Crest of a wave – PDD supplants Alibaba as China’s e-commerce flagship

By CHENG Lu, WU Yangyu, XU Shiqi

PDD Holdings is officially bigger than Alibaba. The company behind shopping apps Temu and Pinduoduo is now the most valuable Chinese entity listed in the US.

Moving in opposite directions

It’s a remarkable feat for a company founded only eight years ago when Alibaba was already a dominant force in global e-commerce.

Just three years ago, one Alibaba was worth about eight PDDs. The company was mostly associated with cheap knockoffs and setting new standards of profligacy in online groceries. It was simply one of the chasing pack and not one that attracted any special fervor.

And there was no Temu, the golden child of China’s assault on e-commerce everywhere.

It’s been just a year since Temu went online. Now operating in 48 countries, the app has been downloaded 200 million times. GMV exceeded US$5 billion (35.76 billion yuan) in Q3 and is well on track to exceed US$15 billion this year.

Temu, indeed, has been a transformative force. PDD’s market cap has more than doubled to US$192 billion in the past year, while Alibaba, sliding from US$248 billion to US$191 billion, met it coming the other way.

Long hot summer of mobile internet

So shocked by the turnabout, Alibaba’s founder Jack Ma emerged from the shadows to urge his employees forward in the quest to reclaim the top spot, without actually mentioning it.

“The age of AI has just begun,” proclaimed Ma. “It’s a challenge and opportunity for everyone.”

“Alibaba will be reborn.” he continued, before adding cryptically, “All great companies are born in deep winter.”

PDD, for comparison, was born in the golden sunlight of China’s mobile internet. In 2015, Alibaba was expanding its empire into logistics, groceries, entertainment, food deliveries and everything else under the sky.

Tencent, JD.com, and Meituan were diligently following in Alibaba’s wake, convinced that to conquer the internet, a company had to be everything for everyone. Pinduoduo, a quite uninspiring domestic shopping site, carved out its own route. From day one, it pursued one thing and one thing only – low prices.

The art of the steal

The charm of Pinduoduo, according to founder HUANG Zheng, was not about being cheap, but “the sensation of having found a steal of a deal.”

Early customers remember Pinduoduo for its inescapable ads, flashy and gamified front pages, an abundance of unbranded products, and ridiculously low prices. Behind the scenes, the company was doing something highly unconventional. It gathered together sellers who were too small to compete on the dominant e-commerce sites and connected them with price-conscious customers.

“Taobao said my volume was not worth their effort,” said a seller of unbranded home appliances. He buys surplus inventory from factories and flips them at a marginal markup. There are tens of thousands of sellers like him on Pinduoduo,

Sit back and watch

The business model has shown some remarkable resilience even during economic downturns. This year, while Alibaba and JD.com are destroying each other’s reputations in price wars, Pinduoduo customers keep on buying. Sellers have noticed that sales remain unaffected even if they raise prices slightly.

Before stepping down to focus on personal projects, Huang had wanted to take Pinduoduo global but shelved the project until 2022, when China’s mobile internet economy became saturated. The playbook is the same – ads everywhere and silly prices. What is different this time is that PDD has a lot of money and a tight grip on a capricious supply chain.

From the moment a product is listed, Temu assumes full control. With its massive volume, it can almost stipulate its own cost of warehousing, shipping and customer service.

Sellers love the ease and speed. It takes less than a week from signing up to the first sales, a process that can stretch up to a month with TikTok. Many are uncomfortable about losing control - Temu’s algorithm often lowers prices without sellers’ consent - but few complain about the bottom line.

Amazon in peril

Temu once said it benchmarked itself against Shein, but it hasn’t taken long for PDD itself to become the benchmark. But the real goal is to overtake Amazon.

That means reducing shipping times from the current week to the standard two days of Amazon Prime. And that means a big investment in infrastructure, warehouses mostly.

Outside the US, however, logistics seem fragile. Only 12 warehouses serve 38 countries, raising concern about surging sales overwhelming the network. This has happened before. In March, following the airing of a US$14-million "shopping like a billionaire" Super Bowl ad, orders skyrocketed, nearly paralyzing the shipping network. Warehouses were overflowing and sellers were asked to stop taking new orders until the backlog was cleared.

Hard taskmaster

For a young company, PDD’s work culture is notoriously aggressive, if not toxic. More than 12-hour workdays are the norm. Former media workers are blacklisted by HR for being prone to leaking business secrets.

Employees are offered stock options to undertake difficult and high-risk projects, such as expanding the online grocery business to a new city.

But the approach is working. The revenue per employee in the first three quarters of the year was more than four times Alibaba’s and seven times JD.com’s. Pinduoduo has kept its workforce at 13,000, nowhere near Alibaba's 225,000.

Everyone loves a winner?

There are, unsurprisingly, quite a lot of people who feel strongly and quite negatively, about Temu. There's a prevailing sentiment that the meteoric expansion won't last, but how could it?

Once the 300-percent growth fades away, PDD will just be a bargain basement with subpar services and a homogenous business model.

Alibaba, on the other hand, has mobile payment, cloud computing, and logistics to sustain itself through ups and downs. Fundamentally, betting on cheap, generic products over brand names and superior quality goes against retail trends.

Loose lips sink ships

Trends, however, are shaped by time. Economic stagnation in the 80s coincided with the rise of big box retailers such as Cosco in the US, and affordable quality brands like Muji and Uniqlo in Japan.

Ten years of mobile internet in China has led to a single-minded focus on web traffic manipulation, which, after three years of pandemic, is swiftly replaced by a reliance on low prices.

For Jack Ma, it’s about survival at any price. He told employees that “only a company willing to change at any cost is a respectable company.” He also talked about AI-driven e-commerce, like everyone does, but no one knows where AI will lead.

PDD, as usual, says very little. Employees are banned from mentioning Alibaba on social media. No one needs a reminder that the top of the heap is a very precarious position.