China’s economic struggles are casting a shadow over even the most resilient sectors of consumer demand, as evidenced by the recent gloomy forecast from PDD Holdings Inc., the parent company of the e-commerce platform Temu. On Monday, PDD shocked investors by issuing a downbeat outlook, coupled with revenue figures that fell short of expectations. CEO Chen Lei repeatedly emphasized that the company’s revenue and profits are bound to decline in tandem with slowing economic growth.
“We face numerous new challenges, including shifting consumer preferences, heightened competition, and global uncertainties,” said Chen, one of PDD’s founding employees, during a post-earnings briefing.
Despite expressing long-term confidence in China’s consumption — a crucial aspect of Beijing’s strategy to recalibrate the world’s second-largest economy — the damage was immediate. PDD’s shares plummeted by 29%, erasing $55 billion in market value. This downturn also dragged down shares of rivals Alibaba Group Holding Ltd. and JD.com Inc., which fell approximately 5% in Hong Kong.
The stark warning was unexpected, given PDD’s reputation as a key beneficiary of China’s “consumer downgrade.” Its low-cost offerings on Pinduoduo in China and Temu internationally were designed to attract budget-conscious shoppers during a period of severe economic volatility.
This disappointing performance from PDD is the latest signal of trouble for the Chinese economy. Recently, the popular restaurant chain Din Tai Fung announced the closure of more than a dozen locations, while Starbucks reported a 14% drop in Chinese revenue for the June quarter.
“The major issue is the weakening of Chinese consumer spending,” commented Joshua Crabb, head of Asia Pacific equities at Robeco Hong Kong Ltd. “This will inevitably have a negative impact on competition and overall market performance.”
While companies like Starbucks and Din Tai Fung have long navigated fluctuating consumer sentiment, PDD’s warnings are particularly surprising given its success in capitalizing on cash-strapped consumers who have opted for more affordable alternatives over luxury brands.
Founded in 2014 by former Google engineer Colin Huang, PDD combined low prices with aggressive expansion into rural areas and engaging, game-like elements on its platform to siphon market share from giants like Alibaba and JD. This strategy propelled the success of its global app Temu, which became a sensation, akin to Shein, following its launch during the 2023 Super Bowl. The app’s success contributed to a sixfold increase in PDD’s market value from its post-COVID lows in 2022, briefly making Huang China’s richest person. However, this title was lost within 18 days amid the recent market selloff.
The driving force behind PDD’s growth — lower-income consumers from outside China’s major cities — is now a source of uncertainty. Consumer spending, a key economic driver, has faltered this year following a brief rebound after COVID-19 restrictions were lifted. Widespread job cuts, salary reductions, and plummeting property prices have led Chinese consumers to become more cautious with their spending, triggering fierce price wars in sectors like automotive.
Retail sales growth has slowed to just over 3% in the first seven months of 2024, a stark contrast to the 8% or higher growth seen in pre-pandemic years. A central bank survey from the second quarter revealed that residents’ confidence in future income had plummeted to levels not seen since the height of the COVID-19 lockdowns at the end of 2022. Nearly half of those surveyed described the employment situation as “grim and difficult,” the highest level since late 2022, while almost two-thirds expressed a preference for saving, near a record high.
Chen noted a significant shift in consumer behavior, moving away from the ultra-low-cost products that had fueled PDD’s revenue growth. “Consumers are making more thoughtful decisions to balance quality and value,” he said, adding that the company is now working with high-quality brands and manufacturers to develop customized products that meet these evolving demands.
Some investors believe PDD’s executives are trying to temper expectations that had become too optimistic. Despite this, PDD’s growth — often exceeding 50% per quarter — is difficult to sustain. While Wall Street had predicted nearly a doubling of revenue for PDD in the June quarter, the actual increase was 86%. Executives have indicated they plan to make significant investments to seize future opportunities.
Morgan Stanley analysts Eddy Wang and Kathy Zhu commented, “PDD’s results imply weak consumption and fierce competition. However, we believe management’s remarks on long-term profitability are overly conservative.”
Looking ahead, much will depend on the job market and how Beijing navigates the economic landscape. While authorities have pushed state-owned enterprises to expand hiring and vocational training, direct support for consumers has been limited, despite calls for cash subsidies or consumption vouchers for low-income groups. The lack of measures to boost wage growth remains a significant hurdle to increased consumer spending.
Nevertheless, many investors are still banking on PDD to outperform its competitors in this turbulent economic climate. “We believe PDD is the only Chinese e-commerce player that will outpace industry growth,” the Morgan Stanley analysts concluded.
