Pinduoduo and its IPO in the U.S. -- The dark force rises?

Even this Chinese Kat who is currently located in the Netherlands did not find Pinduoduo (or PDD) and its advertisements unfamiliar -- simply no escape is possible from its brain-washing marketing campaigns launched everywhere in the Chinese media. 

On July 19, days ahead of its IPO on the Nasdaq, PDD was sued by a Chinese diaper manufacturer, Beijing Daddy's Choice Science and Technology Co., Ltd. (hereinafter referred to as Daddy’s Choice or the plaintiff), for trade mark infringements before the New York Federal Court. See the document here. 

In a nutshell, based on the two trade mark registrations in the U.S. (No. 5463121 and No. 5238282), the plaintiff accused PDD of knowingly allowing the sale of counterfeited and unauthorized products bearing the Daddy’s Choice name. 

The infringement lawsuit itself, in this Kat’s viewpoint, is quite straightforward. What seems more intriguing is the nation-wide discussions triggered by PDD and its IPO in China, on which from this Kat’s observation are mostly one-sided criticism. 

-- Sketch of PDD 

PDD (拼多多) can be literally translated as “the more you join together, the more you save”. Founded in September 2015, PDD made its Nasdaq debut at age 3 -- in a way a toddler, but already a star. Suffices to think that it took JD. Com and Alibaba Group, the twin powerhouses in China e-commerce, around a decade to ring the Nasdaq listed bell. 

Colin (Zheng) Huang, the founder and CEO of PDD, once described PDD as a hybrid of “Costco + Disneyland”, of which cutting-price and net-working are the two pillars. Basically, every user can initialize a group-buying from the PDD platform and is welcome to invite more people to join. 

Luckily, with support from Tencent (held 18.5% of PDD’s shares before its IPO), PDD enjoys the enormous advantages of being able to reach 1billion+ consumers through WeChat at a very low, if any, customer acquisition cost (CAC) which is still considered as the main challenge that every pan-e-commerce project faces. 

WeChat can be seen as an integration of WhatsApp (instant messaging), Facebook (“Moments”, comparable to Timeline), Paypal (WeChat “digital wallet”) and AppStore (gaming) ... the list continues. WeChat users can easily sign in the PDD App with their WeChat account, or can directly subscribe to the WeChat account of PDD. Then they can freely circulate the links containing product information to the private contacts and kick off the process of cutting price. Payment can be easily made by using the WeChat digital wallet, which does not require linking any debit card or credit card. 

Standing on the shoulders of giants, PDD’s GMV (gross merchandise volume) in 2017 was 141.2 billion Chinese Yuan. It took Alibaba Group 5 years and JD.Com a decade to enter the 100-billion-GMV club, whilst PDD hit the figure at the age of 2. Its Prospectus discloses that by March 31st 2018 the number of the active users in the last 12 months was 295 million (by the end of 2017 the annual active users of Alibaba Group was 515 million, for JD.Com the figure was 292.5 million). PDD has been rapidly narrowing the gap with the frontrunners. 

Another reason for PDD’s success is that the large group of long-tail consumers in the vast less-developed regions are finally included in the e-commerce carnival. Before, the battlefields for e-commerce platforms were mostly in the developed regions, i.e. the 3rd-tier cities and above, where the population of online-shopping are above the average.

In contrast with frontrunners like JD.Com, PDD took a different direction, if not the opposite one, stepping into the rural area. By the end of November 2017, 65% users of PDD were from the 3rd-tier cities and below, whilst the percentage of users from the 1st-tier cities was only 7.56% -- PDD’s cutting-price business model had successfully attracted a large amount of price-sensitive customers. 

-- Storm of criticism 

Colin Huang once made a famous remark: 

“The consumption upgrade does not mean Shanghai-landers live the way Parisians are living, but to enable the people from Anqing (a less developed region in Anhui Province of China ) to enjoy good kitchen paper and good fruit”. 

As an example, through mass customization and channels optimization, napkin paper manufacturers Corou and Zhihu lowered the production cost significantly and halved the selling price -- together, with a minimal profit margin of 3 cent Chinese Yuan per pack (1 Chinese Yuan = 100 cent = 0.13 EURO), they have sold 260 million packs of napkin papers -- isn’t it a good-bargain utopia? 

Yet not all the vendors can, or are willing to, make the balance between cost and quality, or between short-term benefits and long-term sustainability. Conceivably, the buyers of the cheap-but-fake goods are more likely the price-sensitive consumers who cannot afford the higher priced goods, yet they shall not be seen or be treated as they only deserve the poor quality goods or even the fake ones.

As a matter of fact, PDD has long been accused of hosting sales of counterfeits, unauthorized goods, or the illegal products that do not match their descriptions, for instance, SANXIN (Samsung), KOIVIKDA (Konka), 立日 (立白), Parmepas (Pampers) … Notably, on July 27, Skyworth (创维) issued a solemn statement demanding PDD to remove counterfeit products from the platform; later, the well-known children's literature writer Yuanjie Zheng reported PDD for selling pirated versions of his books to the National Copyright Administration. The series of negative news might have affected the PDD stock price, which experienced a change of -7.87% on July 31 and the market value shrank by $2 billion -- at this point of time, " Colin Huang's utopia" is far from coming true.

-- Crisis or favourable turn? 

Call me an optimist, but this Kat does not see the future for PDD and the IPR protection in China bleak. 

When Taobao started at the very beginning, it faced all these similar issues. Over the years, Taobao has established the basic rules of e-commerce platform management, e.g. sellers' credit system and anti-counterfeiting mechanism, and has built the effective cooperation mechanisms with the IP Law enforcement agencies. The situations have been improved greatly with the help/push of internal and external forces. 

This time, PDD has exposed itself to the global focal point, thus not surprisingly all its wrongs will under the magnifier. 

On the one hand, this outbreak period heightens the level of criticism; on the other hand, it may become a great opportunity for China to extend the IPR protection to a much wider scale and where Taobao and JD.Com have not gone. From the 1st-tier cities to the 5th-tier cities and below, if the price-performance ratio can be optimized by for instance upgrading supply chain and cracking down on counterfeits, the real sense of consumption upgrade can be expected to realize and to benefit more consumers fairly, which in return will foster the sustainable developments for PDD in the long run. 

All in all, it is too early to tell the future of PDD -- going public is not winning a medal, but merely a starting point of trek.