PDD's secretive founder, his mentor and Warren Buffet - and why Financial Times was clueless
What can the world learn from Pinduoduo
On March 6, Financial Times’ investigative journalist Dan McCrum published a long article on Pinduoduo titled “The mysterious rise of the Chinese ecommerce giant behind Temu“, where he insinuated that the $160bn e-commerce company Pinduoduo (PDD ) looked like a fraud. For those who follow PDD closely, this long report, full of innuendos and pseudo-questions, looks like a piece of work from a junior person who just got to know about China’s e-commerce industry. But being published on an influential mainstream platform can give whatever newbie article an outsized power. Immediately after the report, PDD’s shares tumbled, wiping off billions of dollars of value.
In response, several sell-side research houses wrote reports to rebut the FT story. One of the best I have seen is a 15-point Q&A report written by my good friend Robin Zhu at Bernstein, covering specific questions ranging from “Why do PDD staff use pseudonyms? Isn’t this weird?“ to “Why does PDD’s balance sheet not grow in line with revenues? Why does it not have more assets or spend more on capex?“
If you have access to Bernstein’s research, be sure to find Robin and check out that piece (and please kindly tell him I recommend his work!)
For us at Baiguan though, we will not get into the details of FT’s story. We find that overseas discourses about PDD/Temu mainly suround superficial facts such as “cheap goods”, and “aggressive and secretive management style”, but there are scant discussions about context. But, as you know, providing context is one of Baiguan’s key jobs. So this is something I will focus on for this post, where I will combine my understanding of PDD, derived from years of observing this company, many data points, as well as my personal anecdotes from several meetings with Colin Huang and his team as part of a business deal many years ago.
Secrecy at PDD
The central thesis of the FT story is that Pinduoduo is a very secretive company. Disclosures are scant. The few details gathered from their scant disclosures don’t seem to add up. So very likely PDD is a fraud, as fraudulent as the pre-tournaround Luckin Coffee.
It’s true, that PDD is a very, very secretive company. Their quarterly results announcement as well as investor calls are extraordinary in terms of a lack of details. They have a very tough policy on keeping business secrets and non-compete for their employees. Their apps and websites are notorious for anti-scraping methods so no alternative data companies to this date, not even us at BigOne Lab, is qualified to claim to have a comprehensive and reliable read of it.
Secrecy of PDD serves a very practical purpose. On my personal newsletter
I once commented that:The reason behind this culture of secrecy is simple. They are always the David in a market where a Goliath already dominated. Before, their Goliath was Alibaba. Now that Goliath is Amazon. So it is a deliberate choice that real results of Temu have been always obscured from disclosure in their earnings. (You can probably only have a glimpse through indirect data, such as hiring data)
Besides, this secrecy can be interpreted both ways. Secrecy can lead to an impression of fishiness, but does it automatically mean fraud? Not necessarily. First of all, if you look at many frauds, especially in China, most of them tend to be very loud, not quiet. Naturally, fraudsters are vocal, not shy. I remember when Luckin Coffee first IPOed, there was a frenzy of public relations. After all, how do you pump up the stock prices if you just shut up about it?
Besides, all frauds invariably lead to a purpose, which in most cases is a big cash-out in the end. Today’s PDD stands at ~$160b of value and is one of the most valuable technology companies in the world. On paper, its founder Colin Huang is already among the richest people in the world, why hasn’t he cashed out on a single share yet (other than shares he shared with the team)? If now is the best time to parachute out of a disaster, why hasn’t he?
I don’t have immediate answers to the above questions. But for this post, I would like to highlight that this ultra-secrecy culture is not only part of a strategy, but reflects who Colin Huang is as a person. In fact, it also reflects what a genealogy of earthly wisdom he descends from, a genealogy that goes back to possibly one of the (hidden) richest guys coming from China, and finally going back to Warren Buffet.
Colin Huang, Duan Yongping, and Warren Buffet
You can’t really understand who Colin Huang is if you don’t know about his mentor and early investor, Mr. Duan Yongping 段永平.
Duan is a legendary Chinese-American businessman/investor and may be the richest person in the world that you have not heard of. Duan was the founder of BKK Electronics步步高, a massive electronics conglomerate founded in the early days of reform and opening up in China. BBK’s early products included DVD players and education devices (all of our elementary school pupils knew this brand). BBK was later split into other entities, including smartphone brands OPPO and VIVO. If OPPO and VIVO were combined, it could have already been the world’s largest smartphone player by shipment according to Counterpoint Research.
