Why Pinduoduo is putting all its profit into agriculture

For the past few years, Pinduoduo has been widely regarded as Alibaba’s strongest challenger. While Alibaba reported 863 million annual active consumers across its retail platforms in the 12 months ended September, Pinduoduo’s monthly active users exceeded 740 million in the quarter ended September.

In its pursuit of new growth engines, Pinduoduo is taking a different route from its older rival. Both e-commerce titans are starting to see their growth plateau, but instead of doubling down on cloud computing like Alibaba, Pinduoduo is pouring money into agriculture.

In August, Pinduoduo unveiled its 10 billion yuan ($1.57 billion) agriculture program to “face and address critical needs in the agricultural sector and rural areas.” The initiative is all-encompassing, including possible equity funding for agritech startups and grants for fundamental research and talent training.

The program won’t be profit-driven, the company promised, and all profit from the second quarter and “any potential profits in future quarters would be allocated to the initiative.”

Some see Pinduoduo’s investment in agriculture as an effort to alleviate rural poverty and is thus an answer to Beijing’s recent call for “common prosperity,” which denotes “affluence shared by everyone, both in material and cultural terms.” But the company has reiterated that agriculture was at its core business from the outset.

Founded in 2015, Pinduoduo took off by selling fruit online before gradually broadening its product categories. For many growers, e-commerce was a boon. Agriculture in China was dominated by millions of small family-owned farms, which relied on layers of distributors to sell their produce nationwide. The setup meant farmers often ended up with razor-thin profits.

To attract vendors of agricultural products, Pinduoduo has been waiving commissions and said on last week’s earnings call that it planned to maintain the policy for the “future quarters.” Once farmers sign up, the platform then trains them to be savvy digital store operators and marketers. When orders are placed, third-party logistics services transport the produce to consumers, thanks to a mature delivery network that took shape during China’s e-commerce boom.

Pinduoduo isn’t the only Chinese internet platform trying to bring rural produce to urban households. Alibaba’s Taobao has long made “agricultural e-commerce” a key initiative and video apps like Kuaishou are helping farmers sell through livestreaming.

But Pinduoduo wants to go beyond selling and also help tackle farmers’ production problems.

“Trained as engineers, my team and I have devoted ourselves to finding technology solutions to implement across the agriculture supply chain,” Chen Lei, who took over from Colin Huang as the firm’s CEO earlier this year, said on the earnings call.

“Our efforts in applying agriculture technology go beyond matching supply and demand, and extend into identifying upstream technology solutions to improve productivity, nutritional profiles and environmental sustainability. By strengthening agritech applications, we also hope to make agriculture attractive to a tech-savvy younger generation,” Chen added.

Besides selling and growing, Pinduoduo is working with research institutes to implement industry standards for products like meat and crops, the firm’s vice president of finance, Jing Ma, said on the earnings call.

As a Nasdaq-listed company, Pinduoduo is, of course, beholden to its investors. In Q3, the company posted a positive operating profit for the second consecutive quarter, due in part to reduced marketing expenses. In the meantime, the firm is shifting its focus to R&D spending, which accounted for nearly 19% of its operating expenses in Q3.

It will be a while before Pinduoduo’s agricultural investment starts to produce visible results, like, how will its technology help improve yield output for the 16 million farmers selling on Pinduoduo?

The company has shared some early accomplishments. Last year, for instance, it called on startups worldwide to grow the sweetest and most environmentally sustainable strawberries and claimed that the winning team’s precision-farming solution has already been deployed at some farms.

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