On 21 November, two stories rocked China’s ecommerce scene, with global implications.
(In the previous episode, we discussed the first story: Alibaba’s merger of its domestic Chinese and international ecommerce businesses.)
In this episode, we dive into the second story—PDD Group’s Q3 earnings miss. But was the ‘miss’ engineered deliberately because all the merchant support costs were planned, or was it a lapse in execution?
Tune in as we explore:
- Pinduoduo’s ¥10 billion merchant subsidies;
- Why PDD or Temu seems to choose to directly engage rather than hire lobbyists;
- Temu’s opening of a full marketplace mode in the United States;
- Pinduoduo’s focused operations, and its similarity to global retail giants like Walmart
The ecommerce competition in China and globally is entering a very interesting and probably even more intensified phase now.
Watch the episode here:
Also available on Spotify and Apple Podcast
[AI-generated transcript]
Sabrina: [00:00:00] Hi everyone, and this is episode 102 of the Impulso podcast. So last week, or more specifically last Thursday, two very big things happened in the Chinese e commerce scene, right? So the first is of course Alibaba announced the merger of its e commerce chain.
Sabrina: Chinese e commerce businesses as well as international e commerce businesses. And we did a podcast episode on that just before this. So if you guys are interested, you can check it out in the show notes below or in an info card that will pop up, maybe. And of course, the second thing that happened was that Pingtuoduo, one of Alibaba’s biggest competitors, announced their Q3 earnings.
Sabrina: And of course, during the Q3 earnings, they mentioned that they missed revenue consensus and of course their stock price plunged about 10%.
Jianggan: Which is much milder compared to the previous earnings, Q2. So
Sabrina: you listen in on the earnings, right?
Jianggan: I mean, we listen to a normal company’s earnings call, you will see a pompous statement of how great we are.
Jianggan: And then you will have people like skipping over the analyst [00:01:00] questions. But this earnings are different, right? So first they were like, no, just very plainly tell you. Okay, this is what we did. That’s what we’re trying to do.
Sabrina: So they were very honest. They are very honest.
Jianggan: I mean, for me, being honest has a negative connotation.
Jianggan: It means that you’re not really competitive in a competitive world. But for them, they’re frank.
Sabrina: obviously in Q3, the stock price didn’t plunge as badly as they did in Q2. So, in Q2, um, Felix, if you can pull up what Chen Lei said on the screen. So the co CEO Chen Lei, during the earnings call in Q2, he said that he made it clear on investors that in the long run, the decline in profitability is inevitable. And of course, he also added that competition in its global business, referring to Timur, faces a rapid shift in external environment and significantly the greater uncertainty.
Sabrina: And then he highlighted that the competition Pinduoduo is facing is growing stronger and is here to stay and [00:02:00] is expected to intensify. Therefore, the management has reached a unanimous
Jianggan: decision that the
Sabrina: next few years are not appropriate for dividends and share repurchases. Repurchases.
Jianggan: So
Sabrina: this obviously spooked quite a couple of investors, right?
Sabrina: Because essentially what you’re telling them is that we’re in a very, very tough business. Our profitability is going to go down.
Jianggan: I don’t know, I think more than half of the listed businesses should probably say that. That’s probably true. Probably
Sabrina: what’s going to happen. Yes,
Jianggan: but nobody says that.
Jianggan: Everyone’s saying that, oh, we’re executing great, or whatever, right?
Sabrina: Yes. Of course.
Jianggan: But do we actually believe that? So it’s a complete waste of time, right? You are saying something and everyone else discounts what you are saying. And then because everyone else discounts what you are saying.
Jianggan: What you are saying
Sabrina: has no purpose.
Jianggan: And you have to say even more pompous words because everyone discounts it.
Sabrina: So then is it a lot better to take the Pink Dodo approach and be so frank in your earnings calls?
Jianggan: No, I think it will make the world an easier place.
Sabrina: If everyone is just so honest, right?
