TIP831: Pinduoduo (PDD): Is PDD the Best Buy in China? w/ Daniel Mahncke and Shawn O'Malley

**SPEAKER_1** (0:00)
You're listening to TIP.

**Daniel Mahncke** (0:03)
So imagine two companies. One is Chinese and the other one is American. And the connection between them is pretty surprising. And I'm actually pretty sure you'll get a kick out of it.

**Shawn O'Malley** (0:13)
All right, I'm intrigued. Go on.

**Daniel Mahncke** (0:15)
So for context, one is worth approximately a trillion dollars, and the other is worth approximately a trillion yuan. And both of those companies have about half a billion of cash in their respective currencies on their balance sheet. Both offer no guidance, and both offer limited insight into the business generally. So do you have any idea which companies they could be talking about here?

**Shawn O'Malley** (0:38)
I know you're pitching Pinduoduo today, so I'll take the wild guess that that's one of them. But I don't know, what's the American one? Is it you're talking about one of the tech giants?

**Daniel Mahncke** (0:46)
Not quite. I would say quite the opposite, actually. I'm talking about Berkshire Hathaway.

**SPEAKER_1** (0:54)
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Now for your hosts, Shawn O'Malley and Daniel Mahncke.

**Shawn O'Malley** (1:40)
I gotta say, I don't know much about the company, Pinduoduo, except for that it seems to be ridiculously cheaply valued and is also one of the biggest retailers in the world. And now you're telling me that there's some connection to Berkshire, or at least some parallels.

**Daniel Mahncke** (1:55)
There certainly are, but we will get to those Berkshire connections later on. I can already say, though, it involves Buffett, which is always a story that we are quite interesting in. And when I first started my research, I expected this to be a similar story to Shopee, you know, the marketplace of C Limited, a company that we looked at a couple of weeks ago, or at least closer to Shopee than, for example, Melly or Amazon, which are also companies that we looked at and both own in our intrinsic value portfolio. So, you know, the connection to Shopee is that they beat Lazada, which is also owned by Alibaba by actually being, you know, mobile first, gamified and sort of a social platform to some extent, built around discovery instead of search. And PDD did basically the same thing to Alibaba and also JD in China, in the home market. So you open PDD because you're bored, then, you know, you scroll a bit through everything they offer. And there are these flash reels and these little games and something that is called team buying. And team buying allows users to basically unlock deep discounts on products by forming temporary shopping teams to purchase items in bulk. And it's actually quite a smart system. So what you would see is that sellers offer two different prices for the same product, a high price for individual shoppers and then a lower price for these team buyers. And the idea behind that is basically that Pinduoduo saves money on these bulk orders because obviously it can get a better price from the manufacturer if they order a higher quantity of those items. And then you can team up as the consumer with, for example, friends or family, but you can also just join a random group formed around the product that you're looking for. And the links are often shared on platforms like WeChat, but also Facebook and some other social media platforms. And there's typically a 24-hour window in which the group has to be formed and basically go through with the order. And the main idea is really just to benefit from scale economics shared, even though the scale can be quite small. Talking about your family, only four to five people, for example.

**Shawn O'Malley** (3:53)
I gotta say, there's a lot of ways to do capitalism. I had never heard of team buying before. It sounds like maybe this is more of a phenomenon in China. And I don't know, you have, I guess, a network effect there that some of these other marketplace companies like Amazon and Mellie don't have. And so I wouldn't directly benefit from other people ordering on Amazon, for example. But if I used Pinduoduo, then in theory, I could, right? That's the logic. So I obviously have an incentive to recommend it to other people and integrate them into my group so we can all save money on team bias. And then obviously, this is really just a volume game for Pinduoduo. So that's a really sort of a brilliant incentive system, I think.