This week on the TechBuzz China podcast, our hosts Rui Ma and Ying-Ying Lu lead in-depth discussions on the e-commerce phenomenon that is Pinduoduo and the future of co-working in China with WeWork’s purchase of NakedHub. They also shared commentaries from multiple investors and industry insiders such as Kathy Xu, Mark Pols, and Rebecca Brian Pan. 

Pinduoduo is the fastest growing e-commerce platform that you have never heard of. It is behind only Taobao and JD.com in the number of users, exceeding JD.com in their monthly gross merchandise volume, and even surpassing Taobao in the penetration rate of users from lower tiered cities.

To understand this phenomenon, Rui not only downloaded the app to give us a sense of why it is so popular, but also shared comments by Kathy Xu of Capital Today, an early investor in JD.com, on why she chose not to invest in Pinduoduo. We also had Mark Pols, former investor from GGV Capital and Morgan Stanley, share his thoughts on how Pinduoduo has tapped into “an enduring human need.”

Another trend that is sweeping China is the real estate side of the sharing economy: coworking spaces and offices. Is it a fundamentally real estate business, or does it belong to the service sector? Is WeWork’s purchase of NakedHub a sign that foreign startups can overcome and succeed in China, or is it just the start to another tragic tale? Hear what Ying-Ying and Rebeca Pan, founder and CEO of the U.S. coworking startup Covo, and a coworking industry pioneer, had to say about the future of coworking in the U.S. and China.

To listen to these conversations, tune in to TechBuzz China on iTunes Podcast, SoundCloud, or simply search for TechBuzz China in the podcast app of your choice.

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Transcript

[00:10] R: Welcome to TechBuzz China! We are a new weekly podcast focused on bringing you the most relevant, interesting and buzzworthy headlines in China tech. We are a part of Pandaily.com, a new English language site that tells you “everything about China’s innovation.” This is episode numero dos, number two, dierji, so let’s get ready!

R: I’m going to introduce myself again for those of you who are just tuning in. I’m one of your two cohosts, Rui Ma, and I live in San Francisco. I’m an angel investor, entrepreneur, China watcher and most importantly, cat lover.

Y: And I am Ying-Ying Lu, your other co-host, also based in San Francisco, although originally from Atlanta, and I am also an entrepreneur and China watcher. I’m severely allergic to Rui’s cats.

R: Yeah. By the way, we had a few hundred listeners for our inaugural episode and it’s pretty exciting to get your feedback. Many of you mentioned that you wanted to hear more perspectives and insights on the show, which is so great, since that’s exactly our mission! So, in addition to sharing our own thoughts, we will be reaching out to other experts we know. Keep the feedback coming!

[1:22] Y: OK, let’s get to it. This week, we’re going to be talking about Pinduoduo and NakedHub. The first is a story about an ecommerce company that’s growing like a weed and the second is a consolidation story about coworking in China.

R: Right, so one of the biggest stories in e-commerce the past couple of weeks is the rumored fundraising of Pinduoduo, the fastest growing app in the history of Chinese internet. Pin means to piece together, and duoduo is “much much,” so if you haven’t guessed it already, it’s a group buying app. Its predecessor Pinhaohuo, which means piece together good goods, focused on just the group buying of fruit and other grocery items. So the founder of Pinhaohuo was also an investor in Pinduoduo, which was actually a separate gaming company in Shanghai that somehow ended up doing social commerce. Pinduoduo at the time had broader product categories, not just groceries, and was more focused on gamification and viral growth. Anyway, supposedly at the urging of Banyan Capital, which was an early investor in both companies, they merged in late 2016 and I guess ultimately decided to use the Pinduoduo brand. I know it’s kind of confusing, but you can just remember this, Pinduoduo was founded in September 2015 by ex-Googler Colin Huang, which means it’s only 2.5 years old. And it’s now valued at $15Bn.

Y: Yup. So the way it works is pretty simple. The app offers merchandise that’s cheaper than market price by letting consumers buy directly from manufacturers, cutting out middlemen, advertising and other costs. They also add some gaming elements to the shopping experience, by giving out coupons and rewards. If a shopper recruits friends to join them in an eligible purchase, the entire group gets a discount.

