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July, 2018

China's hottest e-commerce startup struggles to contain counterfeiting

Original article: TMT Post

Pinduoduo, China's red-hot e-commerce startup, faces mounting struggles with fake goods. In recent months, the company has encountered headwinds in both China and the U.S. - where it recently listed - because of fake goods on its platform. The Chinese company diaper maker Daddy's Choice is suing Pinduoduo in a New York court for trademark infringement.

Analysis:

Tencent-backed Pinduoduo has much to be happy about. The red-hot e-commerce startup went public in New York last week, raising $29.6 billion on the Nasdaq. A July Reuters report notes that Pinduoduo's gross merchandise volume reached more than 100 billion yuan ($14.98 billion) last year, a feat that Taobao needed five years and JD.com 10 years to accomplish. 


Pinduoduo has found a niche in China with its social interactive shopping experience. Unlike Taobao, where users buy goods much as they do on Amazon, or WeChat, where users engage with brands on public accounts, Pinduoduo focuses squarely on the integration of social media with e-commerce. The platform allows users to buy goods at lower prices when they make the same purchases together with friends. It also prominently features flash sales and offers free gifts to users who persuade their friends to follow brands on social media. 


To be sure, WeChat does blend social media and e-commerce, but e-commerce arrived long after the messaging app. WeChat initially existed as a messaging platform, then as a digital wallet. In the past few years, brands have sought to reach more Chinese consumers via WeChat. 


In contrast, in its three years of operation Pinduoduo has always focused on the social element of shopping online. Of course, Tencent owns the company, and WeChat promotes it, so there isn't the heated competition between WeChat and Pinduoduo that exists between Alibaba and Tencent. 


Indeed, it's not the competition Pinduoduo needs to worry about just yet; it's the counterfeiters. Beijing-based Daddy's Choice, a maker of diapers and maternal products, recently filed a lawsuit in a New York court alleging that Pinduoduo had committed trademark infringement. According to a statement from Daddy's Choice, knock-off and counterfeit version of its products have appeared on Pinduoduo since last year, although the Beijing-based company has never sold its products on the platform. 


A July report by Yicai Global quotes Daddy's Choice CEO Wang Sengdi as saying that Pinduoduo failed to acknowledge his company's takedown requests over the past year. That led to Daddy's Choice to sue Pinduoduo rather than the individual sellers, Wang said.


A July New York Times report points out that Pinduoduo said in its filings with the U.S. Securities and Exchange Commission that it immediately takes down infringing listings from its platform, while freezing the accounts of offenders. However, a January filing by the company notes that Chinese regulators told it to more proactively fight counterfeiters. 


At the same time, analysts have some concern about the viability of Pinduoduo's business model. In July, CNN Money pointed out that the platform has been successful because merchants slash prices or even give away products for free to attract customers. What happens when a rival copies the idea but cuts prices even lower or gives away more products gratis? What will be Pinduoduo's advantage? Consultancy Bain & Company reckons that Pinduoduo's business model stands on shaky ground for that reason.

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