What remarkable achievements prompted Jack Ma, who has long remained elusive, to articulate his perspective on Pinduoduo’s latest revelation?
On November 28, Pinduoduo unveiled its most recent financial data. In the third quarter of this fiscal year, its revenue soared to 68.84 billion yuan, exhibiting a staggering year-on-year surge of 94%; concurrently, the operating profit reached 16.65 billion yuan, marking a noteworthy year-on-year escalation of 60%. Subsequent to the dissemination of the financial report, Pinduoduo’s stock witnessed a surge, culminating in a market valuation surpassing that of Alibaba by the close of trading on December 1.
Furthermore, in the subsequent trading sessions, Pinduoduo’s equity experienced a persistent ascent of over 20%, propelling its market capitalization to a pinnacle of US$192.4 billion, establishing a record zenith over the past three years.
Despite Pinduoduo’s discretion in divulging granular revenue data by region, Morgan Stanley’s report and brokerage analysts’ perspectives converge on a consensus: the unrivaled performance of Pinduoduo emanates from the robust growth potential of its overseas arm, Temu.
As per the financial report, Pinduoduo’s transaction service revenue in the third quarter of 2023 amounted to 29.153 billion yuan, marking a meteoric year-on-year surge of 315%, thereby augmenting the revenue share from under 30% to an imposing 42%. Calculations from the Guohai Securities Research Report substantiate that Temu played a pivotal role, contributing approximately 16.2 billion yuan, thereby precipitating a substantial upswing in Pinduoduo’s overall transaction commission income.
It is imperative to underscore that Temu’s commendable results transpired antecedent to the traditional peak consumption season, encompassing major holidays such as Christmas. Consequently, a definitive inference can be drawn: e-commerce on the global stage has metamorphosed into the forthcoming growth catalyst.
“Catfish” Enters the Pond
The nomenclature “catfish effect” characterizes the phenomenon whereby the inclusion of formidable external competitors enhances the operational efficacy of a collective entity. In the realm of international consumption, Chinese cross-border e-commerce enterprises epitomized by Temu serve as the transformative “catfish,” redefining the paradigm of price anchoring.
Exemplification of this transpires in the 2023 European and American “Black Friday and Cyber Monday” traditional shopping extravaganzas, denoted as the most voluminous. Chinese overseas platforms, spearheaded by Temu, have proffered a challenge to Amazon, the predominant player in the U.S. e-commerce domain.
According to data furnished by the market research organization eMarketer, Amazon is projected to steadfastly commandeer 37.8% of the U.S. online retail market share until 2022, an echelon six times that of the runner-up, Walmart. However, in less than a year, signs of leverage have emerged, distinctly manifested by Amazon’s sales falling short of expectations during the warm-up phase for this year’s “Black Friday.”
In yesteryears, amid the pinnacle of sales, Amazon’s warehousing fees tripled, advertising expenditures doubled, and overall sales volume could achieve threefold amplification. However, during the preliminary stages of the grand promotion in November this year, order volumes remained stagnant. Advertising proliferated, but orders did not, indicative of a declining investment conversion rate for Amazon.
The underlying cause is rooted in the economic downturn, compelling American consumers to curtail expenditures. A report from the consulting firm McKinsey in February this year revealed that 80% of respondents were “tightening their belts,” opting for frugality by relinquishing expensive brands and altering purchase quantities and packaging sizes; 81% of consumers commenced “comparative scrutiny” prior to purchases, exploring diverse channels.
Survey data from Adobe Analytics, a retail analysis agency, corroborates this standpoint: in contrast to the preceding year, the utilization of buy-now-pay-later services surged by 47% year-on-year during Black Friday this year, signifying that the American populace grapples with a quandary of extensive reliance on credit consumption.
In the backdrop of an economic downturn, Temu capitalizes on its competitive edge of low prices. During this year’s “Black Friday,” Temu’s discounts prompted Amazon sellers to exclaim, “It’s akin to philanthropy” — not only did they proffer substantial coupons of US$100 and US$200, but they also prominently displayed a banner proclaiming “price reductions up to 90%,” primarily showcasing products priced below $3.
In juxtaposition, although Amazon asserts its commitment to competitive pricing, it fails to rival Temu’s unparalleled cost-effectiveness. “Wired” magazine computed that the average order price for the former is US$47, whereas the latter boasts a meager US$25 per order on average, representing an almost twofold discrepancy.
