This article on Colin Huang’s reflections on Pinduoduo as well as his early life lessons was originally published in Chinese. Some of the insights on his upbringing and entrepreneurial philosophy are quite interesting and relevant for many of us.
Few years ago, when everyone in China thought the ecommerce fight was over, with Alibaba and JD dominating, Pinduoduo came about and took the market rapidly. Some of Colin Huang’s thinking offers very good lessons for all of us in the entrepreneurial journey. For example, on how to carve a path against the giants, and how Pinduoduo maintains perpetual efficiency as a large organisation.
Pinduoduo’s overseas expansion has also been aggressive and impressive. Its overseas platform, Temu, has taken the world by storm. Within only 7 months of its launch, Temu has become the most downloaded app in the US App Store with 3 million downloads and has become one of the fastest-growing applications in the United States.
Pinduoduo’s success is inseparable from Colin Huang’s management philosophy. In this Part 2 of 2 of the article, we will take a closer look at Colin Huang’s personal and business philosophy.
You can refer to Part 1: Lessons from the early life experiences of Colin Huang and the founding of Pinduoduo here.
You can refer to Momentum Works’ “Tech Leaders with Chinese Characteristics” and “Who is Temu” reports for a more structured analysis and insights about the company. You can also read our book “Seeing the unseen: behind Chinese tech giants’ global venturing” for more case studies, analyses, and reflections.
Personal and business philosophy
Power of simplicity and common sense
For unknown fields, I usually take a more primitive approach, which is to experience and feel it myself, and judge with common sense.
Most knowledge is useless; solve problems when they arise. I don’t plan for the next five or ten years, but instead, I set a distant and a closer goal.
Most people are better than me in most areas. I am only better than very few people in very few areas. For example, I have the ability to isolate external pressure, return to the original rational thinking, and sometimes have the ability to do invert thinking.
Charlie Munger on invert thinking
When I was working in the secondary market, I realised I seem to be not easily anxious when most people are afraid, but I get easily pessimistic when everyone is too optimistic.
The theater effect
The phenomenon of “bad money drives out good” typically describes situations where negative behaviors or traits dominate a social group, leading to positive behaviors or traits being pushed out or discouraged.
At its core, it shows how selfish and divisive individuals are unable to resist the coercive power of those in positions of authority. In other words, when individuals prioritise their own interests over the collective good and fail to work together, they become vulnerable to the control of those in power who can force them to accept inferior standards.
From another perspective, it also describes a phenomenon of using the power of individual selfishness to redistribute wealth and lower the cost of public services.
There is a similar concept in China called the “theatre effect”, which describes a group of selfish individuals (who are divided and lack external coercive force), and may cause collective self-harm.
For example, if the people in the front row of the movie theater stand up, the people in the back row will also have to stand up. This will disrupt the order in which everyone could have sat and watched.
In other words, the “bad money drives out good” is a (negative) force that overcomes positive force to promote the popularity of bad money, while the theater effect is a phenomenon of collective self-harm where no one really benefits, which is worth studying and addressing.
The people who stand up in the movie theater first are like a bad apple that spoils the whole bunch, and soon the entire bunch has to be thrown away.
This is actually a proportion problem: The bunch has a self-purification ability – if the proportion (of rot) is low, there is no problem, but once the proportion reaches a critical point, the purification ability collapses and the bunch has to be thrown away.
The critical point of which bad apples can spoil the whole bunch is very low. For example, major quality change can occur between being 1% and 5% contaminated – if your bunch is 1% contaminated, the overall bunch might be fine still, but if you have more than 5%contaminated, the entire bunch might need to be thrown away.
Applying this to business: Amazon was able to disrupt the entire book retail industry by substantially controlling the pricing of books, even when their market share was well below 50%.
Why do some products sell better when they are priced higher?
For example, in the air conditioners business, it does not only require installation, it also requires recommendation by someone (i.e.: having a salesperson).
It is possible that an online direct sales model like Xiaomi’s (cutting intermediaries and lowering the price to the lowest point), will not work as well as Gree’s (selling through various intermediaries and distributors), of giving installers and channels enough profits. Although the intermediaries / channel approach may raise the price of the product, in practice, the cost of maintaining channels and providing services may be the most economical and benign way to maintain a certain public understanding and expectation.
Certain channel and service costs are necessary (e.g.: in the case of air conditioners), and it reflects the cost of maintaining a certain order in the public; ignoring this cost system may lead to “bad money drives out good.”
Thoughts on supply and demand
To fundamentally transform the supply, we must first transform the demand.
There are three types of supply-side transformation:
- The first type satisfies existing but previously unfulfilled demands. For example, the desire to fly led to the creation of airplanes to meet the demand.
- The second type arises from the emergence of new use cases. For instance, in sudden scenarios like world wars, clothing and many other daily necessities were needed in large quantities, standardised, and mass-produced, which led to significant changes in the organisation, management, and delivery in the supply side.
- The third type comes from significant changes in the cost of information collection. For instance, the emergence of Uber significantly reduced the cost of information collection, on routes, locations, and ride-hailing demands.
This third type of transformation has a lot of possibilities, such as trading off time and space for higher overall efficiency and lower costs.
