Flanked by a wall of vivid orange packages, YouTuber Hope Allen was uncertain about the phenomenon they represented. “Temu has been taking over, and I don’t know how I feel about it.”
The ecommerce firm’s “shop like a billionaire” ad campaign to promote its online flea market was ubiquitous. Allen’s response was to buy a job-lot of undeliverable parcels that disgorged a sample of Americans’ experiment with Temu.
Among the piles of extremely cheap clothes, bags, tools, toys and kitchen implements were designer look-alikes that provoke questions. “How do they get away with that?” asked Allen of a faux Victoria’s Secret bag, before recoiling from the smell.
All were flown in from China by Temu’s parent company PDD Holdings, a self-described “agricultural group” engaged in what might be the fastest and most ambitious retail expansion in history.
With Temu, PDD wants nothing less than to change the way the world shops, a faster, leaner and cheaper version of Amazon that has spread from China to 49 countries after less than two years in operation.
The plan, as best can be inferred, is to use blanket advertising to lure western consumers to Temu’s app, where algorithms and AI anticipate their whims and desires. Products are shipped for free direct from China’s factory gates, cutting out the middleman and ensuring low prices.
Temu’s sister app Pinduoduo already dominates China. When it still published such numbers, PDD reported more than 870mn active users in the country supplied by over 13mn merchants who, it claimed, together generated a third of all parcel traffic in the country, tens of billions of packages a year.
After just nine years in business, PDD is now bearing down on the world’s biggest ecommerce group Alibaba, both in terms of retail scale and stock market capitalisation. Worth $162bn, it regularly trades places with the older retail giant as the most valuable Chinese company listed on a US stock exchange.
But the tale told by those incredible numbers is a mystery that raises more questions than it answers.
For instance, why does PDD look like much smaller peers when staff levels and research spending are compared? Why haven’t competitors described the impact of PDD’s rise? Why do balance sheet metrics move at a different pace to revenues? How does a $200bn company own less than $150mn worth of hard assets?
These questions add up to a bigger one: why do US investors have so much confidence in an opaque operation whose financial statements seem to lack much pattern or explanation, and whose operations, management, auditors and regulators sit in a distant untouchable jurisdiction?
A PDD spokesperson said: “We respectfully disagree with that characterisation.” They encouraged the Financial Times “to review our financial reports and earnings calls for comprehensive insights” and said “disclosure rules and fairness principles” prevented it commenting on those financials to “individual media outlets”.
The American stock market is scattered with cautionary tales of Chinese promise that ends up unmet. “I drank a lot of coffee in a lot of Luckin Coffee locations, and it was still a fraud,” says one investor, of the once $13bn Nasdaq-stock which admitted to inflating sales figures in 2020. Wish, an algorithmic Temu-like ecommerce site, saw a $22bn market value dwindle almost to nothing.
Yet few have promised as much to investors as PDD. It operates like eBay and Amazon’s third party marketplace, connecting buyers with sellers to take a cut of each transaction and charging merchants to advertise on its platform.
In its most recent quarter those revenues almost doubled versus the previous year, to $9.4bn, prompting Alibaba founder Jack Ma to exhort his former company to “change and reform” in response. PDD reported $2.5bn of cash flow, even as it appears to throw very large sums at the expansion of Temu.
It has achieved this with a headcount that upends all assumptions about ecommerce logistics: it started last year with 12,992 employees, an order of magnitude less than Alibaba and a small fraction of Amazon’s 1.5mn staff.
PDD’s physical footprint is also minuscule, a striking contrast with Amazon, JD.com and Alibaba, where control of logistics was long seen as a competitive advantage; a way to ensure speed, capacity and satisfactory service.
Where Alibaba spends $5bn a year on property and equipment, including the upkeep of 1,100 warehouses, PDD owns just $146mn of hard assets — mainly office equipment and IT hardware and software.
It didn’t disclose any leases of warehouses before 2021, when it said its online grocery business, then just one year old, had expanded to serve more than 300 major cities in China. It doesn’t report the size, location or number of the warehouses it rents.
Those logistics, like PDD’s servers and customer service call centres, are mostly outsourced, ephemeral and unenumerated. The opacity extends inside the business. Staff use pseudonyms and know little about other teams. The structure is flat, with a small group of decision makers directing the “grassroots”, young people chosen for their poverty or debt obligations which motivate them to work long hours. PDD said: “Employees have access to all necessary information for effective cross-team collaboration and to fulfil their roles.”
Such secrecy is a hallmark of Colin Huang, a former Google engineer who founded Pinduoduo in 2015 and for a long time hid his ownership. Initially, it attracted users by gamifying commerce. Describing itself for a while as “Costco + Disney”, Pinduoduo offered games that mimicked addictive titles like Farmville and Candy Crush.
