with his shirt off and the TV blaring. And then there was the company that became Pinduoduo, that was similarly held by this woman who was in her late 60s who owned 90 per cent of the company. But when Pinduoduo later listed on NASDAQ they told investors that Colin had controlled the company since its establishment.

I think if you encounter a company that is pushing boundaries in one area, it might make you ask, well, what else are they doing that we can't see?

They haven't had a chief financial officer since going public, and they've instead cycled through vice presidents of finance.

Last year, Pinduoduo's app was suspended from the Google Play Store, which said it contained malware. Now, the company said, nothing going on, not malicious. But it does raise questions about what sort of culture is going on that that could happen.

From talking to employees, even, they don't really know their colleagues' real names. They use nicknames.

Wechat groups between staff members are actively discouraged.

Looking at that in a positive light, you might say they're doing that because they face Alibaba and JD, and they don't want to reveal how they operate to their major competitors.

Maybe that's true, but it's kind of weird isn't it? And I really think that doesn't feel like a very satisfactory explanation. And it certainly goes against what we might have learned from a lot of business schools about how innovation happens inside companies.

Pinduoduo is essentially an online marketplace where anyone can go sell goods to Chinese shoppers, and they've differentiated themselves by taking a lower cut of each sale, and also not building out any of the logistics infrastructure that JD and Alibaba have. So they're really an asset-light e-commerce marketplace, all online.

PDD domestically basically outsources the fulfilment to the industry of express delivery guys.

It's all very well using third parties day to day when everything's fine. But what about Singles Day, when huge numbers of people across China are sending packages? How has PDD managed the user experience? If you look at staffing levels, PDD told us it had about 13,000 staff.

That is so much smaller than Alibaba, which has hundreds of thousands. Amazon, by the way, has 1.5mn people working for it. If PDD has been able to grow to this enormous size without having its own logistics, without having control, then I think a lot of business schools are going to have to be rewriting some textbooks.

So back in 2020, in the years before then, they were sometimes spending more on sales and marketing than their total revenue. So they really went all in on advertising subsidies to learn users, and they've proven at least within China, that they can keep those users once that advertising spend starts to decline as a proportion of their business. The question is really, will that same model work with Temu, and will it work with American shoppers and European shoppers.

PDD domestically, it's very, very cash generative. This year, 2023, we think the domestic business is probably on track to generate something like $25bn of free cash flow. And that, on some level, is funding the growth of Temu, at least in the first instance.

Temu is spending significant amounts on growing the business. Our estimate is that they will lose over $4bn in 2023 full year in order to get the business off the ground. We expect them to lose money in 2024, and then most likely get to profitability sometime in 2025, 2026.

They don't tell investors much about the company, if at all. They don't mention Temu in their financial reports except for a couple of quick mentions. They don't show how Temu is growing or what they're spending to grow Temu.

The chief exec was asked about it on the call, and he simply said: "It's at an early stage."

We think in the year of 2023, full year, Temu is most likely going to get to somewhere in the range of $17bn of gross merchandise value, roughly a third of Shein, which has been around for a lot longer and is the other main cross-border e-commerce platform.

Shein is a Chinese-founded fast fashion company that shipped cheap clothes directly from Chinese factories to shoppers in the west.

It does feel like the combination of Temu and then others like Shein and TikTok Shop are fronting this charge to expand globally, and to sell essentially all across the world. And it will, in my view, have an impact on some of the global incumbents.

It's early days in Temu's story, but the reason why this company is potentially very important is because they could potentially be replicating Shein's growth story in fast fashion in the online marketplace. If it is able to kind of replicate the speed of Shein's growth through its combination of fun and cheap and easy shopping, then it could potentially be as disruptive a force for the online marketplace for players like Amazon as Shein has been in fast fashion.

So investors are extremely excited about the potential of Temu. What seems worth noting, though, is there have been other companies asked to comment on what's the impact been on their business. And pretty much the response has been, yes, we're aware of it. Surely, it's going to have some consequence, but we haven't seen any impact to our business yet.

And that raises questions about, well, how effective is Temu's big expansion? Certainly, the chief executive of Etsy raised questions about the effectiveness of all this money that Temu has been pouring into advertising. Certainly, they couldn't see the basis for a good return on investment there.

So would you like to see what's inside my parcel? You would love to see what's inside my parcel. I have found that their marketing campaign has been very, very dedicated, so I think that may have kind of given me rose-coloured glasses, so that you can't see beyond the fact that you're getting a great deal. The only difference between this that I bought in Temu for 11 euros and the product that was being advertised by the company here is that they had maybe one or two extra middle layers.