During this year’s “Black Friday,” Temu’s discounts elicited astonishment from Amazon sellers, who declared, “It’s almost reminiscent of benevolence.”
In addition to engaging in a price war, Temu strategically employs the tactic of “extending the front” to perpetuate the expansion of its advantageous terrain. Among U.S. e-commerce platforms, Temu took the lead in commencing the pre-sale festivities, initiating the grand sale on October 20, spanning 47 days; conversely, Amazon, succumbing to the pressures of “involution,” initiated the pre-sale phase on November 17, albeit under duress, and extended the total promotional cycle to 11 days for the first time.
What merits observation is that, amid this promotional contest, Temu’s ability to secure a favorable position stems from its alignment with the American populace’s penchant for high-quality, low-priced products, thereby encapsulating the ethos of “the times making heroes.” Concurrently, it does not derive from a cultivated shopping inertia, as American consumers, influenced by Temu’s low prices, find themselves inadvertently entering a “price comparison mode” during routine shopping. This underscores the authenticity of Temu’s advertisement during the U.S. Super Bowl — “Shop like a billionaire.”
Traffic Reigns Supreme
A perspective posits that Amazon and Temu could potentially compete in a non-confrontational manner — concentrating on high-customer-unit-price products and low-customer-unit-price products in the brand category, respectively, to achieve complementary advantages and peaceful coexistence. Nonetheless, the advent of Temu has already posed a formidable menace to Amazon, with the crux of the conflict residing in the erosion of user attention.
The United States constitutes the “primus inter pares” in the global expansion endeavors of e-commerce enterprises.
Given that the crux of the internet economy lies in the competition for traffic, daily necessities and household products with high repurchase rates — as categories frequently sought and purchased by consumers — become conduits for ensuring stable traffic to online platforms, thereby sustaining competitiveness. Consequently, Amazon cannot afford to yield complacently.
However, when confronted by adversaries deeply entrenched in China’s expansive market for numerous years, adept at price wars, Amazon conspicuously lacks the assurance to do so. A noteworthy detail is that, as per reports from U.S. media, Amazon had expunged Temu from its price comparison system as early as June this year.
According to data sourced from Similarweb, a web data monitoring agency, by November 2023, Temu has counteracted and ascended to become the second-largest e-commerce application in the United States by monthly active users, second only to Amazon, despite the absence of a first-mover advantage and local favoritism. Some Chinese business media broke the news that in the third quarter of 2023, Temu’s sales exceeded US$5 billion, surpassing the annual total merchandise transaction target of US$15 billion.
In the realm of global e-commerce markets, the United States stands as the paramount battleground that companies must conquer when venturing overseas. The European market, marked by fragmentation and lacking unity, pales in comparison. The Southeast Asian market, while experiencing rapid growth, is hindered by ambiguous policies. The emerging markets of the Middle East and Latin America are still in their nascent stages. Only the United States boasts a market size of sufficient magnitude and stability, coupled with a comprehensive infrastructure. Consequently, a prevailing consensus within the industry asserts that establishing a robust presence in the US market is imperative for favorable global expansion, akin to a strategic “dimension reduction strike.”
This rationale elucidates why Temu, making its inaugural foray into the North American market, launched on September 1 last year and swiftly ascended by the third quarter of this year, consistently leading in App Store downloads across 47 countries and regions, including the United States, Britain, France, Germany, and Australia.
In the landscape of the Internet economy, the “second curve” theory postulates that when the zenith of the primary business is reached, identifying the second curve becomes a pivotal survival maneuver, propelling the company to new heights instead of descending into decline.
The financial reports for the first and second quarters of 2022 reveal that Pinduoduo’s revenue growth rates were 7.34% and 36.42%, respectively, marking a year-on-year decrease of 231.55% and 52.59%, and eschewing the previous three-digit growth rates. Against this backdrop, Temu has not only propelled Pinduoduo’s user base, revenue, and profits simultaneously but has emerged as an unequivocal new growth engine.
