S25: When More Is Less

Business History of Modern China

November 10, 2025

Pinduoduo Commercial

Temu Commercial

Timeline: Rise of Chinese E-Commerce

Pinduoduo (PDD)

  • 2015: Founded by Colin Huang
  • 2019: 440 million active users; second largest e-commerce company
  • 2024: Huang becomes China’s richest person, replacing Zhong Shanshan, founder of Nongfu Spring

China

  • 1999: Alibaba founded
  • 2001: China joins the WTO
  • 2013: China becomes the world’s largest e-commerce market
  • 2020-2023: Zero-Covid; crackdown on big tech
  • 2022: 850 million Chinese shop online, with 69 million employed in related sectors

Key Questions

  • How did Colin Huang, founder of Pinduoduo, become China’s richest person?
  • E-Commerce in China: How did it grow, despite weak market mechanisms?
  • Algorithmic price discrimination and platform economy: How did PDD thrive amid deflation? How to get rich off the poor?

E-Commerce Before PDD

Describe the e-commerce landscape before the founding of Pinduoduo:

  • Who were the main players? What were their business models?
  • How did the market evolve?
  • What opportunities were there for new entrants?

When the Giants Fight

Aspect Alibaba JD.com
Founded 1999 1998 (offline), 2003 (online)
Founder Jack Ma Richard Liu (Liu Qiangdong)
Original Business B2B e-commerce portal (Alibaba.com) Offline retail booth selling electronics
Core E-commerce Model Platform-based (Marketplace) Primarily Direct Sales & Inventory-based; third-party sellers introduced in 2011 and made up of 44% by 2014
Key Platforms - Taobao (C2C)
- Tmall (B2C)
- Alibaba.com (B2B)		 JD.com (B2C)
Revenue Model (Initial) Advertising from third-party sellers (e.g., keyword auctions). No transaction commissions on Taobao. Selling goods directly to consumers (holding inventory).
Logistics Strategy Asset-light. Invested in and partnered with third-party providers. Founded Cainiao Network in 2013 to coordinate a logistics alliance. Asset-heavy. Built and owned its own nationwide logistics and delivery infrastructure, including warehouses and staff.

Pinduoduo

  • Who is Colin Huang, founder of Pinduoduo?
  • What’s PDD’s business model? In particular, how did it work as a Consumer-to-Manufacturer (C2M) business?
  • Describe the shopping experience on the app.
  • Who were PDD’s partners and rivals?

The Smartphone Era and the Rise of PDD

  • PDD was founded by Huang, who was born in 1980 and previously worked at Google.
  • Huang got the idea for PDD in 2014, noticing how mobile devices were changing consumer habits in China.
  • In 2015, mobile phones were the primary device for new internet users in China, while PC usage declined.
  • PDD emerged as e-commerce transitioned from PC to mobile.

PDD and WeChat: History

  • Tencent, founded in 1998, became a leading social networking and gaming company.
  • Tencent launched WeChat in 2011, which had over 1.1 billion monthly users by early 2019.

PDD and WeChat: Commercial Partnership

PDD grew by leveraging Tencent’s WeChat social networking app:

  • 2015: PDD started selling products through its WeChat Official Account.
  • PDD used WeChat Pay for payments and developed a mini-program within WeChat.
  • January 2016: PDD reached over 10 million paid customers.

Social Buying + Bulk Buying

Lottery on PDD
  • PDD offered two prices: regular price for individual purchase or a discounted price for “team purchase.”
  • Team purchases typically required only two people.
  • Orders were confirmed and shipped if a team formed within 24 hours; otherwise, a full refund was given.
  • PDD’s user experience was designed to capitalize on short attention spans in the mobile era, unlike traditional search-based e-commerce platforms.

New Avenues of Growth

Lower-tier cities

  • PDD successfully expanded into lower-tier Chinese cities, a large market with strong growth potential.
  • PDD’s typical user is a Chinese female from third or lower-tier cities.

Rural strategy

  • The platform initially stood out by selling fruits and agricultural products.
  • PDD generated demand by aggregating it through team purchases and sourcing directly from farmers.
  • This direct sourcing model cut out middlemen, lowering prices for consumers and boosting farmers’ profits.

Discuss: PDD and E-Commerce

  • How did PDD change e-commerce in China and beyond?
  • What drives PDD’s fast growth and popularity?
  • What risks lie ahead?

Colin Huang: Reversing Capitalism

[I]nsurance is very interesting and also reflects capitalism. “Rich people” have capital and “a lot of money,” thus their ability to withstand risk is strong; “poor people” have “little money” and their ability to withstand risk is weak. Therefore, “poor people” need to buy this ability to withstand risk from “rich people.” Ultimately, insurance as a product further promotes the transfer of wealth from those with no money to those with money. It is called the pinnacle of capitalism because it further amplifies the power of capital.

Colin Huang: Reversing Capitalism, continued

Do mechanisms exist that would allow the poor to also sell “insurance” to the rich, and for the poor to sell some of their “soft power,” their willingness, and their risk-bearing capacity to the rich, thereby achieving more refined feedback and a shorter cycle of money flowing back from the rich to the poor?

  • 1000 people pre-order winter jackets in summer by placing a joint order with deposit.
  • The factory can offer a discount (e.g., 30%) due to this certainty.
  • Certainty allows for better production planning and material purchasing.
  • The factory can use this certainty to negotiate lower costs with suppliers.

Colin Huang: Reversing Capitalism, continued

If these thousand people have a certain credit history, and they place a joint order together, expressing their willingness but not paying a deposit, would the factory be willing to give them a discount? I think they would probably be willing, it’s just that perhaps not 30%, but would 8% be acceptable? This is like the factory using its own limited-time discount coupons to buy insurance from ordinary consumers that guarantees future purchases. If we think further, there are actually many other forms that can marketize, productize, and monetize ordinary people’s willingness and the certainty of their future needs.

