Where will Pinduoduo spend the money next?

Sep 08, 2021 E-commerce PinDuoDuo


August 24, Pinduoduo released its Q2 2021 fiscal reports. As of June 30, 2021, the number of Pinduoduo's active buyers reached 849.9 million for the year, adding 26.1 million in a single quarter, and reported an operating profit of $2 billion according to US GAAP for the quarter.

Many analyses have pointed out that the contraction of marketing expenses has brought about the birth of profits to some extent. But Pinduoduo's "10 billion subsidies" did not disappear, and a new plan began to surface.

On the same day of the financial release, Pinduoduo set up a "10 billion agricultural research special object", Chen Lei, CEO of Pinduoduo, said, "All profits from this quarter and any profits that may be available in subsequent quarters will first go into this special object until the total amount of 10 billion is met.

The so-called "10 billion agricultural research", Pinduoduo explains that the special object "is dedicated to promoting the progress of agricultural science and technology, with the goal of further motivation and access for agricultural science and technology workers and laborers." It does not seem to be aimed at commercial value and profitability.

This will affect shareholders' short-term earnings per share, for which Chen Lei said, "The company will further bring it to the shareholders' meeting next to gain the support of the majority of shareholders." Moreover, Chen Lei will take the No. 1 position for this project.

Among e-commerce platforms, there is no one can surpass Pinduoduo in terms of the importance it attaches to agriculture. Although the marketing expenses were reduced in the second quarter, Pinduoduo's subsidies for all categories of goods did not slow down, especially agriculture. It is reported that in the just-concluded third "Agricultural Goods Festival", based on "zero commission", Pinduoduo increased the subsidies for high-quality agricultural products, and the accumulated subsidies for channels such as "10 billion subsidies" and "limited-time seckill" exceeded 50 million. In its Q1 2021 fiscal report, Pinduoduo also specifically changed its positioning from "a fast-growing new e-commerce platform" to "China's largest agricultural products and interactive business platform."

The question is, how did the layout of agriculture become the "big strategy" of Pinduoduo.


Pinduoduo goes down to the agriculture

In addition to Pinduoduo's fiscal report, the company has been releasing little news information to the public. The reports in 2021 are more focused on the fact that Pinduoduo just recently joined hands with China Agricultural University and Zhejiang University to launch the second "Pinduoduo Agricultural Research Technology Competition" to explore "growing tomatoes with AI". This is the equivalent of Pinduoduo setting the stage for agricultural experts from around the world, experienced growers, and scientists in the AI field to come together to provide higher-level solutions for Chinese agriculture.

It is not difficult to find that Pinduoduo is investing more and more frequently in agricultural research. Last year, Pinduoduo launched the first "Duo Duo Agricultural Research Technology Competition" to explore the use of cutting-edge technology to grow strawberries; later on, it joined hands with the Food and Agriculture Organization of the United Nations and Zhejiang University to launch the "Global Agricultural Creators Competition"; the "First China Agricultural Robotics Innovation Competition" and so on.

The point of this list of moves is that Pinduoduo is trying to use technology to change the production method of agriculture, not just the efficiency of the circulation side. As the largest agricultural products e-commerce platform in China, its 2020 agricultural products GMV has already reached 270 billion yuan, double that of 2019. Behind this is the layout of the "initial kilometer" from 2018, Pinduoduo has directly connected more than 1,000 agricultural production areas across the country. Wider coverage and more interventions can often see deeper problems.

"In the past few years, Pinduoduo's contribution to the agricultural sector has been mainly in the circulation sector. By improving the efficiency of the circulation field, we can benefit farmers and consumers by removing the middle to make up for the two ends. But the improvement of circulation efficiency is after all difficult to qualitatively improve the added value of agricultural products." Chen Lei once said that this somehow reflects his increasingly clear "big strategy" after taking over the role of Huang Zheng as CEO.

