When Chinese discount shopping app Pinduoduo debuted nearly a decade ago, it was tech giants Alibaba and JD.com that dominated Chinese e-commerce.

At the time, Pinduoduo felt more like a gimmick than a future competitor. The app combined an arcade, a shopping platform and a social network, with its main selling point being lower prices for shoppers who “grouped together.” Users played video games to kill time or earned a little money by logging into the app every day to browse content.

Now, people no longer look down on this company.

Pinduoduo is a sister company to Temu, the bargain-hunting app that has tens of millions of users outside of China, including in the U.S., and is investing billions of dollars in raising awareness in the U.S. Americans who haven’t used Temu have probably seen its Super Bowl ad or Instagram post.

Like TikTok, Temu is the foreign version of a very successful Chinese company. As Temu has grown in popularity in the United States, its business practices have come under scrutiny. Members of Congress have questioned whether the app is supporting Chinese products that use forced labor.Provide a US sales channelIt has been criticized for its labor practices and failure to enforce intellectual property laws.

Pinduoduo has also been gaining traction in China. As a popular platform for shopping for cheap groceries and daily necessities, it is now closing in on China’s second-largest online retailer, JD.com, in terms of market share. Last year, Pinduoduo briefly surpassed Alibaba in market value, becoming China’s most valuable e-commerce company. Later, Alibaba founder Jack MaPosting on the company intranetsaying he “firmly believes Alibaba will change, Alibaba will reform” to meet the challenge.

Last month, Pinduoduo Holdings, the parent company of Pinduoduo and Temu, said in its financial report thatAnnual revenueThe company called the result a “pivotal chapter” in its history.

Pinduoduo has successfully capitalized on one of China’s biggest economic challenges: consumers’ reluctance to spend and falling prices for food and other goods. As China’s economic growth slows, consumers are embracing “consumption downgrades,” a lifestyle centered around shopping on Pinduoduo.

This is a far cry from when Pinduoduo emerged in 2015. Back then, China’s rapid economic growth over the past few decades had inspired confidence that a growing middle class would continue to demonstrate its newfound wealth through lavish spending.

Around that time, Alibaba opened a chain of supermarkets selling king crab legs, 30-year-old single-malt Scotch whiskey and other luxury goods. JD.com launched an e-commerce portal for high-end brands called Toplife.

“The biggest mistake at the time was to think that China was full of middle-class consumers and that things would only get better,” said Wu Ge, editor-in-chief of Baiguan Technology Brief, which focuses on Chinese investment and business.

In a 2018 interview, Pinduoduo’s founder, Huang Zheng, China’s second-richest man, said the company was trying to cater not only to China’s nouveau riche but also to people “outside the fifth ring road” in Beijing, referring to those living in financial difficulty far from major city centers.

Pinduoduo grew by relying on deep discounts spread by word of mouth. Because Pinduoduo is tightly linked to Tencent’s WeChat, China’s ubiquitous messaging platform, it’s easy for users to share bargains online. Less than a year after its founding, Pinduoduo had 100 million users. Five years later, Pinduoduo had 788 million users, surpassing Alibaba. Pinduoduo didn’t respond to requests for comment.

In a 2023 report, Goldman Sachs estimated that Pinduoduo would account for 19% of China’s e-commerce market in terms of product sales, JD.com would have 20% and Alibaba would have 41%.

Shoppers on Pinduoduo deal directly with suppliers, farmers and manufacturers, so they get lower prices. Pinduoduo keeps fees charged to users and sellers low and avoids heavy investments by outsourcing logistics to other companies. Huang Zheng once said he wanted Pinduoduo to become the e-commerce version of Facebook, a place where people gather online, not necessarily to shop.

After Pinduoduo’s success, social commerce has now become the norm in China. Every e-commerce app has livestreaming, where influencers test new products and answer user questions. Some of China’s largest social networks have become shopping destinations. These include Xiaohongshu, China’s equivalent of Instagram, and Douyin, an app owned by ByteDance and known as TikTok outside China.

Pinduoduo’s main appeal is the shockingly low prices on the platform. A five-pound box of cherry tomatoes costs less than 35 yuan, but if another person joins the “group purchase,” the price of each box will be halved. A 12-roll set of five-ply toilet paper costs less than six yuan. And delivery is free.

In its early days, Pinduoduo was rife with fakes. The company has taken aggressive steps to address the problem. Buyers who receive fakes are eligible for a refund of up to 10 times their purchase from the seller. If a customer is not satisfied with their purchase, they can return it and the seller will refund the money, no questions asked.

Wang Hong, an English teacher in Beijing, calls herself a loyal Pinduoduo customer, buying daily necessities such as fruits, vegetables, rice and yogurt on the platform. She pays a 10-yuan monthly membership fee to get greater price discounts.

Ms. Wang said she likes Pinduoduo’s low prices, free shipping and generous return policy. She said that although the discounts were bigger before, she would continue to shop on Pinduoduo because “things are still very cheap.”

For sellers, the attraction is the huge traffic that Pinduoduo brings. Marcus Ding, general manager of a sporting goods company, said he makes more money on Pinduoduo because the platform charges sellers lower fees. But he spends about 20% of Pinduoduo’s revenue on advertising his products on the platform. Most of Pinduoduo’s revenue comes from advertising on the website. Last year, about two-thirds of the company’s revenue came from fees paid by sellers to have their products appear prominently on the platform.

This advertising-based model is likely influenced by Google, where Huang Zheng worked as an engineer from 2004 to 2007. Pinduoduo’s ads use a bidding system similar to Google’s for keywords.

There are other signs of Google’s influence on the platform.

In 2018, Huang Zheng filed for an initial public offering on the Nasdaq exchange. Although he left Pinduoduo in 2021, he is still its largest shareholder. He wrote at the beginning of the cover letter that “Pinduoduo is not a traditional company.” Fourteen years ago, Google founders Larry Page and Sergey BrinThe same method was used to openGoogle’s initial public offering.

Google claims that one of its principles is “Don’t be evil.” Huang Zheng echoed the same sentiment. “We may not be understood, but we always act with good intentions and don’t do evil,” he wrote.

Critics say those altruistic statements contradict some of the company’s practices. Last year, the Google Play store suspended downloads of the Pinduoduo app outside of China after cybersecurity experts found a large amount of malware in the app. Pinduoduo is also likely to face more scrutiny because of the success of Temu, which is one of the most downloaded apps in the United States and is expanding to dozens of other countries.

Temu sells items other than groceries, mostly clothing, beauty products and gadgets. Like Pinduoduo users in China, people who buy on Temu buy products directly from manufacturers and suppliers. The platform probably loses money on most orders because of its low prices.

Because most of Temu’s products originate in China, it estimates that each order costs $11 to ship to the United States and $9 to $10 to ship to Europe and Australia, said Zhu Bin, a China Internet analyst at Bernstein Research.

Last month, Chen Lei, co-CEO and chairman of Pinduoduo Holdings, told analysts that Temu’s global expansion is still in its early stages and there are many uncertainties. But its business model is built on the company’s experience in China, which is that consumers always want to save more money.