The rise of Pinduoduo and Temu: profits and secrets | FT Film

when you start looking at pindor door you very quickly realize this is not a normal company so there's a lot of mystery around the company with a great deal of secretiveness around how it runs PDD went from zero market share to we think now slightly over 20% of the market it's number suggest a reimagining of what people once thought was possible in the world of complex retail listic it's incredibly cheap and it's also fun but at the same time there are lots of questions about it the way it was founded the way it's structured the way it interacts with investors and those questions some investors might see as red [Music] [Applause] [Music] flags pinor is essenti Al a Online Marketplace and it's really pioneered being an online Dollar Store having all different types of goods no Brands all cheap [Music] prices [Music] [Music] it's grown by just bringing these cheap prices to Consumers that can't afford branded in other Goods back in 2020 uh during the height of the mini internet bubble they they had a market cap of nearly 200 billion uh which they are at again today pindor door has come into Focus now with the launch of its overseas app t- they expanded into this overseas Venture call it September 22 and now they're expanded into almost 50 countries globally essentially leveraging domestic light manufacturing to sell all sorts of things to the rest of the world I mean the reason why ft readers are so intrigued by teu is because just suddenly they've seen their children their friends changing their shopping habits almost overnight so Timo is special this is probably the most important thing to happen to Global e-commerce in quite a long time so I came across teu um through social media I have ordered children's toys um preschool toys montauri toys um stuffed teddy bears I have ordered novelty socks I have ordered um Taylor Swift jewelry there's no denying that pindor door and timu are selling huge amounts of merchandise to huge numbers of people around the world the problem is I can't see how given the lack of information about the company anyone on the outside can really claim to properly understand it they don't Court Wall Street Equity analysts like the other Chinese e-commerce Giants do there are 56 Wall Street analysts who cover PDD Holdings as a stock and 53 of them recommend that their clients buy it they think it's great the weird thing is they don't really have very much information to go on PDD is known to be minimally communicative as far as the business is concerned they've yet to break out any kind of financial detail on you for example timu versus the domestic business and generally it is a very secretive business by Nature by culture um they tend not to give too much away on earning sces and such nobody can tell you how big PD's Marketplace is two years ago it was worth almost $400 billion in what we call gmv Gross merchandise value and using some reasonable assumptions you can get a pretty let's say ridiculous range of estimates is PDD as big as Amazon or is it as big as Amazon Plus Walmart and if you want to get really carried away you can kind of take some of the numbers which they publish and haven't explained run that forward and hey maybe PDD is actually as large as the Italian economy and that's kind of Bonkers right when we do our work on PDD and teu the job is essentially an exercise of triangulation between different data points we talk to Merchant we talk to a lot of the logistical providers that help both PDD and teu in the international market we speak to different industry contacts that are in the e-commerce trade both domestically and cross border and we do get some management access on top of that where you know they can talk in qualitative terms and give you some idea of what they're trying to achieve high level um so it's not completely op but yes it it's less Hands-On when it comes to investors than for example some of my other companies that guide Cly revenues and earnings and so on so pendoo is listed on NASDAQ but unusually as all these other Chinese companies have done these homecoming listings to list in Hong Kong and kind of lessen some of their us risk pindor is held off having a listing in China gives you access to Chinese investors who you would think know your business better than anyone else I think the question for PDD is why don't they want a second listing glossing over details of your business when you're a startup is to be expected when you're a $200 billion public listed company investors kind of expect Clarity on basic matters like Hey where's your headquarters I'm Jude Weber and I'm the island correspondent for the financial times the first floor of this building behind me in the center of Dublin is what PDD Holdings has been telling us Regulators since March 2023 is their principal executive office there's a plaque on the wall outside the office but in fact the company that's registered in Ireland is not t or PDD Holdings but another company completely whale CCO technology limited I wanted to go and visit them and I tried to get up to the first floor but they have no reception there and I was asked to send an email they're the only major Chinese internet company to move their headquarters abroad uh at least on paper there are definitely reasons why PDD might want to be in Ireland island has a low corporate tax rate and that's helped attract other Global Tech companies like apple and meta and Google and that also means there's a pool of tech Talent available here in Ireland Ireland's also an English-speaking country and it's based in the EU and the EU is a crucial Market if it wants to expand globally China also has a cordial relationship with Ireland new Chinese Premier Le Chang visited Dublin in January 2024 and big Chinese companies like Tik Tock and Huawei and woi biologics all have operations or offices in Ireland but really we know deep down this is a Chinese company it's headquartered in Shanghai that's where all the staff and management are so what exactly is it we're dealing with here well that's complicated Teemo says it was founded in September 2022 in Boston waleco was incorporated in Ireland in July 2022 but waleco isn't mentioned any of PD's official filings to the US regulator meanwhile teu tells European customers to get in touch at the Dublin office that we went to and data protection query should be sent to the same office but addressed to [Music] waleco you do usually have to have some sort of assets or important star where you're claiming your headquarters are and it sort of points to this bigger question about PDD what is it that American stockholders