It was 2006, at a conference in San Francisco, and Amazon founder Jeff Bezos was crouched down in a packed auditorium attentively taking notes. Jack Ma, the founder of Alibaba, was introducing a hushed crowd to the company that would come to dominate China’s e-commerce market. It would have been hard to imagine back then that Alibaba would eventually take on the American e-commerce giant in China and win.
Fast forward 17 years and Bezos might have another Chinese counterpart to worry about: PDD Holdings, the parent of domestic online retailer Pinduoduo and cross-border e-commerce platform Temu. With the backing of tech giant Tencent Holdings, PDD extended its domestic experience of Pinduoduo and embarked on a grand overseas push.
Temu tops the most downloaded free app charts in the US and some European countries including the UK, and became the most downloaded free shopping app in Japan and South Korea within months of being launched in July.
“We’ve reinvented the online shopping experience to be more interactive and engaging, drawing inspiration from some aspects of physical retail. This new approach has been well-received by consumers globally, playing a significant role in our growing popularity,” a Temu spokesperson told Nikkei Asia.
In the past month, PDD’s market capitalization surpassed that of Alibaba to make it the most valuable US-listed Chinese company. That feat is all the more remarkable considering Alibaba held the record for the world’s largest IPO until 2019. The share surge made Colin Huang, the 43-year-old founder of PDD, the second-richest man in China, with a net worth of USD 52.3 billion as of December 18, 2023, according to Forbes.
PDD’s rise in an already packed e-commerce market has delivered a wake-up call for both investors and established domestic rivals Alibaba and JD.com.
The founders of Alibaba and JD have even been forced to address their employees’ concerns over Pinduoduo’s rapid rise, with Ma vowing in late November that Alibaba will “transform” itself and JD founder Richard Liu acknowledging during an internal forum this month that “JD must change, or else we will have no way forward.”
But PDD’s rise does more than highlight the seismic changes within the Chinese market. As it aims to extend its run of success overseas, its ruthless drive for dominance has fueled a relentless work culture within the company, raising questions about the human cost of the new champion’s explosive growth.
Experts are also voicing doubts about the sustainability of Temu’s cash-burning marketing campaign, which was reportedly USD 2–3 billion in 2023, to fuel its rapid and aggressive expansion into over 45 countries within just one year. The company also faces an even greater long-term hurdle: regulatory scrutiny, particularly from the US.
A controversial challenger
PDD’s rise has been equal parts rapid and controversial.
Since its inception, the company has faced persistent allegations over malware and the presence of counterfeit items on its platform, as well as criticism of its over-the-top marketing strategies and grueling work culture—some of the same allegations Alibaba faced in its early days.
Pinduoduo, which means “together, more savings,” was established in 2015 by Colin Huang, a former Google employee and the founder of multiple startups, including a gaming company. The online retailer started out selling cheap fresh groceries and swiftly diversified into other inexpensive product categories.
From the beginning, Huang’s gaming background set Pinduoduo on a different path from Alibaba and JD. Using a so-called social e-commerce strategy, coupled with an intensive advertising campaign, the platform allowed users to get deeper discounts or even free items by referring deals to more friends, particularly on WeChat, a Tencent app that is used by more than 90% of China’s population.
Pinduoduo has thrived within WeChat’s ecosystem, as links from Tencent’s competitors were blocked. Discount links spread rapidly through WeChat groups, particularly among older demographics in rural areas. WeChat Pay also played a crucial role as many early Pinduoduo users, who didn’t have an Alipay account to shop on Alibaba’s Taobao, found it more convenient to use their WeChat wallets to buy inexpensive items, bypassing the hassle of connecting their bank accounts.
After gaining a large user base in rural China, Pinduoduo began to gravitate toward urban populations, catering to the same users as Alibaba and JD. By 2017, Pinduoduo’s annual sales surpassed RMB 100 billion (USD 13.9 billion), behind only Taobao and JD. In the second half of that year, Pinduoduo began funneling users from WeChat to its own app.
That rapid growth catapulted it to a New York listing in 2018, four years after Alibaba’s.
