PDD Holdings, the parent company of Pinduoduo and Temu, has reported lower-than-expected sales for the third quarter, highlighting the impact of China’s sluggish economy on its tech giants. Shares in the company dropped by nearly 9% on Thursday following the announcement, as concerns mount over intensified competition and weak consumer spending.

Key Financial Highlights

• Revenue Miss: PDD reported sales of RMB 99.4 billion ($13.7 billion) for Q3, a 44% increase year-on-year, but below analysts’ estimates of RMB 102.8 billion.
• Net Income Growth: Net income rose by 61% to RMB 25 billion, but adjusted profit per American depositary share (ADS) came in at RMB 18.6, again missing market expectations.
• Market Reaction: Shares fell nearly 9% in early trading, reflecting investor disappointment.

Economic Challenges Weighing on Growth

China’s ongoing economic slowdown is taking a toll on ecommerce platforms. Rising youth unemployment, a sluggish property sector, and weakened consumer confidence are forcing companies like PDD, JD.com, and Alibaba to adopt aggressive strategies, including discounts and promotions, to attract budget-conscious shoppers.

Chen Lei, PDD’s chair and co-CEO, acknowledged the challenges, saying, “Profits trended lower in the third quarter with intensified competition in the ecommerce sector.”

Industry Competition Heats Up

Competition among China’s top ecommerce players is intensifying as they navigate reduced consumer spending:

1. Alibaba’s Overhaul: Rival Alibaba recently announced a major restructuring, merging its domestic and international ecommerce divisions to improve profitability and expand its global reach.
2. Temu vs Amazon: PDD’s global platform Temu, launched in 2022, has aggressively expanded into Western markets by undercutting prices. It has drawn attention from Amazon, which launched its discount platform, Amazon Haul, in response.

Reputational and Regulatory Challenges

PDD has faced additional scrutiny in recent months:

• Merchant Protests: In July, the company dealt with a public relations crisis when merchants protested at its Guangzhou office over withheld payments and perceived unfair fines. PDD responded by investing heavily in merchant support, including reducing transaction fees and enhancing aftersales services.
• Regulatory Scrutiny: Temu, PDD’s international arm, is under investigation in Europe for allegedly failing to prevent the sale of illegal products. Additionally, Western politicians have criticised Temu’s model of shipping goods duty-free, promising to close loopholes that enable these practices.

Looking Ahead

Despite challenges, PDD remains committed to “high-quality development” in alignment with Beijing’s push to bolster the economy. However, the company’s reliance on deep discounts to win market share, particularly in overseas markets, could strain profitability over time.

As competition intensifies and regulatory pressures increase, PDD faces the dual challenge of maintaining growth while adapting to the shifting economic landscape both in China and abroad.

This report underscores the pressures facing not just PDD Holdings, but also the broader tech sector in China as companies grapple with slowing growth, increased competition, and mounting regulatory scrutiny.

Source: (FT.com)