China Consumer

Backing away from a bargain

Why e-commerce platform Pinduoduo won’t honour “hacked” giveaways

Pinduoduo-w

Pinduoduo: coupon controversy

When Hong Kong carrier Cathay Pacific sold a batch of first-class tickets between Vietnam and North America at economy-class prices last month it tried to make the best of its mistake. Cathay even promoted the error on Twitter with the hashtags #promisemadepromisekept and #lessonlearnt.

As it turned out, lessons could have been learned a little better: there was a second snafu a few days later on first-class flights to Lisbon (see WiC437) sold at similarly erroneous bargain rates.

Chinese group discounter Pinduoduo ran into a similar situation a few days later, when a programming problem on its sales platform resulted in an extraordinary offer: an unlimited number of Rmb100 ($15) coupons redeemable for free with no constraints on the types of purchases they could be used for.

It took no time for this ‘helicopter money’ to go viral. Many netizens grabbed the coupons to top up their mobile phone credits, with one saying that the haul would pay his phone bill for decades to come. Another claimed that he had exchanged Rmb900,000 worth of the coupons into Q-tokens, a virtual currency developed by Tencent, National Business Daily reported.

The coupons in question had been circulating online for about 12 hours before Pinduoduo picked up on the shopping spree, according to Jiemian.com. But in a statement the three-year-old start-up then blamed hackers for wreaking havoc. “[They] exploited a loophole linked to expired vouchers and stole tens of millions of yuan worth of them,” the company said, adding that it had already reported the case to the country’s public security department and fixed the bug.

Although Pinduoduo said it would try to resolve conflicts with customers over the usage of the vouchers, it had already nullified all the orders linked to the coupons. The move displeased consumers who were disappointed that the Hangzhou-based firm had chosen to renege on its contractual agreements.

The cancellation, in their eyes, compared unfavourably with other precedents at more established brands. Tencent, for instance, had honoured transactions wrongly computed by a similar error with coupons on its video platform in 2017. Nearly three million such deals were struck before the problem was detected, setting Tencent back at least Rmb51 million.

“Pinduoduo has the right to claim compensation from hackers who took advantage of its technical vulnerability. But for ordinary online shoppers, they simply have no ability to detect professional fraud, and therefore they should not be responsible for any losses linked to the platform,” said Xiao Wei, a director at the banking chapter of the China Law Society.

The cyber theft took place two days before the expiry of the lock-up period for Pinduoduo’s Nasdaq-listed shares. Thanks to a bull run from early November, Pinduoduo saw its market capitalisation touching $32.54 billion as of Thursday, inching closer to Beijing-based rival JD.com’s $35.95 billion, and surpassing consumer tech company Xiaomi’s $30 billion.

Pinduoduo’s progress is fuelling anticipation that the upstart is going to displace JD.com as China’s second largest e-commerce platform soon (see WiC404 for our first article on Pinduoduo’s unique business model). Yet some analysts believe the surge in its share price isn’t going to be sustainable, saying that the company isn’t investing enough in its technological base.

For the quarter ending last September, Pinduoduo said it had increased its research and development expenses by eightfold to Rmb332 million. Yet the figure represented just a tenth of what it spent on sales and marketing, mainly sponsoring entertainment shows. In contrast, JD.com allocates a much higher proportion of its expenses to R&D, while some of Pinduoduo’s critics have been trying to link its lower spending back to the system bugs that spawned the coupon crisis, implying that Pinduoduo has been punished for doing things on the cheap.

Another criticism is that its platform is too reliant on a small group of distribution partners. “Pinduoduo’s aggressive promotion through traditional channels points to its bottleneck in growing through social media (i.e. WeChat)”, wrote 36Kr, a local news outlet, noting that the company needs to reduce its reliance on Tencent for sustainable growth (see WiC404). This could turn out to be more of a weakness if relations with Tencent turn testy. The social media giant has been getting more restrictive about allowing its rivals a presence on WeChat, its dominant social media app. Over the weekend Tencent banned promotional links by external platforms, including companies that it has financially backed – including Meituan-Dianping – on concerns that these are disrupting the platform’s group chats and its Moments social sharing function.

 


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.