R: Sounds pretty intuitive. So to help you all picture what this app looks like, I downloaded it to check it out. As of the time of this recording, this is what’s showing up for me on the front page of the Pinduoduo app – Linkin Park t-shirt for 26 rmb or 4 bucks, with already 210K purchases completed. An 8-pack 300 sheet napkins from recycled paper at $1.40, with free shipping, which 3.6mm people have already bought, and which I can get by just inviting one other friend to join in. Wow! That’s pretty cheap. Yingying – need any napkins?

[3:44] Y: You know, Rui, I’m super tempted, but I don’t think they ship to the US yet. At the end of last year, Pinduoduo is already seeing about $1.6Bn USD of monthly GMV, and 300 million users, behind only Taobao and JD. It’s the second most popular shopping app in China on app stores. And it doesn’t show any sign of slowing down. Which is why one of the headlines at Pandaily this week is “Alibaba’s worst nightmare” — Pinduoduo. Its huge user base is mostly from third and fourth-tier city residents whose average monthly disposable income is only $160 or so. It’s got 70% female consumers, and over half of its users are between 25 and 35 years old. That’s prime Taobao demographic.

R: Yes, but there’s still a good amount of Chinese people not on the app. For example, I have the maximum amount of Wechat contacts allowed – 5000 – and I have yet to see a single request to join in a Pinduoduo group purchase, or any kind of group buy. But then again, most of my friends are in investing, so, understandably they’re hunting for a different type of deal.

Y: Yeah, my experience is similar. So it’s still a pretty specific type of people who are on Pinduoduo. It’s also not super clear how much Pinduoduo has raised in this new round of funding, but it seems to be either $1Bn or $3Bn at a $15Bn valuation. And guess who’s the rumored lead investor? Tencent of course. Ah, the Tencent Alibaba rivalry … we will have to devote a whole episode to that one day, but listeners, you guys just to know they hate each other. Like Democrats vs. Republicans hate.

[5:23] R: Yeah, so Pinduoduo is in Camp Tencent, which is good for them, but I personally think that their future is still uncertain. I mean, is this kind of growth sustainable or is it a fad? Before I tell you my opinion, let me share with you the perspective of Kathy Xu, one of the top VCs in China, who has made her fortune on ecommerce and retail, and who was one of the first investors in JD, Dianping and various other decacorns in China. Her fund is called Capital Today and was founded in 2005. She’s basically, no exaggeration at all, the most respected investor in this space. According to her, of course they looked at Pinduoduo early, and noted that its strength was in its supply chain, which impressed her. I think it’s interesting, by the way, that she didn’t think the whole Wechat social element was its core advantage. Anyway, she ultimately didn’t invest because she said she couldn’t figure out the value proposition of the company. Was it to bring happiness to consumers because they like buying in groups? Was it to save 25 cents on a 1 dollar purchase? Or was it to provide an entertaining experience for consumers who wanted to be distracted? She didn’t think any of these were quote unquote revolutionary enough for a truly great business.

Y: But obviously, many other investors disagree. On the other side of the table, we have Mark Pols, who was a long time investment banker at Morgan Stanley covering China tech, which is where Rui met him, and used to be an investor at GGV, one of the biggest cross-border funds and also a big player in ecommerce, having been early in Alibaba, Wish, and other players. Mark lived in China for over a decade and gave us his perspective over the phone:

[6:59] Mark: Pinduoduo is actually really interesting to me because it’s one of these business models that simply would not have been possible even a few years ago. And that’s because it leverages a large social graph, in this case Wechat, to bring together consumers, to discover and participate in finding deals, for goods. They aggregate interest at a scale that was previously not possible. You have to remember these sort of business models, group-buying physical goods, was among the first in commerce that were actually tried, back in the mid to late 90s, but they simply could not scale because your audience wasn’t large enough, you couldn’t aggregate interest by using machine learning, through social mechanisms, etc. What Pinduoduo taps into is what I think an enduring human need, to find deals, right? Now people get a dopamine rush when they feel they scored a deal. And it’s the group social element that adds a gamification layer that gets those groups together, whether or not longer term as consumers in China become more sophisticated it will persist, I would draw the comparison to the United States, arguably the most advanced consumer society in the world, and you have companies like a Ross or a TJ Maxx, that are not particularly convenient or fun shopping experiences, that are still used by 80+ million American shoppers every year, and things such as coupons.com, rebates, or coupon-related business models that are there are still very popular right? If you look at the top shopping apps in the Android store, in particular, but also on iOS, it’s the coupons or rebates related apps that are among the top, that are at least three out of the five top apps consistently. And this is not about saving a lot of money, this is saving small amounts of money, relatively speaking, people love deals! I don’t think that’s ever gonna change.

