China’s market watchdog said on Wednesday it has asked Shanghai regulators to investigate the online discounter Pinduoduo Inc. in the fifth trading day since its headline-catching flotation, as media reports accused of selling counterfeits and intellectual property infringement.
The Tencent-backed e-commerce start-up raised $1.63 billion last week in its Nasdaq listing, with a valuation of $23.8 billion, making it the second-biggest U.S. IPO by a Chinese company this year.
Several articles and clamorous complaints on social media condemned that the website sells low-quality counterfeit products of global brands including Nike, Calvin Klein at the prices much lower than fair level, which could “bury the decade-long efforts that country had made to protect intellectual property and to hone its manufacturing industries.”
Pinduoduo said on Tuesday that it was unfair to blame the firm for counterfeits.
“We have been working to clean the shelves from fake products since the first day of our foundation,” said Da Da, co-founder of Pinduoduo, during a press conference in Shanghai.
The company said it has dragged down 10.7 million faulty products and intercepted more than 40 million illegal links from its website, but it did not seem to exempt it from public slaps.
Tricky business model
The three-year-old firm has long been questioned about its business model that has led to a record success.
Pinduoduo offers big discounts to group buyers and has lured a wide range of clients from small cities and villages in China, which helped it to book an impressive gross merchandise volume (GMV) of 141 billion yuan ($20.64 billion approx.) last year, according to its prospectus. The gauge describes the growth of the e-commerce business.
It took 10 years for the e-commerce giant JD.com to achieve this figure, and five years for Alibaba’s Taobao.com, but only 27 months for the Shanghai-based young bull.
It has been a consensus that winning customers is crucial for such operators in the initial stage, but costly and time-consuming that it could highly leverage for expansion.
Supported by Tencent’s popular messenger app WeChat, Pinduoduo could easily have access to its one billion active users over the globe. The acquaintance-based social networking also strongly powered its group-buying business.
This inherited priority helped to set up the foundation to roll a snowball. Three hundred million people share discount information among friends, relatives and colleagues, and aligned to get lower prices.
“For us the management of the company, our core business is to create value for clients. We may not be understood, but we are well-intentioned, and never do evil.”
Colin Huang, founder and CEO of Pinduoduo, said in a letter to investors on June 30
The website traffic peaks on weekends and visits are mainly paid by users from the most populated metropolis and the tier-three and -four cities around, where host a large amount of immigrated workers from less developed regions.
“People living inside the fifth ring road cannot understand our party,” said Colin Huang, founder and CEO of Pinduoduo in an earlier report. The fifth road in Beijing unofficially separates the downtown from the outskirt, where the average residents could not be as rich as those living in the central city.
The luster of Pinduoduo is fueled by a giant pool of low-income groups who are willing to spend time in seeking discounts for living goods and even substitute luxuries.
But it may also spark another problem: there is still a significant amount of people whose daily life and consumption might be experiencing a downgrade while a so-called “consumption upgrade” carnival sweeps the world’s second-largest economy.
The disposable income of Chinese citizens climbed by 6.6 percent in the first half of this year, down 1.5 percentage points compared to 2013, slower than the growth of the country’s gross domestic product (GDP), according to China’s National Bureau of Statistics. People might feel more pressure from the sluggish economy and reluctant to spend than years before.
But in rural areas, it seems that people still have strong enthusiasm in shopping, even when their pocketbooks swell slower than their bills pile up.
Analysts and several media reports warned a consumption trap might be happening across the lower income class that fertilizes manufacturers who produce counterfeits and discounters like Pinduoduo.
The newly-U.S.-listed firm is not the first one to lift the criticism. Alibaba was sued in 2015 after China’s market regulator highlighted in a white book the counterfeit selling problems of the e-commerce giant, which led to a $30-billion shrink of its market value in four days.
“It is urgent to work out regulations to make it clear and to further bind the operators,” said Jia Lulu, a Beijing-based lawyer and researcher who focuses on e-commerce.