Over the last month, one of the most widely circulated posts on Chinese social media goes something like this: in the 1990s, when Nike tried to figure out how many fake Nike shoes there were in the China market, it sent an executive to Yiwu, the country’s main trading hub for cheap wholesale goods. He brought a counterpart from P&G and together they went to a local market. By the end of their visit, the Nike executive broke down in tears. Why? Because although they found a few genuine bottles of P&G’s Head & Shoulders shampoo, he couldn’t find a single pair of authentic Nike shoes amidst all the fake sneakers carrying the US firm’s iconic swoosh.
The post then concludes that if Nike were to look on Pinduoduo today, the company executives would feel crushed once again on finding that there was nothing but fakes on the e-commerce platform.
Pinduoduo has rapidly become China’s latest internet darling thanks to its unique approach to sales (see WiC404). It pioneers a social group-buying model that allows third-party vendors to sell items directly to consumers. It offers generous discounts, of up to 90% off, if buyers share the product listing with friends using social media platform WeChat and persuade them to purchase the item too.
The approach has proven attractive to more price sensitive consumers in fourth and fifth-tier cities. In just three years since its inception, the company has garnered 300 million users and Rmb40 billion ($5.8 billion) in monthly gross merchandise value. For comparison, it took JD.com well over a decade to hit the same milestones.
Pinduoduo’s success also caught the attention of internet giant Tencent, which became a major investor in 2016. Pinduoduo is now China’s third-largest e-commerce site, with a 5.2% market share, behind Alibaba’s 58.2% and JD.com’s 16.3%. In mid-July, it successfully raised $1.6 billion in a US initial public offering.
We reported in 2016 how Alibaba, less than two years after going public in New York, was having a rough time dealing with fake goods and fraudulent reviews on its platform (see WiC327). Pinduoduo appears to be going through similar growth pains now, although they have come much sooner. Since the IPO last month, Chinese media notes that Pinduoduo has faced virtually a new accusation every day about knockoffs on its site and products of questionable quality.
It first started with a picture showing Pinduoduo selling Beingmate’s infant formula for only Rmb7.5 on the site (usual retail price: Rmb888). Consumers quickly complained that the platform was selling milk powder long past its use-by date.
The next day, Skyworth, a Chinese manufacturer of audiovisual equipment, demanded that Pinduoduo remove counterfeit versions of its products from the platform, claiming that it reserved the right to sue the company over the matter. Within 24 hours, US diaper maker Daddy’s Choice also filed a trademark infringement lawsuit against Pinduoduo in a New York federal court, alleging the company had knowingly allowed the sale of knockoff products bearing its name.
China’s market regulator quickly announced an investigation. “Regardless of whether it is by third parties or internal platform operators, whenever there is illegality it will be dealt with severely in accordance with the law,” warned the State Administration for Market Regulation.
The accusations spooked investors too, dragging down the company’s stock price to $19.3, barely above its IPO price but 30% lower than its first day’s closing price of $26.7, following a strong trading debut.
Huang Zheng, Pinduoduo’s founder and chief executive, insists that he is committed to fighting fake goods. However, he also defends his young firm. “To put so much pressure on a company [to combat the problem of counterfeiting in the industry] is just too much. I also think it is very unfair to do that for a three year-old company,” he said in a press conference.
The company later issued an open letter about the steps it had taken to prevent the sale of fake goods, claiming that it had taken down 4.3 million listings and blocked 450,000 suspected counterfeit good listings from its platform.
New cases continue to crop up. Jiemian, a portal, found a vendor that sold headphones that look identical to Apple’s AirPods, but priced at only Rmb19.9. However, when the package arrived the journalist disovered that only one earbud had been delivered.
“The commonality between them is that all the ads were false and the products were inferior. While everyone loves cheap stuff, it doesn’t mean you should use fake and substandard products to deceive unwitting consumers,” Jiemian thundered.
All the same, Pinduoduo has become a big enough threat that its rivals cannot be complacent. Alibaba has recently launched Pintuan on the Alipay app, showcasing a selection of items from Taobao at discounted prices. JD.com, too, has adopted a similar feature, JD Pingou, that requires customers to refer at least one other person to purchase the product for a discount.
“How can Alibaba contain Pinduoduo’s sudden emergence? While it remains to be seen whether it can create a similar model, what Alibaba now wants to do is to hinder and limit Pinduoduo’s growth,” commented Beijing News.
Less wonder then that some industry observers reckon the onslaught of allegations against Pinduoduo seem a little too choreographed.
“This whole thing has the hallmarks of being a pre-orchestrated smear campaign,” was the verdict that Matthew Brennan, co-founder of China Channel, gave to Fortune magazine.
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