Duan is also a successful investor. A few weeks ago, an online sleuth on Xueqiu.com (one of China’s largest stock message platforms for retail investors), figured out that it is Duan who controls an entity called H&H International Investment, which holds close to 0.5% of Apple’s shares, worth over $10b. It is widely believed that this entity is but one of Duan’s many investment vehicles. So although his exact shareholding in OPPO and VIVO is not known (those two companies are private) and he may be also managing other people’s money through H&H, it’s very likely Duan is now the richest person born in China, even if he was nowhere to be found on Forbes.
One of the most widely known episodes of Duan was that in 2007, Duan spent US$620,100 to have lunch with Warren Buffett. Unlike most other Chinese businessmen who also made it to the Buffet’s famous lunch (such as the flamboyant crypto wunderkind Justin Sun), Duan maintained a cordial relationship with Buffet ever since.
Buffet left an indelible mark on Duan. Unlike Colin Huang, Duan is a very chatty person. In the early days, he regularly appeared on TV to share his story and wisdom. On the same platform, Xueqiu, where his position was uncovered by others, he was also a big influencer. He liked to share his folksy investment philosophy and regularly disclosed his trading moves. In many of his posts, Buffet is someone he has always referred to. His trading style, candidness, and overall humbleness closely resemble Buffet. He also never shies from admitting things he doesn’t know. Many times he shares about something he doesn’t want to invest in simply because he is not able to understand it. Duan’s nickname on Xueqiu is “The Great Way大道”, which is a reference to Tao Te Ching’s famous line “The great way is the simplest way大道至简“.
It’s also at Buffet’s lunch where Colin Huang, almost a teenager at the time, was taken by his mentor Duan to meet Buffet. Years later, Colin recounted this episode:
Buffet told us to figure out if something is good or not good, if you apply common sense, it’s usually very obvious. If it’s not obvious enough, then it’s not good enough. For example. if you sit inside a restaurant, and Yao Ming came in. You would notice him at once. But if someone came and was not noticed, then it mean he is not tall, right? When you apply common sense and simplicity to look at things, the obvious differences are really obvious, but some minor differences can be overlooked.
This discussion of Duan and Buffet is very relevant to this post. People cluster around like-minded people. To understand Colin, it’s crucial to understand the people around him, especially the mentors he draws life’s lessons from. What are the lessons he might have learned, and what are the lessons the world can learn from him? There are at least 4 lessons, which will hopefully shed more light on your understanding of the company Colin Huang founded.
Key lessons
1# Focus on your biggest tasks. Be simple. No bullshit
I’d say this is the biggest characteristic of PDD. Just like the name of Duan’s Xueqiu account, the Great Way is often the simplest way.
There used to be a framework to evaluate the success factors of an e-commerce platform in China, summarized in a 4-character phrase “多快好省“, or “Plentiful, Fast, high-quality, and Cheap”. You may argue that Alibaba is really good with having “plentiful” choices for consumers, while JD is great in terms of “fast” delivery and “high-quality” products.
But PDD basically comes in and says, this framework is bullshit. Does it come from a management consultant’s slide deck or what? There is only one key factor that makes a consumer love the online shopping experience, and that is ”value for the money“. So they pushed this factor to the extreme, just during a time when Alibaba tried to shift upward in terms of consumer premiumization. Very simple.
They understand that they were born at a time when Alibaba and JD have already become giants, when nobody would dare to imagine there was in fact another Alibaba-sized opportunity in the Chinese e-commerce space. It’s a David vs Goliath battle, and their chance for survival was slim. To survive, they had to do it secretly and build a culture and infrastructure based on ultra-secrecy from Day 1. Very simple.
They also strongly understand that in a so-called “two-way marketplace” like an e-commerce platform, the consumer side is always more important than the merchant side, at least in China. So their algorithms and platform rules have clearly favored consumers (“shopping like a billionaire!”) at the expense of merchants, including a notorious feature that allows users to ask for instant refunds even without returning the products.
Many merchants made a lot of complaints about PDD regarding its stringent and sometimes even insensible merchant rules. If you think about it, those complaints are quite interesting. If those merchants really don’t like PDD, they could just go away to many other platforms such as Taobao and Douyin. The fact that they are quite persistent in making complaints about PDD shows that PDD, with a higher user stickiness and seemingly endless order flow from its loyal consumers, has become quite indispensable for those merchants. Very simple.
I think this focus on cheaper products as well as a one-sided customer-first policy are not the results of any personal taste, but a well-calculated move, in which the risks and rewards were all taken into account to arrive at the “best”, interest-maximizing practice. In this regard, PDD operated much more like a highly efficient American business, where only numbers matter, but unlike a typical Chinese company, where respecting “human emotion人情味” is often part of the dominant culture.
This emotionless, scientific mindset and a lack of 人情味 is also what I observed from my personal meetings with Colin.