There have been a slew of companies that have tried this cross-border e-commerce model, shipping packages directly to US and European consumers. And no one has yet been able to do it and make a lot of money from doing it, although Shein is beginning to show that the model could have potential.

I'm Ryan McMorrow. I'm usually in Beijing, but happen to be in San Francisco at the moment. I ordered this package on Temu. Originally, we were going to go to the factory and film how it was made. But unfortunately, the local government got in our way. It is a very basic bag, costs about $8, so you can't expect too much. But it looks about like what I ordered, although it's a bit smaller.

The low prices are essentially a function of two things. One is the fact that compared to peers like Amazon, Temu is currently charging a much lower take rate than what we hear merchants are having to pay on, say, Amazon. And the second thing which PDD has done prolifically in the domestic market is something that they call C2M, Customer To Manufacturer, where the platform actually aggregates consumer feedback and data from the from the platform, from sales, from other sources, and actually tells the producer to iterate the product in different ways.

One of the ways that they do this is often the platform will tell the merchant to design something to a slightly cheaper spec so that it's a little bit lower quality, but significantly lower in terms of production cost.

The products that we as western consumers are buying on platforms, for example, like Amazon, the high cost of them has a lot to do with the fact that they need to create a brand. They spend a lot on marketing. They do consumer surveys to try and figure out what we want. All of this costs money and is baked into the price of the product.

Temu has stripped that away. They've basically said, OK, we're going to go straight to the manufacturer, use algorithms to predict what shoppers want online, cut out all of this brand creation, fee, cost structure, and ship these goods directly from the factories to shoppers in the west.

At $8, this bag is cheap, but when I looked on Amazon, comparable bags were selling for about $15. The thing is, sending this bag across China costs less than $1, but the cost of getting it to San Francisco from LA is probably about half the cost of the total bag, which raises questions about how they keep costs down in China to make this business model work.

Now that the volumes are much higher, we hear that there are discussions going on between merchants and Temu about supplying Temu, not just from the manufacturing base in Guangzhou and surroundings, but also to supply the platform from inventory that's already in the US, where the merchant has already taken on the inventory risk of the long-haul leg. And that's served one purpose, which is to allow Temu to sell more expensive items, to sell heavier items, which if you're sending things via brown-paper envelope, via air, is more difficult.

China hawks in the US are certainly not happy that US consumers are becoming more and more reliant on these platforms, but the question is whether or not they can actually do anything about it.

There's obviously the potential for geopolitics to influence the business. One of the more visible things is the de minimis provision in the US, which allows parcels to go into the US without paying tax if it's under $800 of value.

Temu takes advantage of this according to a US Congressional committee. This committee is also looking into where Temu sources its goods in China, so there's some impetus to look at if Temu is getting any of its goods from Xinjiang and whether that is getting into the US illegally.

We're in an age where it's become very obvious that there is an environmental cost to fast fashion and to overconsumption. But over the past two years we've seen these companies whose whole business model is premised on us buying more, throwing it away, and updating our wardrobes, filling our cupboards with things that we didn't even know that we needed or wanted.

And the key question here is whether or not through their business model they're actually creating this new demand, whether or not they're encouraging and impelling the shopper to constantly add to their basket and to be buying stuff that quite frankly, they probably don't need.

Close friends of mine, one of them recently put in her own order only last week, and she said, oh my gosh, we have created a monster. My basket is already full again and I can't wait to check out.

As a shopper, if you're just going on the Temu website, you would have no idea that this is a Chinese company.

On Temu's website, they've sporadically been updating their founding story. At one point, they listed on their website their connection to Pinduoduo, but at the moment, they've removed any mention of China and say they were founded in Boston in 2022.

I think it's fine for a company to be secretive. Apple, famously, prides itself on secrecy. What's weird about PDD is it isn't telling you some fairly basic stuff about its business, which isn't the special sauce, not its innovation, but really, just trying to understand the financial numbers it's publishing. These are some pretty standard questions that you would expect to be answered by a public listed company.

The story of Temu is really a story of how dominant Chinese manufacturing continues to be. We've seen geopolitical tensions between the US and China, but in spite of all of those trends, you've seen these companies shipping Chinese manufacturing almost directly to consumers in the west. That is a testament to the continued strength of Chinese manufacturing base.

Since I started following Pinduoduo, the question for me has been, why do they operate the way they do with this extreme secretiveness? At least within China, Pinduoduo has really proven that their business model does work, according to their financial statements. The question is whether they're going to be able to recreate this with Temu abroad.