Sabrina: So, thankfully in Q3, Chen Lei didn’t make such statements, right? So,
Jianggan: I was listening through the call, and when I was [00:03:00] listening, I was also like simultaneously texting like a bunch of investor friends, discussing about how to make sense of, This line that he just said, and how to make sense of that, and of course, the prepared statements, everyone knew what they were going to say.
Jianggan: It’s the Q& A which were more interesting, right? I was kind of disappointed that the analysts didn’t ask sharper questions. But anyway, so during the Q& A, everyone was saying that I hope they’re not going to say something that they said in Q2. That was the end. I think, the other co CEO, he said,
Sabrina: he said, so, um, so yeah, the next slide.
Sabrina: So he said, our team’s gradual aging and lack of certain capabilities might cause us to miss out on some macro opportunities, especially when facing new or evolving situations. So he was very, very frank. He even gave an example, right? So the example he gave was that there were multiple macro policies introduced this year.
Sabrina: He was slightly referring to the government subsidy of [00:04:00] 150 billion yuan. So he mentioned that this has brought significant support to industries and fewer consumer demand. And then he followed that up with, however, our team was unable to fully leverage this macroeconomic shift due to the limitations in our operations experience.
Sabrina: So the as a third party platform and then they said that they incurred much higher cost.
Jianggan: Yeah
Jianggan: So one person I was talking to and and when we started saying that Here’s the example or something like that, right? He said My friend was saying, oh gosh,
Sabrina: if you say
Jianggan: the team is aging good, like just gloss over it and talk about something else. And he actually went on to give an example.
Sabrina: He gave such a specific example as well.
Sabrina: And he was just like Which
Jianggan: is probably true, right? We missed it. Because if you look at the latest W11 results in China, one of the best performing categories was electronics. And much of that subsidiary was actually Geared [00:05:00] towards consumers replacing their aging, electrical, electronic appliances at home.
Jianggan: I think top about chemo and JD tapped into the subsidy quite a lot. Mm-Hmm. It’s probably the best perform categories during the past double 11. I think Pinduoduo didn’t leverage it as much. And I think he was,
Sabrina: he was very frank about it.
Sabrina: Right. But this is interesting because obviously now I think not just in China, right. Even globally, because of Timu, Pinduoduo is a company that a lot of people are watching and a lot of people are listening to, and a lot of people are trying to guess what they’re going to do, especially for Timu, right?
Sabrina: Like a lot of international companies are guessing what, what country are they going to enter next, what. Are they going to shift into like a marketplace model? What are they going to do? So the fact that they are so frank in their earnings call, is it to throw off other companies and just be like, don’t focus on us.
Sabrina: We are not doing well guys, we are struggling.
Jianggan: Oh, that’s what Intel said, right? But Intel was indeed struggling, but I mean, this company is not struggling. They are still making a lot of profit. And [00:06:00] if you look at what they said in Q2 a lot of things they said was of course, competition is here to stay. I mean, of course.
Jianggan: if you’re in a competitive environment and the profit will decline over the long term. This is basic classic economics. So they didn’t really tell you anything new. I think what spooked investors was the message of the, hey, we are not giving any share repurchase. We’re not giving any dividends.
Jianggan: So, because they were very profitable and people were expecting them to be even more profitable. And when you are very profitable, investors expect some returns, right? They made it very, very clear that we’re not going to do that. And of course, people are guessing like, why don’t you do that?
Jianggan: There were lots of speculations. One of the most widely circulated theories was that, okay, Colin Huang, the founder, didn’t want to be the richest man in China. So
Sabrina: he wants the share prices too.
Jianggan: Yeah, so as a result, he gave a discount to their share price, just as Pinodo would give to any other goods sold on the platform.
Sabrina: That’s an interesting theory.
Jianggan: Another theory which I [00:07:00] find a bit more plausible is they were expecting more intensified competition with Alibaba. So as we mentioned, Japan is going to take over the management and Alibaba still has, I mean, you, you, you, right?
Jianggan: I mean, we talked to the merchants and merchants there actually still have an affinity to Alibaba. They said, Oh,
Sabrina: that’s true. Over
Jianggan: the years, Alibaba helped us a lot. I mean, look at all those businesses without Alibaba platforms, will not be able to grow so big over the last 10 years. But Pinduoduo, they harm the merchants.