“We don’t aim to become the next Alibaba. Pinduoduo represents a distinct model. … You can call me low, say I’m just a beginner, but you cannot ignore me,” Huang told Chinese media outlet Caijing in 2018, adding that the company’s core strategy was not being cheap but “satisfying the feeling of getting a good deal for the users.”
In 2019, Pinduoduo sought to shed its image of “low quality” and “counterfeit goods” by initiating a “10 billion subsidy” plan that gave merchants cash in return for offering customers cheaper prices, a move mimicked by JD and Alibaba in 2023. Pinduoduo’s subsidies prioritized high-end products such as the iPhone. The tactic was pivotal, as it persuaded some consumers they could find genuine branded products at a discount on the platform.
“You can call me low, say I’m just a beginner, but you cannot ignore me.”
—Colin Huang, founder of Pinduoduo
Most of Pinduoduo’s projects and plans are centered around what the company describes as its key strategies: consumer first, absolute efficiency and low prices. Buyers, for example, can get an immediate refund without having to return purchased items if they complain about the goods, a strategy that has helped Pinduoduo acquire users. It also differentiates PDD’s model from Alibaba’s, which puts more of a burden of proof on buyers in disputes with sellers.
However, some consumers are still hesitant to buy expensive products on Pinduoduo due to “a prevalence of fake goods on the platform,” said Jacob Cooke, co-founder and CEO of WPIC Marketing and Technologies, a Beijing-based e-commerce consultancy.
“Some brands have gone onto Pinduoduo as a means of reaching new customers and to shed inventory, kind of like a digital outlet mall,” Cooke said, “but the volume remains low.”
A PDD spokesperson defended the company’s record on counterfeit goods, saying it has invested significantly in technology and processes to fight counterfeits. “We take swift action to remove and investigate any infringing items as soon as we become aware of them,” he added.
Temu is even stricter, a spokesperson for the platform said. Merchants must sign an agreement to adhere to the legal standards and regulations of their respective markets. Temu merchants found to be selling counterfeit items are subject to having their listings removed, accounts terminated and even being permanently banned from the platform.
Keeping prices low and customers happy, however, comes at a cost. Even by the standards of China’s notoriously demanding tech scene, working at PDD can be tough.
Multiple current and former employees and executives shared with Nikkei their experiences at the company. “If you don’t care about sleeping, you can join [the company]. Otherwise, I don’t recommend it,” one recently hired Temu employee said.
Behind the success
All PDD employees use pseudonyms at work, and individuals from one team have no access to the organizational layout of another team, sources told Nikkei. PDD also actively discourages social interaction among staff and persistently dismantles WeChat groups between colleagues.
And while most rivals adopt a flexible work schedule—though some with lengthy overtime—PDD adopts a strict clock-in, clock-out system. Several current employees told Nikkei that they have to work six days a week and 12 hours a day, and being one minute late will result in a deduction of one hour’s pay.
The company actively seeks out individuals who have a strong motivation to make money, on the assumption they will work harder and be more obedient. According to a current employee, the company often asks personal questions during recruitment interviews, including about candidates’ relationship status, where their family is from and whether they have a mortgage to pay.
“The purpose of these questions is to screen for individuals who are eager to make money and are willing to dedicate their time solely to the company,” said the employee, who asked not to be named but said they had been asked such questions themselves.
Unlike Alibaba and JD, which have branched out into multiple businesses including logistics, finance and artificial intelligence, PDD remains narrowly focused on e-commerce. It has a much smaller workforce than Alibaba and JD, allowing for more nimble decision-making and implementation.
If you don’t care about sleeping, you can join [PDD].
—A current Temu employee
But concerns about PDD’s work culture threatened to plunge the company into crisis in late 2020, after a 22-year-old employee at Pinduoduo died after working late. The young woman “suddenly clutched her abdomen and fainted while walking home” at 1:30 a.m., and died after being sent to a hospital, according to Pinduoduo.