A few years ago, when almost nobody had heard of PDD (I hadn’t either), I was a junior partner in an investment firm, leading a consortium of investors to sell a business to Colin. We had a number of in-person meetings together, around the time when they announced they had become China’s second-largest e-commerce platform by order volume, surpassing JD. (At the time we had serious doubts about this claim, because, you know, few people had heard of them by then.)
In those meetings, Colin struck me as someone with a very sharp mind. He was not very talkative but not pretentious either. He was very candid and always spoke his mind. That deal was cut efficiently, with key obstacles swiftly raised and tackled. Even though it involved hundreds of millions of dollars worth, I remember it among the fastest and most refreshing deals I have ever seen.
Years later, when I read Walter Isaacson’s biography of Elon Musk, I saw someone just as minimalist. Although temperament-wise Elon and Colin seemed very different from each other, they shared a singular attention to the core of the matter. In the biography, Musk was always seen to challenge his colleagues about why they should do this device or add that feature, who told them to do it, what for, and what the first-principle reasons were for it, only for his colleagues to run around and figure out that, yeah, maybe this feature was not necessary at all! When I read these, I always thought about Colin Huang (minus Musk’s trademark obnoxiousness.)
And so, my question for Mr. Dan McCrum is: why should PDD carry so many assets? Why should an e-commerce company have so many staff?
The fact that conventional wisdom dictates it does not mean it is true. If at the very core, an e-commerce company’s reason for being is to provide good value for money for its consumers, why shouldn’t it have a lean workforce and outsource things like logistics to capable outsider providers? Maybe those other guys are doing it wrong?
And maybe the other guys are indeed doing it wrong. Alibaba is a case in point. After initial success in the e-commerce space, Alibaba became bloated, venturing into a variety of businesses including cloud service, logistics, and even supermarkets. That was the source of its troubles today. Now Alibaba is struggling with how to get leaner for its bloated body.
Here, one may also turn attention to Buffet’s Berkshire Hathaway, one of the largest conglomerates in the world. If you do not count the portfolio companies invested by it, Berkshire has a lean workforce of only ~20-30 people. Why don’t we challenge why Berkshire has such a small investment team? Because we know for a business of making savvy investments, you really don’t need that many people.
(Also, if you think about it, Berkshire is also quite thrifty in terms of disclosures. They do not talk in detail about the business operations of their vast portfolio holdings in their annual reports. They don’t do quarterly earnings calls. And the famous Berkshire Hathaway annual shareholder meeting was more of a gala than a serious investor conference. Does that make Berkshire Hathaway a secretive, fishy company?)
#2 Find your best non-consensus idea and bet big on it
It is well-known that Warren Buffet ridicules modern portfolio theory that sees diversification as a key tool to manage risks. One of Buffet’s ideas is that there is only so much one knows about the world, and there are only a few things someone truly has an edge about. So it is crucial to understand where your edge is and bet big on it. He has practiced what he preached, and it is common to see his portfolio concentrated on a few names he truly loves.
And so is Duan Yongping. In H&H, the investment vehicle commonly believed to be his, almost 80% of the positions are concentrated in Apple. This is definitely not the portfolio your wealth advisor would recommend.
Usually, one may be alone in those ideas. I call them the “non-consensus“ ideas. But it’s those non-consensus ideas that make an investment great.
When PDD was founded, the consensus at the time was that Chinese consumption would continue to “upgrade”, so there was a deliberate attempt to shift resources away from Taobao, a platform of mainly cheap white-label products, to the more premium Tmall. The non-consensus idea, on the other hand, was that Chinese people are still largely poor. They can’t make premium purchases every day, while all the white-label merchants left in the cold by Alibaba had to find somewhere to go.
Colin Huang and his team saw this. But it’s never good enough to just have a brilliant non-consensus idea if you are not betting big on it. Betting big or small is a crucial difference between a real master and a would-be one.
And betting big was what PDD did. When PDD first IPOed, many investors were shocked to find a company running at a loss that could be 150% of revenue. This is crazy! But the money was in retrospect wisely concentrated on marketing efforts (so that it quickly survived before Goliath realized) and on subsidizing consumers (so consumers were kept happy and sticky.) This was a huge bet.
#3 Bring matter-of-fact to your business relationships
This may be common in Western culture but quite rare in Chinese businesses: be candid with your business partners.
In one of those business dinners I attended, I remember Colin recounted tales of the symbiosis between OPPO, VIVO (“OV”), and their many suppliers and distributors. When OV had some business difficulties, they would tell their partners bluntly that times were tough, and terms had to be adjusted. Let’s go through the storm together, and rest assured you will also share the boom if the tide turns.
After our deal, we also recommended another potential acquisition target for Colin’s consideration.