are actually buying because you have this complicated system where what they own is a stake in a Cayman Islands company that company has some contracts with operating businesses in China in China all their operating companies are owned by various people that could be a problem if there's any dispute between shareholders and the people who own all these companies that produce the majority of their revenues the origin story of pindor is also confusing but what it does show is that the founder Colin hang has this history of muddying the waters around who exactly owns what to do with his companies back a decade ago Colin Hong who was this ex Google engineer was running a series of companies in this one building in Shanghai and they just basically sold cheap stuff to Americans although Colin Hong was behind them he didn't own any of the companies on paper in China this is known as using white gloves um or B showel I followed the address on business documents to the home of one of these shareholders and he was a 65-year-old man and he answered door with his shirt off and the TV blaring and then there was the company that became pindle that was uh similarly held by this woman who was in her late 60s who owned 90% of the company but when pend later listed on NASDAQ they told uh investors that Colin had controlled the company since its establishment I think if you encounter a company that is pushing boundaries in one area it might make you ask well what else are they doing that we can't see they haven't had a a Chief Financial Officer since going public and they've instead cycled through uh vice presidents of Finance last year pindo door's app was suspended from the Google Play store which said it contained malware now the company said nothing going on not malicious but it does raise questions about what sort of culture is going on that that could happen from talking to employees even they don't really know their colleagues real names they use nicknames we chat groups between staff members are actively discouraged looking at that in a positive light you might say that they're doing that because they face Alibaba and JD and they don't want to reveal how they operate to their major competitors maybe that's true but it's kind of weird isn't it and I really think that doesn't feel like a very very satisfactory explanation and it certainly goes against what we might have learned from a lot of Business Schools about how Innovation happens inside [Music] companies pindle is essentially a Online Marketplace where anyone can go sell Goods to Chinese Shoppers and they've differentiated themselves by taking a a lower cut of each sale and also not building out any of the logistics infrastructure that JD and Alibaba have so they're really an asset light e-commerce Marketplace all online PDD domestically basically outsources the Fulfillment to the industry of express delivery guys it's all very well using third parties daytoday when everything's fine but what about singles day when huge numbers of people across China are sending packages how has PDD managed the user experience if you look at Staffing levels PDD told us it had about 13,000 staff that is so much smaller than Alibaba which has hundreds of thousands Amazon by the way has 1 and A2 million people working for it if PDD has been able to grow to this enormous size without having its own Logistics without having control then I think a lot of business schools are going to have to be rewriting some textbooks so back in 2020 and the years before then they were sometimes spending uh more on sales and marketing than their total revenue so they really went all in on Advertising subsidies to learn users and they've proven at least within China that they can keep those users once that advertising spend starts to to decline as a proportion of their business the question is really will that same model work with teu and will it work with American Shoppers and European Shoppers PDD domestically it's very very cash generative um this year 2023 we think the domestic business is probably on track to generate something like $25 billion of free cash flow and that on some level is funding the growth of timu at least in the first instance Teo is spending significant amounts on growing the business um our estimate is that they will lose over $4 billion in 2023 full year in order to get the business off the ground um we expect them to lose money in 2024 and then most likely get to profitability sometime in 2025 2026 they don't tell investors much about the company if at all they don't mention Teemu in their financial reports except for a couple quick mentions they don't show how teu is growing or or what they're spending to grow teu the chief exec was asked about it on the call and he simply said it's at an early [Music] stage we think in the year of 2023 full year um teu is most likely going to get to somewhere in the range of $17 billion of gross merchandise value roughly a third of shien which has been around for a lot longer and is the other main crossb e-commerce platform Shen is a Chinese founded fast fashion company that shipped cheap clothes directly from Chinese factories to Shoppers in the west it does feel like you know the combination of teu and then others like Sheen and Tik Tok shop are fronting this charge um to expand globally and to sell essentially all across the world and it will in our view in my view have an impact on some of the global incumbents it's early days in U's story but the reason why this company is potentially very important is because they could potentially be replicating shien's growth story in fast fashion in the Online Marketplace if it is able to kind of replicate the speed of Shen's growth through its combination of fun and cheap and easy shopping then it could potentially be as disruptive a force for the Online Marketplace for players like Amazon as Sheen has been in fast fashion so investors are extremely excited about the potential of Teemu what seems worth noting though is there have been other companies asked to comment on what's the impact been on their business and pretty much the response has been yes we're aware of it sure it's going to have some consequence but we haven't seen any impact to our business yet and that raises questions about well how effective is teemu's Big expansion certainly the chief executive Etsy raised questions about the effectiveness of all this money that Teemu has been pouring into advertising certainly they couldn't see the basis for a good return on investment there so would you like to see what's inside my person you would love to see what's inside my person I have found that their