[8:54] R: So what do you think? Do you agree with Kathy, or think that Mark’s points are spot on? I have to confess, I am with Kathy. But then again, I hate hunting for deals, and rely on my brother to explain credit card rewards to me, so I may really be the wrong person to evaluate this company. Let us know what you think! Send us your thoughts and we’d love to feature the most thoughtful comments on our next episode. You can tweet at Mark as well, he’s always up for a good debate. He can be found @m3pols on Twitter.

[9:26] Y: Another big news that was announced on April 12th was WeWork’s acquisition of Naked Hub, one of its primary competitors in China, for $400M.The brand will continue to exist, but adds 24 spaces to Wework China and triples its presence, bringing the total to 37. For context, WeWork had first entered China in 2016, with a space in Shanghai.

Y: There was a lot of debate on the Chinese blogosphere about about to interpret this — was it all about Naked Hub selling due to lack of funds, or in fact a move that shows foreign entrepreneurs can succeed in China? The founder of Naked Hub, Grant Horsfield, is a South African entrepreneur who had originally started a hospitality and resort business. It was only after he closed his Series C for that parent company that he decided to get into coworking.

R: Yeah, Yingying and I totally had a debate about this over Wechat. I’m of the mind that it shows a success story– a foreign entrepreneur can succeed in China and have a great exit; and a foreign company can do well in China. Naked Hub is actually one of the few spaces in China I haven’t visited, probably because it is too upscale for many struggling startups — but it’s known for really good beautiful designs, and for being in prime locations, like Xintiandi in Shanghai, the most upscale business district in the city.

[10:45] R: Also, I really believe there is a core difference between Wework and top Chinese competitors such as UCommune – Wework has over 25% of its revenues from large corporate clients now while UCommune hasn’t been as quick to go beyond startups. That’s probably because it received a lot of Chinese government stipends and so it’s still heavily tied to “innovation” and entrepreneurship, the cheap rallying cry of the current presidency.

Y: Yeah, the ties to government are a big driver in this different mindset. For example folks in the coworking industry in the US often think of the industry being that of real estate; conversely, in China often times the land and buildings are gifted, or at least highly subsidized. As Rui mentioned, that’s both an advantage and a challenge, because it comes with a lot of strings attached and makes for completely different business models.

[11:33] R: For the benefit of some of our listeners who might not be as familiar, why don’t you give us some context on the trend of coworking in China?

Y: Sure. The the growth of not just coworking, but also accelerators, incubators, and all sorts of ‘Services for entrepreneurs’ have been exploding in recent years; I noticed an uptick beginning late 2015. In China, shared offices have been growing at a rate of 30 percent/year. By the numbers, it’s estimated that by 2019, the total operating area of shared offices in China will reach 550 million square feet. By 2030, 30 percent of office space in China, will be shared. It goes along with the rise of an entire sharing economy in China as well.

R: Yeah I think we should add that Ying-ying is definitely an expert in this area because she worked for a while as the head of US expansion for Chinese co-working space. Anyway, we are actually all familiar with the Chinese co-working spaces. In fact, the team at Pandaily works out of a co-working space, the UCommune in Beijing.

Y: That’s right. We asked our friend Rebecca Pan, CEO and cofounder of coworking space Covo with locations in SF and St. Louis, about her takeaways from a visit that took place in October 2016, a couple of years ago.