In abstract terms, there is a possibility to stimulate demand and circulation by using a plan that promotes more adoption on the demand side, which in turn would drive the supply side to break away from traditional large-scale production and enable small-scale customisation – i.e. using “semi-planned economy” on the demand side to promote the “semi-market economy” of the supply side.
Ecommerce has solved the problem of moving Yiwu’s (famous for the world’s biggest wholesale market for manufactured small consumer goods) small commodity goods online, making information highly transparent and accelerating competition among merchants, but it has not changed much for traditional manufacturing.
Factories still need to do the planning, and the main factories still rely on batch orders from offline supermarkets. They plan according to periods of several months or even half a year or a year.
The more intense the competition among online merchants, the more market-oriented it becomes, and the more pronounced the discrepancy between the online retail sales and the planned batch orders for international demand.
Under this situation, the main factories still rely on Walmart and Carrefour, and the extreme fluidity of online circulation does not change the backwardness and high rigidity of production planning.
Is there a model that can change the time lag and rigidity of production planning?
Suppose we can make consumers more patient and willing to coordinate with others, and give up some of their impulsive desires for instant gratification. In that case, we have the opportunity to use people’s recommendations, relationships, and similar interests to group people together, to aggregate individualised needs into planned needs with a certain degree of time abundance.
Such demand aggregation may not be as large as that of Walmart’s batch orders for six months, but it can be enough to operate a factory production line economically.
If we can do this, we can alleviate the discrepancy between the highly fluid demand and rigid production.
The more we integrate planned demand and market-oriented production, we can have more comprehensive information between the front and back ends, thus eliminating the mismatch between demand and supply, helping us break away from dependence on traditional Walmart-style supermarkets, and move towards a process where supply is more synchronised with demand.
Thoughts on redistribution of wealth
Insurance products further promote the transfer of wealth from the poor to the rich, amplifying the power of capital.
Continuing down this path, if the market is highly efficient and runs free (with no intervention), and the law safeguards the legitimacy of capital and its compounding interest, it is very likely that the rich will become richer and the poor will become poorer.
Warren Buffett is highly regarded because he not only plays the game of capital to the extreme but also understands that money is not the ultimate goal. He enjoys the pleasure of the game of capital on one hand, and on the other hand, donates most of his money to the Bill & Melinda Gates Foundation to achieve the proper redistribution of wealth.
At the same time, he advocates that other wealthy people also donate money, and proposes that the country increase taxes on the wealthy and carry out more significant wealth redistribution mechanisms.
Does a mechanism exist that allows poor people to sell “insurance” to the rich, achieve more precise feedback, and have shorter cycles of money flowing from the rich to the poor?
For example, suppose a thousand people want to buy a certain style of winter jacket in the summer. They can place a group order with the manufacturer and pay a 10% deposit based on last year’s price.
In this case, the factory is likely to give them a 30% discount. This is because the group order provides the factory with a certainty of demand that they did not previously have.
This certainty can be transformed into the ease of production during the off-peak season, or it can be converted into certainty when purchasing raw materials.
The factory can even further “sell this certainty” to upstream and manufacturer partners to further reduce costs.
(Instead of having the manufacturers anticipate and plan demand), everyone (whether rich or poor) is much clearer about their own desires, needs, and plans at a future point than others (i.e.: factories).
This individual planning, desire, and certainty about one’s own behavior are often valuable to the supply side. It can reduce the uncertainty of organisational production and help achieve a more effective allocation of resources and capital.
Therefore, I think capitalists and the wealthy are willing to pay the cost of purchasing this certainty from ordinary people and the poor.
This type of “reverse insurance” is not about poor people accumulating credit and money to borrow from the rich and pay interest, or spending money to buy a rich person’s lifestyle certainty. Instead, it is the reverse: the wealthy and capitalists pay to buy the certainty of an ordinary person’s production and capital allocation.
Where to find strength?
Duan Yongping‘s philosophy in business and life is summed up in his saying, “Fast is slow, slow is fast.” Doing things with a calm mind is better, but it’s hard for most people to achieve that.
Duan Yongping is a person who is always learning and progressing.
He also taught me common business sense, that prices will always fluctuate, but as long as you keep raising your value, the final price will be close to your value.
This common sense allows you to focus on increasing the intrinsic value of your company, and not be overly concerned with the price fluctuations in the capital market.
In addition, Duan Yongping taught me to be content with what I have and do well in the present.
In 2006, Duan Yongping took me to have lunch with Warren Buffett. I found what Buffett said was actually very simple, even my mother could understand it.
Colin Huang joined Duan Yongping for lunch with Warren Buffett, which Duan paid US$600,000 in an auction
The biggest significance of this lunch may have made me realise the power of simplicity and common sense.
When making judgments about something, you need to know the background and facts. After understanding them, what is needed is not wisdom, but the courage to see reality and act with rationality and common sense.
Common sense is obvious and easy to understand, but we are often blinded by the prejudices formed by our growth, learning, and personal interests.
Momentum Academy conducts sharings, workshops, and simulations on Pinduoduo’s culture, its key success factors, people and organisation practices. If you are interested in bringing such learnings to your organisation, please contact [email protected].