Following the incident, Pinduoduo’s official account posted a comment on Zhihu, a Chinese chat forum, stating that “this is an era where people trade their lives for success.” The post caused a sharp backlash on social media. Pinduoduo initially denied the comment came from its official account but later acknowledged it was made by an individual employee and did not reflect the company’s official position.
A PDD spokesperson told Nikkei that it would be “an exaggeration” to say “employees must work an excessive number of hours,” adding that the company has employees at “various levels” who work fewer than eight hours a day.
Rivals have taken note of how PDD operates. An executive from JD told Nikkei that from time to time in the company’s internal meetings, colleagues would say, “This is what PDD is doing, shall we do it, too?”
Pinduoduo has also been accused by cybersecurity experts of using malware to spy on its users. Pinduoduo is still suspended from the Google Play app store after versions offered outside the store were found to contain malware in March, according to Google.
Still, PDD is confident that it has hit on a winning formula.
While Pinduoduo was offering cheap products to customers, Alibaba and JD were betting on the so-called consumption upgrade trend, in which Chinese consumers in the past decade have been spending more on services and higher-quality goods. Alibaba prioritized Tmall, its business-to-consumer online retailer dedicated to offering quality goods, while JD won customers thanks mainly to its premium logistics services.
Alibaba’s prioritization of Tmall is deeply rooted in its fundamental business model, as a big portion of Alibaba’s revenue is from the commissions earned from Tmall vendors. These commissions served as the main funding source for Alibaba’s money-losing businesses.
Pinduoduo appeared to have a different understanding of the trend.
“Consumption upgrade isn’t about making people in Shanghai live like Parisians but about providing people in Anqing [a small city in eastern China] with kitchen paper and good fruit to eat,” Huang said in the Caijing interview.
A senior Alibaba executive told Nikkei that in late 2018 Alibaba already knew Pinduoduo could one day become a formidable competitor, but the company was reluctant to make any big moves to fend off the newcomer.
“Alibaba’s focus is on selling traffic and advertising, primarily through Tmall,” a PDD executive told Nikkei. “To emulate our model entirely, they’d have to reverse their strategy by prioritizing small vendors on Taobao. However, this change would significantly impact their revenue and stock price, which would be self-destructive.”
Alibaba and JD launched their own cost-efficient e-commerce platforms, Taote and Jingxi, in response to the Pinduoduo challenge around 2020, but it was too late and both failed to take off.
“You cannot blame Alibaba’s bet on consumption upgrade back in 2018 or 2019 because our shares were rising and Beijing was encouraging consumption upgrade,” said the Alibaba executive, who asked not to be named. “And of course, no one had a crystal ball foreseeing the pandemic was coming.”
Three years of stringent Covid-19 lockdowns took a heavy toll on the Chinese economy, pushing millions of small and midsize companies into bankruptcy. During this time, Tencent and Alibaba posted their first revenue drops since going public.
Then Beijing’s two-year tech crackdown began in late 2020, halting Alibaba’s fintech arm Ant Group’s blockbuster initial public offering that year and making Alibaba “hesitant and cautious about pursuing future endeavors,” the Alibaba executive said.
When Pinduoduo’s monthly active users in China peaked in 2022, PDD started looking to make an impact overseas.
Its first major push abroad came in September of that year with the launch of Temu—short for “team up, price down”—in the US, a market Alibaba has tried and failed to crack. With the tagline “Shop Like A Billionaire,” Temu soared to the top of US app store charts in a few weeks. In the third quarter, users on average spent 30% longer on Temu and Shein than Amazon, according to data from market intelligence firm Sensor Tower.
On the reason behind the platform’s rapid success, a Temu spokesperson told Nikkei that “Temu gave shoppers more choices … to do more with their money, at a crucial time when rising living costs were affecting people from all income brackets.”
The company added that Temu’s “novel digitized flexible global supply chain … reduced the usual inefficiencies and extra costs that are often found in traditional retail.”
Temu does not own any stores and only uses third-party courier services, but the way it handles logistics is an important factor in attracting vendors. As long as a seller’s products are approved by PDD, they only have to ship the goods to a designated warehouse in China’s southern Guangdong province, and Temu will look after everything from that point forward, including shipping abroad and after-sales services, a PDD executive told Nikkei.