[12:49] Rebecca: I’ve been in coworking forever, since 2009, and have opened 11 spaces since then. It was really illuminating to visit Beijing and see what the coworking space is like there. It’s interesting because it’s such a new scene in China. But, it’s been so explosive that we were able to learn a lot. One of the spaces we visited was Soho 3Q, and one thing that really struck us was just the scale and the quality we were incredibly impressed. The biggest thing we really drew, is just how valuable WeChat is and I don’t know why that’s not a bigger deal in the US, because it should be. I’m not sure why Slack is so big here when we could all be on WeChat. And also, the potential in terms of scale that we’ve seen makes me realize that we can go bigger at a grander scale, and that can be really successful.

[13:52] Y: I was with Rebecca on the trip and remember how much she was amazed that coworking had been adapted and scaled beyond her imagination in China. We’re talking about both the size of the space and the seamless delivery of amenities within those spaces. She called 3Q “galactic” (it also looks like a spaceship).

Y: I’ve also observed at least two completely different schools of thought within coworking and the folks who start coworking spaces: 1. Is that it is primarily a real estate business; 2. It’s all about services: models and teams that are driven by community and the ability to provide services and to monetize off of those services: The main purpose is to provide community and gather resources for entrepreneurs. For example, the dad of our intern, Gilbert here is the founder of Impact Hub in Shanghai. ImpactHub is primarily a community space and aims to facilitate interactions between entrepreneurs. offering their services to emerging startups.

R: There are the service providers who tack on a real estate business, and then there are the real estate entrepreneurs who see this as still primarily a property business. I think the latter is winning. For example, UCommune, the top player that we mentioned earlier, was founded by a senior executive from China’s largest real estate company, Vanke. It has 7000 members, whereas Wework just exceeded 200,000. So it’s quite small. What do you think Yingying, will WeWork “win” in China?

Y: This may be a bit of a cop out answer, but I think they are doing very well and are on a really good trajectory. As you can see from these numbers, the industry is just now getting started– China or elsewhere. I think there is space for both foreign and domestic players in the coworking industry in China, especially given the different customer segments that we just discussed. WeWork has an impressive operational playbook and the ability to establish standard practices and levels of service. They also use data and technology to optimize office design and to create an internal network for members.
As long as WeWork is able to continue to hire locally, to localizes its product smartly, then it will do well. It already has a good number of global multinational clients in China and a good brand name.
Finally, it’s got a major Chinese fund HONY Capital, which is affiliated with Lenovo, as an investor, which is always helpful.

R: Yeah, I agree with you. Ultimately, I think that the most successful entities are going to be those who remember that they are first and foremost a real estate business. And I think NakedHub was a great purchase. There’s a culture and strategy fit. And I can’t imagine $400mm was a poor outcome.

Y: No not at all! And this is just the start. I’m very bullish on the merging of creativity, design and real estate. Co-working is just one example. If you think about how cities are developing and how new trends in mobility are impacting urbanization and the future of work, which I believe is in remote working and distributed teams, we are going to see what I call hyper local hubs. And in China, this will grow quickly from not just in first-tier cities but to second-tier cities, and so on.

R: Yeah, and in China, we don’t have to rely on market forces for that to happen. The government can singlehandedly issue mandates that will just radically change the entire country.

[17:21] Y: To recap, we talked about the newest decacorn in the house, Pinduoduo the social commerce app, and how it’s growing like crazy. We also talked about Wework’s second substantial acquisition in Asia (the first being Singapore’s Spacemob) of the high-end coworking space NakedHub in China and what that means for the sector as well as foreign entrepreneurs doing business in China. Some of the other stories we didn’t get to cover this week include fundraising news for Faraday Future, a Chinese electric car company, and JD.com entering Spain. As always, you can find these and more on pandaily.com.

R: OK, that’s all for this week folks! Thanks for listening. We really enjoyed putting this together, and are always open to any comments or suggestions. You can find us on twitter @thepandaily, THEPANDAILY, and my personal Twitter account is @ruima, that’s spelled RUIMA.

Y: And my twitter is spelled @ginyginy. We also have a FB page now, https://www.facebook.com/techbuzzchina/. Don’t be a stranger, see you guys next week!

R: This show was brought to you by Pandaily.com, a new English language site that tells you “everything about China’s innovation.” Our producer is Carol Yin, and our intern is Gilbert Chan.