Temu’s swift overseas popularity hinges on bridging the industrial belt with small and medium-sized businesses, catering to users seeking cost-effectiveness. This success stems from critically inheriting and perpetuating the experience accrued by Pinduoduo’s primary website and Duoduo’s grocery shopping venture. Employing the “full hosting” mode, Temu distinguishes itself from the “OEM model” by providing a low-threshold entry for small and medium-sized merchants to establish their brands overseas. This eliminates concerns about operations, sales, and after-sales, all managed by the platform.
Manufacturers hesitant due to limited cross-border operational capabilities can now focus on product development and design without being encumbered by promotion, logistics, or customer service. The elimination of intermediary links and the establishment of a “green channel” between domestic source factories and global consumers result in significant reductions in merchant operating costs and consumer purchasing costs, achieving optimal outcomes.
The American “Charlotte Observer” lauded this innovative platform, stating, “It pioneered the use of the ‘next generation manufacturing’ model, saving about 50% of products by streamlining the production and delivery process and effectively managing inventory costs.”
Harvard Business School strategist Michael Porter’s concept of the “value chain” underscores the importance of managing design, production, sales, delivery, and other links in the value chain to gain true competitive advantage. In this context, Temu’s “full custody model” amplifies the value chain’s advantages. With the power of a single platform, it integrates tens of thousands of factories, providing products globally and unleashing the production capacity of hundreds of industrial chains. Thus, China’s cross-border e-commerce industry has shifted from individuals fighting alone to collective efforts with industrialized energy levels, presenting a new window for “Made in China” to the world, fostering numerous domestic small and medium-sized independent brands.
**Still a Long Journey Ahead**
Despite these achievements, it is premature to declare Temu a triumphant success. The business logic of emulating the “Pinduoduo playbook,” oscillating between losses and gains, is not without its challenges. Pinduoduo’s prospectus reveals substantial losses, which were gradually offset as market share increased, leading to profitability in the second quarter of 2021.
However, the adage “If an orange is born in Huainan, it will be an orange, and if it is born in the north of Huaibei, it will be a tangerine” cautions against assuming overseas success by simply replicating the Chinese playbook. The viability of this strategy remains to be verified by subsequent market performance, presenting a considerable challenge.
On the marketing front, Temu incurs substantial expenses. According to SimilarWeb data from August to October, 34% of Temu’s traffic originates from paid search, deviating from the predominant traffic sources of senior American e-commerce platforms relying on direct and natural search. Notably, Temu spent US$14 million on two 30-second ads during the US Super Bowl in February 2023.
Since 2023, Temu has allocated approximately $5 in marketing for every $39 order in the U.S. market. “Wired” magazine disclosed that Temu’s publicity and distribution expenses in the US market are anticipated to reach US$1.4 billion in 2023, escalating to US$4.3 billion the following year. A Goldman Sachs research report indicates that, since 2023, Temu’s marketing expenses equate to about $5 for every $39 order in the U.S. market.
Logistics costs, however, remain a significant hurdle. Diverging from the mature domestic logistics industry, the cross-border logistics transportation chain is protracted and involves intricate transshipment. Some sources suggest that logistics expenses constitute 28% of Temu’s order costs.
The strategy of large-scale publicity coupled with a disregard for costs renders Temu still unable to achieve positive cash flow. With Temu’s average order price at US$25 and costs at US$32, “Wired” magazine estimates an expanding average loss per order to US$30. A research report by financial services company Sanford C. Bernstein speculates that Temu’s operating loss may reach as high as US$3.65 billion in 2023.
Indeed, Temu has begun to adversely impact Pinduoduo’s performance. The third-quarter 2023 financial report reveals Pinduoduo’s gross profit margin at 61%, a year-on-year decrease of 18%, marking the lowest point since the second quarter of 2021.
In contrast, SHEIN, China’s fast fashion e-commerce platform that ventured into overseas markets before Temu, prioritizes low prices without resorting to losses for market share. In February 2023, SHEIN reported a profit revenue of US$700 million for 2022, achieving profitability for four consecutive years and maintaining robust financial health. Clearly, SHEIN has charted a course of steady, long-term development with lower risks.
The success of Temu, relying on the strategy of burning money, remains to be seen. Regardless, the “fully managed track” pioneered by Temu has been adopted by cross-border e-commerce platforms such as AliExpress, Lazada, and Shopee, paving the way for China’s industrial brands to venture overseas. Over the hills, one can hear the echo of the mountains, signaling a transformative shift in the landscape.