Combined with micropayments, carefully calibrated rewards, coupons and offers, the software was said to keep consumers returning to the app, where they were tempted to make impulse purchases or promote Pinduoduo to their friends. By 2018, the app boasted 300mn customers and after only three years in business the company listed on the Nasdaq stock exchange, raising $1.7bn.
PDD vice-president of strategy David Liu, a former Goldman Sachs banker, described its “push-based business model” on a 2019 podcast. He said that instead of searching for particular items, people went to Pinduoduo to browse, where algorithms and highly targeted offers encouraged social sharing of purchases. The rise of mobile internet use, according to co-chief executive officer Chen Lei, created a “new paradigm”.
Their descriptions are hard to square with the numbers. Almost all of PDD’s revenues then came from marketing services, where merchants “bid for keywords that match product listings appearing in search or browser results”.
Another claimed benefit were insights into consumer demand that PDD passed on to merchants. As an example of this cutting-edge information, Liu talked about a glassware manufacturer that supplied big western retailers: PDD helped it to understand that Chinese people liked stubby wine glasses to go in their small cupboards.
That theory of PDD’s business model soon clashed with reality. In a surprise shift in strategy, Pinduoduo started selling merchandise itself. It began Amazon-style first-party retailing, prompted by people searching for stuff. “We have noticed there are consumer demands in our platform, which we haven’t been able to identify the appropriate merchants for,” it said in late 2020.
Asked on a March 2021 earnings call “what exactly” PDD was selling in this experiment, Liu didn’t give examples. He just said that the product categories were “actually quite diversified”.
Over 2020 and 2021, PDD reported selling $2bn worth of merchandise without disclosing any stocks of inventory on its balance sheet, or the costs of those goods sold, two standard retail accounting items. Then it stopped selling mystery merchandise as abruptly as it started.
The experiment’s end may have been overshadowed by events. Founder Huang, one of China’s richest people, stepped down in 2021 declaring a desire to research food science and life science. His letter said: “I would feel very lucky and blessed if I have the chance to become a research assistant to a future, possibly great, scientist.”
He was replaced by co-chief executives, Chen and Jiazhen Zhao, who as a sideline personally control a payment services provider to the company that they purchased with the help of a $100m loan from PDD.
A PDD spokesperson said this was “a simpler legal arrangement to secure and complete the acquisition of a payment licence.”
Straight after Huang left PDD made a long-awaited flip to profitability. Having lost Rmb27bn ($4.2bn) in three years, PDD reported earnings of Rmb2.4bn ($380mn) for the second quarter of 2021. It was a key moment, as the group had raised $11.6bn from sales of stock and debt that converts into shares to support a spend-now-for-profits-later business model.
Rather than focus on this milestone in the August 2021 earnings call, Chen described PDD’s efforts to support Henan province after it was hit by heavy rain.
More unusual still, Chen then announced a plan for the first Rmb10bn of profits to be generated by PDD. He intended to spend it all on an “agricultural initiative” without a clear business purpose. The aim was fuzzy and broad, “to facilitate advancement of agritech, promote digital inclusion, and provide agritech talents and workers with greater motivation and a sense of achievement”, he said.
It is unclear how, or even if, the money was spent. PDD has not subsequently detailed the initiative in its financial statements, which are audited by a Chinese arm of EY, and continued to report profits. Research and development spending that year rose only slightly to $1.5bn in total, similar in scale to eBay rather than Alibaba’s $8bn annual spend on product development.
Chen was ambiguous when asked about the initiative during a 2022 earnings call. He said he’d evaluated many proposals, that PDD was “co-operating with top agronomic universities and research institutions to jointly work on some research projects”, and its investment in agriculture was “early stage”.
Perhaps the biggest mystery about PDD is how large it has truly become.
A metric published by some ecommerce businesses is gross merchandise value (GMV) sold via the platform — a picture, effectively, of its entire ecosystem of sales. Ebay, for instance, reported GMV of $73bn for its marketplace last year, from which it earned $10bn of revenues.
PDD used to report such a figure. For 2021 it said GMV was Rmb2.4tn ($383bn). From that, PDD generated a total of $14.7bn of revenues from marketing and transaction services, a 3.6 per cent margin known as the “take rate”.
However, while PDD still publishes revenue from marketing and transaction fees, it no longer reveals its GMV. Estimating how big its ecosystem has become thus depends on assumptions about what the take rate now is, or what share of GMV the company keeps for itself.
Analysts offer a range of estimates for last year’s total GMV between Rmb3.6tn ($500bn) and Rmb4.8tn ($700bn), according to Bloomberg, with a consensus of Rmb3.9tn ($550bn). At the higher end, that would be similar to estimates for Amazon’s total GMV this year.
But complicating that picture are metrics on the income statement and balance sheet moving at very different speeds.
