Business model of the new Chinese e-commerce giant, Pinduoduo

In recent years, the newly reigned e-commerce giants, Pinduoduo and Temu, found by Huang Zheng have taken the world by storm, establishing itself as a worthy opponent of e-commerce giants such as Amazon, Shein and Taobao. What then is the business model of this somewhat secretive company? What could they be hiding behind closed doors that they are too afraid we might know, and do they have to keep these secrets hidden to preserve its revolutionary success.

The story of the Guan Yin Tu

There is a Chinese adage, revolving round the story of the 观音土 (or GuanYin clay), the story goes: Imagine if your country is experiencing a famine, and you and your family is left with nothing to eat. But you heard from the words from the street that there is something called the Guanyin clay, a white clay that can be mixed with water to create cake like "food". Although this clay contains no nutritional value and isn’t digestible, but consuming it gives you and your child a temporary sensation of fullness, helping you stave off the pain hunger. If you were the protagonist of this story, what would you have done? This was the social dilemma that this story presents.

The social dilemma of whether to let your child consume the Guan Yin Tu is the exact same story going on between production factories and Pinduoduo. For these production factories, Pinduoduo might be their last saving grace to keep their factories “afloat and alive.”

Well entrenched into the rungs of poverty

The fate of a production factory often depends on the demand and supply from the capitalist world. Only with high demand will these factories be able to maximize their profit and sustain their business.

But many production factories do not face the luxuries of having a huge demand for their goods all year round. Some of these manufacturing companies might even be facing the difficult decision of having to close their doors for good. They are then faced with two difficult choices: either to selling off their company to cut their losses and maximise their profit from the liquidity process or to consume their “Guan Yin clay.”

Hand of God

At such a difficult juncture, Pinduoduo offers them their "Guan Yin clay". Pinduoduo is willing to promise a boost in the demand for the goods they are producing in exchange for just two simple demands:

First, these production factories would have to first pay a fixed deposit fee as part of an agreement for their partnership to commence. This would require these production factories to take a leap of faith, and to take a loan from banks in a gamble that their Guan Yin clay would be their saving grace.

Even with the agreement set in stone, these manufacturing companies would still have to adhere to 5 golden rules.

5 Golden rule

The agreement between the production factory and retailer pivots on these 4 golden rules:

1. Delivery problem - Factories would have to ensure that they do not have any delivery issues or else that would incur penalty charges

2. Take legal issues - There mustn’t be any legal issue within the manufacturer, or else that would also incur a penalty charge

3. Return issue - Factories have to ensure that none of their products gets refunded, or else Pinduoduo has the right to incur a penalty on them

4. Quantity issue - Factories would have to ensure that a fixed amount of their items must be sold every month, or else that would have to pay a penalty fee

5. Low price guarantee - Factories must offer the lowest price to Pinduoduo. If PDD finds that there is another manufacturer selling the same product at a lower price, then the agreed company would have to pay a penalty fee.

The short end of the stick

But who exactly is getting the better end of the stick here. You might think that this sounds like a rather reasonable deal, right? But on closer inspection, things might not seem as simple and straightforward as it seem. On paper, it might seem that these manufacturing companies are finally making some progress and might even turn over their losses.

But through the agreement, Pinduoduo stealthily transferred most of the money that these production factories have made into their own pockets because of the penalty fee and the hefty deposit that the factories would have to pay to continue their partnership with Pinduoduo.

So in a twisted game of fate, it seems that these manufacturing companies are kicked back to square one, and they have made no progress at all. And that itself would be an understatement, because I would argue that after their agreement with Pinduoduo, these manufacturing companies are even more entrenched in their debts and in an even more dire situation than when they first began.

This brings us back to the story of the Guan Yin clay. If you were in their shoes, what would you have done?