marketing campaign has been very very dedicated so I think that may have kind of given you Rose Colored Glasses so that you can't see beyond the fact that you're getting a great deal the only difference between this that I bought in teu for € and the product that was being advertised by the company here is that they had maybe one or two extra middle aay there have been a slew of companies that have tried this crossb e-commerce model shipping packages directly to us and European consumers and no one has yet been able to do it and make a lot of money from doing it although Sheen is beginning to show that the model could have potential I'm Ryan mcaro I'm usually in Beijing but happen to be in San Francisco at the moment I ordered this package on teu originally we were going to go to the factory and film how it was made but unfortunately the local government got in our way it is a very basic bag cost about $8 so you can't expect too much but it looks about like what I ordered although it's a bit smaller the low prices are essentially a function of two things one is the fact that you know compared to peers like Amazon timu is currently charging a much lower take rate than what what we hear Merchants are having to pay on say Amazon um and the second thing which PDD has done prolifically in the domestic Market is something that they call c2m customer to manufacturer where the platform actually Aggregates consumer feedback and data from the from the platform from sales from other sources and actually tells the producer to iterate the product in different ways one of the ways that they do this is often the platform will tell the merchant to design something to a slightly cheaper spec so that it's a little bit lower quality but significantly lower in terms of production cost the products that we as Western consumers are buying on platforms for example like Amazon the high cost of them has a lot to do with the fact that they need to create a brand they spend a lot on marketing they do consumer surveys to try and figure out what we want all of this costs money and is baked into the price of the product Teemu has stripped that away they've basically said okay we're going to go straight to the manufacturer use algorithms to predict what Shoppers want online cut out all of this brand creation fee cost structure and ship these Goods directly from the factories to Shoppers in the west at $8 this bag is cheap but when I looked on Amazon comparable bags we're selling for about 15 the thing is sending this bag across China cost less than a dollar but the cost of getting it to San Francisco from La is probably about half the cost of the total bag which raises questions about how they keep cost down in China to make this business model work now that the volumes are much higher we hear that there are discussions going on between merchants and teu about supplying teu not just from where the manufacturing base in guango and and surroundings but also to supply the platform from inventory that's already in the US where the merchant has already taken on the the inventory risk of the long whole leg and that serve one purpose which is to allow timu to sell more expensive items to sell heavier items which if you're sending things via brown paper envelope via air is is more difficult China Hawks in the US are certainly not happy that us consumers are becoming more and more reliant on these platforms but the question is whether or not they can actually do anything about it there's obviously the potential for geopolitics to influence the business um one of the more visible things is the DI Minimus provision in the US which allows Parcels to go into the US without paying tax if it's under $800 of value teamu takes advantage of this according to a US Congressional committee this committee is also looking into where teus sources its goods in China so there's some impetus to look at if teu is getting any of its goods from shinjang and whether that is getting into the US [Music] illegally we're in an age where it's become very obvious that there is environmental cost to fast fashion and to overc consumption but over the past two years we've seen these companies whose whole business model is premised on us buying more throwing it away and updating our wardrobes filling our cupboards with things that we didn't even know that we needed or wanted and the key question here is whether or not through their business model they're actually creating this new demand whether or not they're encouraging and impelling those shopping to constantly add to their basket and to be buying stuff that quite frankly they probably don't [Music] need close friends of mine um one of them recently put in her her own order um only last week and she said oh my God we have created a monster my basket is already full again and I can't wait to check it out as a shopper if you're just going on the teu website you would have no idea that this is a Chinese company on teemu's website they've sporadically been updating their founding story at one point they listed on their website their connection to Pendle door but at the moment they've removed any mention of China and say they were founded in Boston in 2022 I think it's fine for a company to to be secretive Apple famously Prides itself on secrecy what's weird about PDD is it isn't telling you some fairly basic stuff about its business which isn't the special Source not its Innovation but really just trying to understand the financial numbers it's publishing these are some pretty standard questions that you would expect to be answered by a public listed company the story of timu is really a story of how dominant Chinese manufacturing continues to be we've seen geopolitical tensions between the US and China but in spite of all of those Trends you've seen these Companies shipping Chinese manufacturing almost directly to consumers in the west that is a testament to the continued strength of Chinese manufacturing base since I started following pend the question for me has been why did they operate the way they do with this extreme secretiveness at least within China pend has really proven that their business model uh does work according to their financial statements the question is whether they're going to be able to recreate this with teu [Music] abroad

Channel: Financial Times

Views: 482,033

Keywords: business news, finance analysis, Financial Times, finance news, international news, global news, markets, china trade, us economy, brexit, news, business, tech, india, finance, Pinduoduo, Temu, ecommerce, China, Amazon, Alibaba

Id: 2d8j_q2tl9c

Length: 25min 28sec (1528 seconds)

Published: Wed Mar 06 2024