In the blow-out recent quarter, marketing services grew at roughly the same pace they have since the middle of 2021, about 40 per cent year-on-year. But over the same period, transaction fee revenues grew at more than three times the rate of marketing services.
Based on the transaction fee rate PDD reported in 2021, that would suggest an improbable level of activity, making the PDD ecosystem twice the size of Alibaba and on a par with the $2.2tn annual output of the Italian economy.
Instead, PDD must be charging its merchants a lot more. Asked about the trend on a 2022 earnings call, Chen said user engagement had contributed to earnings growth and that “it is common to see fluctuations between quarters”.
PDD told the FT it had expanded its offering to include “various transaction services”. It did not say what those additional services were. Analysts assume transaction services includes revenues from groceries and Temu, which have different dynamics to Pinduoduo.
A liability still detailed on PDD’s balance sheet, meanwhile, signalled a much slower pace of growth for GMV.
At the end of September each year from 2018-21, the money “payable to merchants” ranged from seven to nine days’ worth of annual GMV. The most recent figure thus suggests estimates for 2023 GMV of $400bn to $500bn.
At either end of that scale, it would seem inevitable that PDD’s rise would be felt by its main competitors. After all, there are only so many online shoppers to go round.
PDD’s impact is hard to detect in their numbers. In the battle of online flea markets, Alibaba’s Taobao reported improving take rates and growing merchant numbers last month that hardly indicate obliteration by Pinduoduo. Alibaba’s executives have not addressed their upstart rival by name on any of their earnings calls.
Outside China, both eBay and US discount chain Five Below said last year they hadn’t seen any impact on their business from Temu. Amazon didn’t mention it when reporting results last month.
Etsy’s CEO Josh Silverman focused on Temu’s head-scratching advertising blitz, estimated by some analysts to cost billions of dollars: “It’s not obvious that they have much of an ROI [return on investment] lens on their spend. So they appear to be spending a lot of money to acquire customers who may not have very large wallets and may not be very loyal.”
PDD said it anticipated “refinement of our marketing approach, placing increasing emphasis on building strong customer loyalty and advocacy”.
Some of its advertisements address concerns about Temu head on. In one, a pastiche of mafia movies, a beard-stroking mobster remarks: “So cheap. People may not believe it’s real.”
If PDD’s numbers are indeed to be believed, then a shrewd executive team directing pseudonymous underlings has created one of the most successful businesses the world has ever seen.
But it is not clear how the several thousand staff who run PDD deal with the risks in administering hundreds of millions of transactions, and tens of millions of suppliers delivering tens of billions of parcels.
How, to use just one example, does the company monitor money-laundering risks — given the dangers that fake customers use fake transactions to send money to fake merchants?
PDD said it supported this vast network through “a core workforce and strategic partnerships” that leveraged “technology-driven solutions to monitor and address issues like counterfeit goods”. A Temu spokesperson also said that all partners “must strictly comply with regulatory standards”.
Investors searching for further detail were unlikely to find it at the most recent earnings call, when Chen took a total of six questions from three analysts and made pronouncements that resembled state political sloganeering.
“We are dedicated to generating value through innovations, which forms the foundation of our high-quality development,” he said, echoing a key tenet of his country’s latest five-year plan.
They would also draw a blank attempting to direct questions to a chief financial officer. PDD doesn’t have one. Instead it is on its fourth “vice-president of finance” since the 2018 initial public offering, if a period when founder Huang added the job to his duties is counted.
It seems that while profits are good, investors are willing to tolerate such opacity. On Wall Street, 53 out of 56 analysts recommend their clients buy, and not one suggests they sell.
Norm-breaking appears to make PDD a tabula rasa on to which foreign investors project assumptions. Unlike other large US-listed Chinese companies, PDD — which is nominally headquartered in Dublin — hasn’t courted the investors who might know it best with a secondary Hong Kong listing.
The structure for foreign ownership of Chinese assets remains untested, with “heightened operational and legal risks”, according to the head of the Securities and Exchange Commission. Holders of PDD stock own shares in a Cayman Islands company that has unpublished contractual agreements said to entitle it to the profits of the Chinese operating companies.
A spokesperson said PDD had “a robust financial leadership structure” and “strong corporate governance”, that its “disclosure practices compare favourably to those of our peers”, and that its US listing provided “the necessary access to capital markets and visibility to support our business objectives”.
Huang still owns the largest stake in PDD and his shares are voted by the board, whose three independent directors include a former foreign minister of Singapore and a Dutch academic expert in food safety.
Hayden Capital, an investor in the company, acknowledged in a memo that a “lack of transparency and concerns about corporate governance” had put off investors in the past.
It argued that “just because a company doesn’t give investors disclosure doesn’t necessarily mean they don’t care about investors”. To truly understand PDD’s thinking, the New York firm continued, “we have to analyse past actions”.
Data visualisation by Steven Bernard
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