Colin Huang: Reversing Capitalism, continued

I guess capitalists and the rich would be willing to buy this kind of reverse insurance from ordinary people and the poor. This kind of reverse insurance can monetize the credit and willingness of every ordinary person. This reverse insurance is no longer about the poor accumulating credit and money to borrow from the rich and pay interest (in the case of lending, the poor have to pay interest because they borrowed money, making the things they buy actually more expensive than what the rich buy), or spending money to buy certainty in life from the rich. Instead, it’s the opposite: the rich and capitalists pay money to ordinary people and the poor to buy certainty in their production capital allocation. In the former case of insurance and financial lending products, money flows from the poor to the rich, whereas in this reverse insurance, money flows from the rich into the hands of the poor. There should be a qualitative difference here.

Discuss: Reversing Capitalism

Evaluate Colin Huang’s notion of reversed capitalism:

  • What is it? Does it work?
  • Who benefits, the rich or the poor?
  • How does Pinduoduo translate his vision into reality?

Pinduoduo vs. Chinese Economy

Why is PDD doing well when the Chinese economy falters?

Is Pinduoduo Making China’s Deflation Worse?

Involution (Chinese internet slang: neijuan)

  • diminishing returns: increasing labor fails to yield productivity gain
  • cut-throat price competition
  • a race to the bottom

“Excessive competition”:

  • Pinduoduo: How to lower prices even more?
  • Sellers: Either lower prices or sacrifice sales
  • Real challenge: How to increase household income so that people can pay more, and sellers earn more?

Algorithmic Discrimination

  • Should companies use machine learning algorithms to price discriminate based on data such as customers’ past purchases, web browsing history, location, or age, race, and gender?
  • Such algorithms can not only identify consumer willingness to pay, but might even attempt to nudge or inflate willingness to pay.
  • Will such price discrimination improve distributional equity – companies could charge higher prices to higher-income consumers and lower prices to lower-income consumers – or worsen it?

Amazon Effect

  • Amazon’s dominance drives down prices online and in physical stores.
  • Retailers use “dynamic pricing” to constantly adjust their prices.
  • E-commerce makes prices more sensitive to economic shocks, like rising energy costs, which can raise prices quickly.

“Dynamic Pricing”: Best Deal for Whom?

Discuss: Political Economy of E-Commerce

Explain these concepts:

  • Large-scale impersonal exchange
  • Institutional outsourcing
  • Private regulatory intermediaries

Questions:

  • How did e-commerce thrive in China, despite weak market development, lack of formal institutions, and government control of economy?
  • What are the effects of e-commerce development on China?
  • What are the author’s research methods and main sources?

China’s E-Commerce Puzzle: Formal Institutions

Conventional wisdom

  • Strong formal institutions (property rights, contract enforcement, rule of law) are crucial for efficient markets.
  • A strong legal system is vital for e-commerce growth due to fraud, counterfeits, and

China

  • E-commerce market took off without strong formal institutions.
  • Legal frameworks (e.g., E-Commerce Law, internet courts) emerged after the e-commerce boom.
  • Legal system improvements are a consequence, not a cause, of market growth.

China’s E-Commerce Puzzle: Market Transactions

Conventional wisdom

In countries lacking strong legal institutions, market transactions rely on personal networks, social ties, or face-to-face exchanges.

China

Most e-commerce transactions are impersonal exchanges between small, anonymous traders in distant localities.

China’s E-Commerce Puzzle: Market Development

Conventional wisdom

  • Larger e-commerce markets are anticipated in developed economies compared to China.

China

  • Leapfrogged developed economies in e-commerce.
  • E-commerce sales accounted for a significant percentage of total retail sales, almost double that of the US in 2019.

China’s E-Commerce Puzzle: Government Attitude

Conventional wisdom

  • The Chinese internet is often depicted as heavily controlled, suppressing innovation.

China

  • Duality in internet control: tight regulation of social media/communication, but more lenient control over the economic facet.
  • For two decades preceding 2020, the government refrained from imposing stringent regulations on e-commerce.
  • State-owned enterprises (SOEs) had little presence in the market.

Strategic Deregulation and De Facto Outsourcing

States can outsource governance functions to digital platforms.

  • De jure outsourcing is formal delegation through contracts.
  • De facto outsourcing is when the state deliberately chooses not to regulate or intervene, even if it can.
  • China’s e-commerce growth before 2020 is an example of de facto outsourcing.

“Strategic non-regulation” aims to foster industry development.

  • The government allowed experimentation and avoided excessive intervention.
  • 2015: Banning local tax authorities from any inspections on e-commerce firms.
  • 2020-2023: Big crackdown on big tech, later eased off, to realign private platforms with the state’s political and economic visions

China’s Regulatory Dilemma

  • Regulation ensures platforms align with the state’s political and economic goals.
  • The main challenge is how to regulate platforms, not if.
  • Too little regulation can lead to platform abuse, while too much can stifle innovation.
  • Achieving optimal economic outcomes requires balancing platform and state power.
  • China’s campaign-style governance and erratic shifts in regulation shows that finding this balance is difficult, but the challenge is not unique to China.

America’s Regulatory Dilemma: De Minimis

Temu’s Roadblock

  • 2025-02-01: Trump’s executive order struck down the “de minimis” trade exemption, which allows packages under $800 to enter the U.S. duty free.
  • PDD-owned budget online retailer Temu and its rival Shein have relied on de minimis to maintain their rock-bottom prices: 4 million de minimis shipments every day in 2024.

What should PDD do?