Temu’s swift rise in the US was also aided by an expensive marketing campaign, which could be a source of vulnerability going forward, according to experts.
Temu’s US ad spending is estimated to have grown fifteenfold on the year in the first 11 months of 2023, according to Sensor Tower. Around half of that spending went to Facebook, with 25% going to Instagram and 15% to desktop display ads. Goldman Sachs estimated in October that Temu will spend about USD 1.2 billion on ads with Facebook parent Meta this year.
PDD’s latest financial report did not disclose revenue, marketing expenses or any other data related to Temu. A PDD spokesperson said PDD does not report Temu’s revenue separately, as “it has not reached the threshold required for individual reporting.”
While splashing out on ads has been successful as part of a very rapid customer acquisition strategy, it is not sustainable for Temu to continue losing money at this rate over the long term, according to Sky Canaves, a senior analyst of retail and e-commerce at Insider Intelligence.
On the sustainability of Temu’s advertising strategy, a spokesperson told Nikkei that the company has a “rigorous process for calculating the return on investment” of marketing campaigns and that any suggestions of “significant losses for Temu” are “far from reality.”
In Q3 2022, US users spent 30% longer on average on Temu and Shein than Amazon.
There are already signs that Temu’s initial boom in the US is starting to lose steam. Active monthly users of its mobile services grew steadily from January to October but dipped by around 1 million to 63.7 million in November. Amazon, by comparison, had around 300 million such users in the US that month, according to research company Data.ai.
Temu has also started to see a slowdown in order growth in the US and plans to shift resources to emerging markets with higher growth potential, the PDD executive said.
While Temu doesn’t yet pose a serious threat to Amazon’s overall business, as Amazon has a much more diversified retail business, it does pose some threat to the lower-priced segment of the US giant’s retail sales, Canaves said.
Amazon is taking notice of the disruption from Temu and taking steps to address it. Amazon recently lowered its commissions on inexpensive apparel and has started to court Chinese merchants more actively.
But Amazon is not Temu’s only potential rival in the US. It is also in a heated battle with Chinese fast fashion giant Shein for American market share, a battle that has ended up in court.
A few months ago, Temu and Shein sued each other in the US. Temu accused Shein of pressuring suppliers into exclusive deals to undercut rivals, while Shein alleged Temu directed influencers to make false claims against it. The suits were dropped in October but the fight flared anew in December, when Temu sued Shein again, accusing the latter of using “mafia-style intimidation tactics on merchants to “steal Temu’s business secrets and simultaneously forcing merchants to leave Temu.”
“Shein believes this lawsuit is without merit and we will vigorously defend ourselves,” a Shein spokesperson said.
But experts say there may be an even bigger long-term hurdle for Temu: regulatory scrutiny.
An obvious challenge is the US Congress ramping up scrutiny of both Temu and Shein’s labor rights and intellectual property practices. In an apparent effort to present a more international face in foreign jurisdictions, PDD this year changed its legal domicile from Shanghai to Dublin, while Temu claims it is a Boston-based company. Still, almost all of PDD’s executives and employees are in China, according to the company executive.
“Temu’s entrance into the US market comes as US legislators have raised growing concerns around Chinese mobile apps and websites that collect personal information from Americans,” said Caitlin Chin-Rothmann, tech policy researcher at the Center for Strategic and International Studies (CSIS). “In this case, Temu collects data around shopping transactions, browsing history, device information, and geolocation.”
PDD has already shown it can transform one massive e-commerce market. The question is whether it can repeat that feat abroad, in increasingly less hospitable circumstances.
So far, the US has proved too challenging a market for other Chinese e-commerce companies, even the mighty Alibaba. In addition to Amazon’s home court advantage, this latest generation of challengers must also grapple with a steadily rising distrust of China in US politics.
“As [Temu] grows in popularity and takes market share from established retailers in different markets,” Canaves said, “its business practices will draw more attention from authorities.”