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Pinduoduo shows worrisome governance issues

Pinduoduo, third-largest marketplace in China has grown exponentially in the last five years from nothing to handling more business than eBay. Whilst sales and revenue have kept growing and growing, the Chinese newcomer has not come any closer to turning profits. Its business model is based on generating traffic through its website offering subsided discounts on best-selling items, so sellers would pay a small fee to sell their merchandise through Pinduoduo marketplace. Although merchandise deals continue increasing in size, expenses in subsided discounts and marketing have risen even more. This growth has made the market leader, Alibaba, to take the newcomer seriously as a competitor and has already tried to limit its future growth by trying to get sellers to commit to exclusivity by closing their Pinduoduo sites.

Fast-growing newcomer to show profits on its quarter results from its Nasdaq filling in 2018, but its share price has kept soaring. In fact, since the coronavirus outbreak, it has more than double despite keep increasing net losses. Pinduoduo has also financed its excessive spending through three successful funding rounds since its IPO, which added up to $3.3bn. Additionally, corporate governance issues regarding the lack of Chief Financial Officer and the use of alternative metric GMV that doesn’t reflect financial performance, cast doubts over the viability of Pinduoduo business model. Also, the Chinese company negligence to implement anti-brushing measures in the marketplace has foster distrust around the ecommerce disruptor.

Despite the lack of profits and governance issues, having Tencent as the second largest shareholder in the company may prevent the company from failing, unlike others with similar issues did. The volume of business that Tencent could direct through its tech, telecom and entertainment services would offer a saving line for the fast-growing marketplace. Pinduoduo could also benefit from AI technology developments by Tencent-owned companies. Should the ties between Tencent and Pinduoduo get even tighter, the rising marketplace could count with the Chinese government favor as Tencent has collaborated with the government in the past by providing data recorded on citizens’ online activity.