3 Reasons Pinduoduo Won’t Unseat E-Commerce Giant Alibaba

Among Alibaba Group Holding’s (NYSE: BABA) (SEHK: 9988) many challengers, Pinduoduo Inc (NASDAQ: PDD) might be the most impressive.

Pinduoduo’s rise is impressive given that it was founded just four years ago. Having been founded from humble beginnings in 2015, Pinduoduo, also known as PDD, is now one of the largest e-commerce companies in China.

PDD is also growing fast. In the third quarter, sales rose 123% year-on-year to RMB 7.51 billion (US$1.05 billion), and the company’s average monthly active users (MAUs) rose a staggering 85% year-on-year to 429.6 million.

PDD increasingly challenging Alibaba

In the first few years of PDD’s founding, Alibaba and PDD were more complementary rather than rivals. Alibaba operated in China’s more developed areas while PDD operated in China’s less developed rural hinterlands where Alibaba wasn’t a strong presence.

Recently, and perhaps inevitably, PDD has increasingly challenged Alibaba by making inroads into China’s developed and more affluent cities. According to the company, PDD’s GMV from richer tier-1 and tier-2 cities rose from 37% in January to 48% in June.

Given its large consumer base, PDD’s platforms have also attracted more merchants. At the end of the second quarter, it boasted 3.6 million merchants, substantially higher than before. With more merchants on its platform, PDD’s product offerings have increasingly become more competitive with Alibaba’s product offerings in more categories.

While PDD’s ascent isn’t good news for Alibaba, here are three reasons why the e-commerce company won’t surpass Alibaba any time soon.

1. Alibaba venturing into less developed areas

Whereas PDD is going into the higher tier cities, Alibaba is increasingly going into China’s lower tier cities. Of the 20 million annual active customers Alibaba added in the June quarter, more than 70% were from China’s less developed areas.

E-finance operator Alipay, which Alibaba partly owns, is also offering a group buying feature. Alipay is one of China’s most widely used digital payment apps with hundreds of millions of users.

2. Alibaba has logistics advantage

While the price of an item is a big factor in making purchasing decisions, the speed of getting the item can be equally important for many consumers. To that end, Alibaba has invested billions in making its logistics operations more efficient and speedier.

Although it doesn’t carry inventory like an actual retailer does (such as Amazon or local Chinese rival JD.com), it has worked with large merchants – particularly those listed on its Tmall platform – to optimise delivery times.

With more financial resources than PDD, Alibaba can build a better logistics network and deliver to customers faster from merchants for a wide range of products.

3. Alibaba is more than an e-commerce company

Alibaba is much more than an e-commerce company. Alibaba owns China’s largest cloud computing company, Alibaba Cloud, that’s growing extraordinarily fast.

The cloud division has an opportunity to capture a large slice of a potential US$100 billion a year market and could be worth much more to Alibaba if current trends continue.

Alibaba also has exposure to China’s large mobile payments market with one third ownership of Alipay’s parent Ant Financial. Analysts expect Ant Financial would fetch a valuation of US$150 billion or more when it goes public.

While PDD is challenging Alibaba in e-commerce, it won’t be a viable challenger to Alibaba in the cloud or mobile payments any time soon.

Foolish conclusion

Although PDD is growing quickly, Alibaba’s product diversity, financial strength, and logistics advantage make it very difficult for it to surpass the e-commerce leader any time soon.