Jianggan: They push the prices down. So, what Pinduoduo did in Q3, which I think they expected they would do during the Q2 earnings call, is they’re going to give subsidies to merchants.
Sabrina: Yes, so this is kind of something, I think, I’m not sure if they mentioned it in their Q2 or Q3, but one of the reasons, They said this that they want to reinvest their profits back into the ecosystem.
Sabrina: Right. And one of it, of course, is helping the merchants. So Pingtuoduo actually launched recently a 10 [00:08:00] billion yuan subsidy. It’s the fee reduction. Fee reduction or subsidy? Fee reduction, right? Reduction and high quality merchant support initiatives. Yeah. So this is interesting because previously Pingtuoduo has given similar subsidies, but they were mostly to consumers.
Sabrina: Yes. Right is this the first time that they’re giving merchant, well not merchant subsidies, but merchant support?
Jianggan: I think they have done some initiatives to support merchants in China to build brands, but things at this scale, it’s something which is new , and they probably assess the market and decide, okay, we have been focused a lot on consumers and now we are in a competitive environment where it makes sense for us to invest To the merchant side so that we get all the good quality merchants and are willing to play with me on the platform
Sabrina: So this is probably why they’ve kind of shifted.
Sabrina: Earlier this year, there were some sellers who kind of stormed the Pink Dota’s office, right? Because they were complaining about
Jianggan: unfair fines and a
Sabrina: lot of stuff. We have [00:09:00] an article about it. It’ll be linked down below if you guys are interested.
Sabrina: But do you think this could also be maybe one of the reasons why they’ve realized the importance of having to focus on merchants as well in
Jianggan: this ecosystem? I’m not sure whether how related this thing is to that specific event. But what we did see is that after this event, they became more lenient towards merchants.
Jianggan: So if you’re a platform and you want to make sure that your platform is trusted on both sides, right? Especially when Tamr started selling cheap goods, right? How do you make sure the consumers trust it? I mean, it’s by imposing higher standards on the merchants there.
Jianggan: So this is something that Wish didn’t do. That’s why Wish is. failing, but has failed. , that’s something that Amazon couldn’t find a way to do, at least in the past, to do it at a reasonable cost. So Temo did that. And of course, I mean, some merchants were unhappy about it. But I also know like a number of merchants who actually made good money out out of Temo.
Jianggan: So I don’t think that’s the main trigger. I do think that whatever they are doing, is after some assessment [00:10:00] about micro landscape in commerce and how it’s likely to move in China and they decide to focus there. This company is, if they decide to focus on something, they put all their resources there.
Sabrina: And they’re very focused and executed very well and very
Jianggan: quickly. So
Jianggan: we said that them being frank, this is what we’re going to do. I mean, they can say that because there’s no need for them to hide. They just tell you that. This is what we’re going to do and good luck trying to execute better than us.
Sabrina: That’s funny, yeah, because it’s not like, usually you think if they are so frank, maybe they are trying to throw off their competitors, right? But maybe to them, if your company is so efficient and you know that none of your competitors can execute at the speed and scale that you can, it doesn’t hurt, just be like, okay, this is what I’m going
Jianggan: to do.
Jianggan: And also e commerce in China is a market where everybody can see clearly
Sabrina: I mean,
Jianggan: the leaders are all very smart, and they understand the industry well, they see the dynamics, they see what the right focus should be.
Sabrina: We also talked a little bit about, obviously, Big part of Pinduoduo’s business as well is also their international business, right?
Sabrina: Yeah, so we mentioned about Teemu and they did talk a lot about Teemu So they said as our [00:11:00] business continues to grow Consumers and external stakeholders have placed higher requirements on us. So we do know that Overseas Teemu has been facing a lot of
Jianggan: pressure,
Sabrina: pressure from governments and all right but you shared that Pinduoduo doesn’t seem to spend a lot of time lobbying So this is something that other companies have done.