Pinduoduo went down to the infrastructure early. For example, the loss rate of fresh goods in circulation in China is as high as 20-30%, while the United States is 11%. For this reason, Pinduoduo has increased its investment in the infrastructure of cold storage and fresh food cold chain. The fiscal report shows that Pinduoduo's operating costs reached 7.9 billion yuan this quarter, up 197% year-on-year, where the investment is mainly spent.

But this still belongs to the circulation side of the efficiency improvement, not enough to essentially improve the added value of agricultural products and production efficiency.

Therefore, the transformation of agricultural production methods at the level of science and technology is already an inevitable part of agricultural development. However, Chinese agriculture is a "big country, small farmers" situation, small farmers are not high-income generators, tens of millions or even billions of "start-up capital" is not realistic for them. As China's largest agricultural products uplink platform, Pinduoduo must continue to "go down" to the bottom of agriculture to transform the supply side.

A Pinduoduo's executive said that the only way to enhance the supply-side is to let more farmers benefit in this industry, to help this industry retain talents, and to form a virtuous industrial cycle. At present, Pinduoduo has directly driven 100,000 "new farmers" to return to their hometowns to start their businesses and plans to train another 100,000 new farmers in the next five years to help revitalize the countryside.

April in this year, the CEO of Pinduoduo, Chen Lei said in the "The 4th China Digital China Construction Summit": " In the future, we can control and standardize the beneficial trace elements of common agricultural products through agricultural technology, so that a tomato has the most suitable trace element ration for our body needs. Consumers enjoy the food while completing the nutrient supplement. Agricultural products are then upgraded to health products, thus generating higher value."


Chen Lei rethinks in technology

Pinduoduo is also rethinking.

Pinduoduo's user growth is slowing down. "Six years ago, when Pinduoduo first entered the e-commerce space, it created the 'Pin' model ( which means buy products together) of e-commerce, so that it was able to survive and stand firm among the giants. But now, we are constantly discussing whether this model is the most innovative and suitable for users' needs at the moment." Chen Lei said in a conference call after the fiscal report.

"As the business grows and competition intensifies, the standard growth model of the past is subject to change. Chen Lei has been the CTO of Pinduoduo before he took over as CEO and chairman of the board, and after Chen Lei took over, a clear change in Pinduoduo is that it is light on marketing and heavy on R&D. The rethinking of the 'Pin' model can also be seen as a signal for Pinduoduo to further seek changes in technology.

Scientist Rao Yi has said that while the distribution methods and business models of a large country are important, the outputs are more important. "Leading output must rely on original results supported by science and technology. Science and technology have had a close relationship with China's future for quite a long time."

Similarly, Chen Lei, who comes from a technical background, seems to be more willing to bet on changing the industry with technology. Even in the face of the impact of video e-commerce, the technology-born leader prefers to focus on solving industrial problems.

A reflection of this is that previously, there was the phenomenon of "apples and slippers mixed" in agricultural courier packages, resulting in a high "loss rate" of agricultural products in the logistics and transportation chain. The Pinduoduo team found that the main reason was that "the big trucks delivering to the countryside often returned to the city half empty".

Chen Lei directly chose nearly 100 talents from Pinduoduo's technical team to focus on R&D, allowing express logistics to "send cell phones to the countryside and transport apples back to the city", realizing special train transportation for agricultural products and building new agricultural products logistics system.

In the second quarter, Pinduoduo also continued to increase its investment in R&D, with R&D expenses of RMB 2.3 billion, up 40% year-over-year from RMB 1.7 billion in the same period of 2020.

Chen Lei's new move is more or less a reflection of the fact that in today's environment, model innovation is no longer enough to create great value, and investment in technology and infrastructure is more likely to have a definite future. But as Chen Lei said, "there are more unpredictable challenges" on this road.

But isn't this the "real problem" that Pinduoduo, which has become one of the giants of the industry, should explore more? If this problem is solved, the future growth of Pinduoduo will naturally come to smooth.