Behind the fakes: Pinduoduo is leading the way for low-income consumption

Pinduoduo’s sponsorship advertisement appeared in Go Fighting’s Season 3. In July 2017, the platform had around 100 million users. (Screenshot from iQiyi)

“Pinduoduo, Pinduoduo, the more you group-buy, the more you save. If you wanna group-buy, go Pinduoduo; every day, every time Pinduoduo. Pinduoduo.” This song repeatedly appeared in celebrity reality show Go Fighting sponsored by the company. To many Chinese consumers, particularly those in the middle class, Pinduoduo exists in this song, not their lives. For those with lower means, the story is different.

Interestingly, the show’s previous top sponsor was Tmall. The new sponsorship quickly made Pinduoduo’s brand well-known in China’s mainstream market. Though the show’s fans didn’t know the exact reasons behind the sponsor change, they believed Pinduoduo must be powerful—at least the sponsorship fee they paid should be equivalent to Tmall’s.

Pinduoduo’s IPO made the company famous overnight. As criticism of its business, products, and operation rose, debates have gone beyond Pinduoduo to issues of China’s retail business, legal principles, and social fragmentation. Some say Pinduoduo is a shameful business. Some say it is Pinduoduo who has drawn public attention to low-income consumers.

A rice cooker uncovers a divided market

A rice cooker priced at RMB 20 ($2.93) has become one of the main targets of the debate. Mainstream consumers doubt if it’s even possible to produce such a cheap cooker. If not, the seller is likely luring customers with fake product information. If yes, it would be wrong to allow selling such a low-quality rice cooker.

Wanlida rice cooker on Taobao. (Screenshot from Taobao)

On Tmall, Alibaba’s quality guaranteed e-commerce platform, the lowest price for a rice cooker is RMB 52 while on Alibaba’s other platform, Taobao, the lowest price is RMB 38.

Mainstream consumers may find such cheap rice cookers hard to accept: the best selling rice cooker with 54,000 monthly sales costs RMB 189. One reason behind this is the unfamiliarity with manufacturing costs but there is another hidden issue. Middle-class consumers and Pinduoduo’s target users have different lifestyles with the first group often lacking an understanding of low-income buyers’ conditions.

“In this world, the number of poor people is larger than that of the rich.”

This is the phrase that opens an article titled The Truth behind Pinduoduo’s $27 billion: Winning the Poor is Winning the World that went viral in the midst of the Pinduoduo debate. If investigations into unfit products are the state’s duty, the mass demand supported by Pinduoduo’s 343 million users is a social issue, states the article (in Chinese) published under the WeChat account Big Cat Finance (大猫财经).

Responding to Pinduoduo users’ complaints of poor-quality clothing on a local community forum (in Chinese), one netizen wrote: “Very cheap products often mean poor-quality things. You should have known this before you confirm any purchases on the platform.”

But reality suggests purchases made on Pinduoduo are not always a choice. According to official state figures, in 2017, the annual per capita disposable income of urban residents was RMB 36,396 while for rural residents it was only RMB 13,432.

The numbers are also reflected by China’s Gini Coefficient, the reference index for inequality. In 2017, that number rose to 0.467, according to China’s National Bureau of Statistics. The closer the figure is to 1, the higher the likelihood of real social inequality.

Legal framework remains an issue

While trademark disputes and fraud have clear legal frameworks, products that have their own brands but are still copying other products are another problem.

Wang Xing, founder and CEO of Meituan, said on mini blog platform Fanfou on July 29, “A lot of people are criticizing Pinduoduo, but they don’t ask how [Alibaba’s] Taobao rose to power. What a forgetful society!”

The comment was reposted by media on China’s Twitter-like Weibo and soon went viral. Wang’s words met with plenty of criticism but some have noted that Pinduoduo’s products simply represent a part of China’s current retail landscape.

“I have been in China’s retail industry for decades, and products with no production date, no qualification, or no manufacturer account for around 60% of all items produced,” said one of the commentators.

Another comment, directly responding to Wang’s words, says, “You should have known that times have changed. The time now is no longer the time when Taobao was building up its business.”

Although times are changing, China’s e-commerce industry has few legal references for protecting intellectual property in cases where one brand simply copies the design of another brand. The country has seen some tough cases from angry foreign companies.

Screenshots of Pampers “fakes” on the Pinduoduo platform.

Some believe that the launch of a strong legal framework is intentionally being delayed or at least watered-down to give local brands more time to redefine themselves from learners to future masters of innovation. Xiaomi is one example—previously berated as Apple’s copycat, it is now one of China’s powerful companies with other Chinese companies trying to copy their brand, including one clever one.

Retail with Chinese characteristics

While the copycats are clearly a problem for most, many are showing an ambivalent attitude to products without clear trademark regulation violation.

To them, Pinduoduo’s fast expansion and successful IPO imply a diverse and even hugely fragmented Chinese consumption market that breeds remarkable potential. This is the unique situation in China that businesses relying on mass consumption are more than familiar with.

Liang Ning, often known as the No.1 female tech talent in Zhongguancun, China’s Silicon Valley, believes that the low-income needs are there and someone has to be there to fill the vacuum.

“Will our accusation of Pinduoduo clean up all fake products? Can pushing Pinduoduo to the corner bring TVs to rural residents? Will all this upgrade rural residents’ material situation? I believe it’s right for media to blame Pinduoduo for allowing some fake products. But we need to think, is it the fake products that have made Pinduoduo the Pinduoduo it is today? Try finding a platform that has no fake products at all. They are a common phenomenon in China, and [in nature] China’s social problem,” Liang says.

She also believes that any one of the questionable products on Pinduoduo has the potential to become another Xiaomi leading to a more equal experience for both rich and poor consumers.

Ma Zhankai, the father of Sogou Keyboard, published his thoughts (in Chinese) on building startups in a consumption landscape marked by Pinduoduo.

“Serving basic needs with bold and innovative ideas is a common development pattern discovered in many successful [user-oriented] startup cases,” he says. Ma holds positive attitudes towards Pinduoduo’s basic model and study of user profiles.

“It is Pinduoduo that has allowed 200 million people to experience the convenience of portable TVs. Is receiving purchased parcels not a happy thing? But 500 million people have never experienced it before,” Ma said. Allowing low-income families to upgrade their consumption and enjoy new products is one of the cores of Pinduoduo’s business in smaller cities, he explained.

A widely accepted truth seems to be that a social need for cheap products exists despite the fact that many middle-class consumers ignore it. Though regulators will deal with trademark disputes and fraud, the low-price products and blurred lines between copycats and those who want to learn from the best will long be shadowing the industry. And at times it will be the fuel for some retail businesses’ fast expansion and strong growth.

What deserves close attention is not just any final decision made on Pinduoduo, either in China or overseas. Whether the case will set up new standards in the industry is of more importance. A trend that modifies or shifts current business models to tailor to lower-income markets will also grow strong.