Jianggan: She spends a lot of time, money and energy . Tim does not do that. I was actually having discussion with a friend in the US and she was telling me that, Oh, she doesn’t see lobbyists being hired by Tim to do things. She said, Oh, they probably don’t care about it.
Jianggan: I said, probably they have done some calculation to say that the ROI of hiring all this lobbyists. It’s probably not very high because this is the environment where the trade tensions are there and you want, you’re on the wrong side. So what should you really do?
Jianggan: I mean, higher up is to help people argue a case and is that going to get anywhere with all the cost you’re incurring? So look at, I mean, she is spending lots of money and effort on that and not much and look at the [00:12:00] results similar.
Sabrina: But also Teemo seems to be focusing more on what it can do on its own in terms of operations to sort of bypass these regulations, right?
Sabrina: So we mentioned that Teemo originally started as kind of a full consignment model, and then They’ve shifted to a half consignment model and now even a marketplace model, right? So, um, Faze, you can pull up the slides that kind of show the differences between what it is.
Sabrina: So initially when they started, they started as a full consignment model, which was something that not a lot of players were doing in the international market. So they just handled the, they handle almost everything. They
Jianggan: handle everything. So the suppliers just need to supply the goods and traditionally in the marketplace, the suppliers does a bit of everything.
Jianggan: I’ve seen so many analysis saying, oh, this is how great a full consent model is. I mean, how sustainable is this model and stuff? And, and all of them are missing the point.
Sabrina: So what’s the point?
Jianggan: You can go back to the page about the strategy.
Jianggan: Full consign model is a way for them to start leveraging the supply [00:13:00] chain in China. And tackling a market space, which is empty, right? So for instance, I mean, premium customers, they have Amazon, which does pretty well, right? Fulfill your goods and fast, efficient, and it’s just, they do not cater to low cost goods very well.
Jianggan: But there are lots of low cost goods demand. I mean, people need to buy like small items, from the market. And traditionally people like Wish try to fulfill that demand and, they grew fast. But then they couldn’t handle the operations, fake goods, fake merchants, bad reviews, poor
Sabrina: quality goods,
Jianggan: poor quality and not good enough fulfillment, et cetera, et cetera.
Jianggan: So terms for consignment in a way, first you go to the manufacturers that allow you to lower the cost.
Sabrina: And the
Jianggan: second is that by controlling the whole process, you ensure a certain standard. to consumers. So of course on the market you see lots of people complaining about, you know, Timu goods being not good. But if you flip that thought around, I mean, for that amount of price that you pay for that category of goods, they are probably the best option amongst what you can find anywhere else.
Sabrina: That’s true. For the hit and miss, like, it’s probably [00:14:00] good enough for the price that you’re paying, right?
Jianggan: Yes, yes.
Sabrina: But it’s interesting that kind of how we see Timu is kind of shifting to this. marketplace model now where they give a lot more responsibility to the suppliers.
Jianggan: Yes. They allow suppliers to be directly, sort of selling from the U. S., shipping their goods from the U. S. So that is attempt to bypass the notion that, okay, we are cross border, we’re shipping like, you know, billions dollars worth of goods in the U.
Jianggan: S. We’re also, I mean, now we’re also like allowing people in the U. S. to sell their own goods. But
Sabrina: I think it’s kind of funny that Teemu is kind of going from full consignment to marketplace, where we see a lot of kind of marketplace platforms go into a consignment model, right? So in the visuals you’ll see, so Aliexpress started Choice.
Sabrina: Aliexpress, Lazada also started Choice, Shopee also started Choice. I don’t know why they’re all called Choice. Because they don’t have a choice. Yeah. I don’t know why they’re all called Choice. And recently, Amazon also launched Amazon Haul, which is their version of a full consignment model,
Jianggan: right?[00:15:00]
Jianggan: Yeah. Amazon Haul it’s actually quite interesting. So you go to Amazon and go to this page, the look and feel is different from all the other The actual Amazon. Yeah. It’s lively. It’s, it’s hippish. I mean, it looks fun. Until you go to checkout page, it was just still the traditional Amazon experience.
Jianggan: I think people are figuring out a way to try to satisfy that demand for goods, which are relatively low value. And how do you fulfill them? How do you sort of tap into the supply chain and be able to deliver consumer goods of that low average value? In a way that’s sustainable.
Jianggan: So everyone’s is doing that. I think Tehman will probably stick with that model, but moving forward, it’s because of the geopolitical tension for certain key markets.
Sabrina: They probably will have to either do a half consignment or shift to a marketplace.
Jianggan: And to be honest, in the U S we do the marketplace and most people sending these items would probably still source these items from China.
Sabrina: I guess that’s how you position your company, right? I think it’s interesting that instead of spending so much money on lobbying, [00:16:00] which might not have as much of an ROI, as you mentioned, what Teemu or rather Ping Duoduo focuses on is how can they improve the operation so that they can sort of bypass these regulations.
Jianggan: So the company is quite practical and it focuses on solving problems and it’s in a way that many in the ecosystem will find it like annoying and boring.
Sabrina: Why boring?
Jianggan: Because it just does whatever it’s supposed to. It doesn’t have all this like creativity and stuff.
Sabrina: But if it, if it works, it works.
Jianggan: I think at the end of the day, if you look at this company, you can draw lots of parallel from the successful like large U. S. retailers like Walmart. I mean, if you look at how Walmart does procurement, how Walmart does operations, How Walmart motivates its employees. I think we will see lots of similarities.
Sabrina: So I think it’ll be interesting to see kind of how the e commerce scene, not just in China, but globally as well, is going to evolve even further, right?
Jianggan: Do you know what this apple is?
Jianggan: Okay. Do you know that there are different kinds of apple?
Sabrina: Yes, yes. I know I like Fuji apples.
Sabrina: Do you
Jianggan: know where Fuji apples [00:17:00] are grown? No. Mostly in Shandong province it’s largely grown in Shandong province in China.
Sabrina: I’m being scammed. I always thought they were from Japan.
Sabrina: So I
Jianggan: think in episode 100, we talk about this.
Sabrina: We talk about the Tianshui apples, which is 150 billion parts of
Jianggan: Tianshui, Huaniu, right? The low, low price, yet decent quality. Colin Huang, the founder of Pinduoduo, long time ago, he once used the example to demonstrate that.
Jianggan: So when the consumers receive a box of 24 apples, right, two of them are rotten. And people saying that, Hey, how can you have that? But he was saying that, if you look at the traditional supply chain, 24 apples live in the farm and probably like 15 to 16, they will be rotten along the way.
Sabrina: Oh, so in the old supply chain, the customers don’t see the rotten apples because obviously they get tossed up.
Jianggan: Yes, they got tossed out, but the result is you are paying a high price for
Sabrina: the
Jianggan: Apple to compensate all this and all these people who are working along the supply chain.
Sabrina: So that’s what Pinduoduo is doing with their [00:18:00] consignment model, right? Essentially just getting that, right? It might not be as good, but you reduce the wastage and you reduce the
Jianggan: price. As we said in episode 100, so the 150th billion parcel of China is Apple. Okay.
Jianggan: sold by Pinduoduo. So I think they are doing a lot of initiatives to help the government promote agriculture produce or different localities. That put them in the good eyes of the Chinese government at least. And how do they replicate that to really like, you know, not only just the export goods from China, but help the supply chain to become more efficient in metro markets, say the U.
Jianggan: S. I think that would be something interesting.
Sabrina: And I also think that would be something that would probably put them in a better standing with foreign governments, right? Not just, I’m not just exporting goods from China, but I’m also helping your merchants. I’m also helping your suppliers in your country.
Jianggan: If they can do that, that would be phenomenal. But that would be a very, very difficult task.
Sabrina: If you guys are interested in more news about e commerce and what’s happening in the e commerce scene, not just in China, but Also [00:19:00] globally, do like this video and subscribe to our channel to stay updated on the latest happenings and trends in tech, new retail, and the broader digital economy.
Sabrina: Thank you. And bye bye. And Zhang Gan is eating the apple.
