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How Ghost Shops Triggered China’s Biggest Food Scandal | AB Explained — Transcript

by Asian Boss · 6,683 words · 730 segments · language en · Watch on YouTube

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0:00In July 2025, there was a Chinese man in Beijing only known by his last name,
0:06Liu, waiting for his delivery.
0:08You see, he had ordered a birthday cake for himself using an app called—
0:12no, not Temu, but Jingdong, which is better known as JD.com to the English-speaking world.
0:18We'll get to Temu a little bit later, but think of JD.com as China's version of Amazon.
0:24It's actually China's second-largest e-commerce platform that had only entered food delivery in early 2025,
0:30just months before Liu ordered his cake.
0:33So when Leo heard the doorbell and realized his cake delivery had arrived,
0:37he was excited because from the listing photo, the cake was supposed to be this beautifully decorated cream cake with roses on top.
0:45Of course, Liu assumed that the roses were edible like any normal cake.
0:50Then he opened the box, and to his surprise,
0:53he saw that the roses on his cake were real, not the edible food-grade decorative kind,
0:59like literally actual flowers stuck directly into the cream.
1:04What would you do if you're in Liu's shoes?
1:07Some of you might be like, "Okay, this is a bit weird, but whatever,"
1:10and just take out the roses and eat the cake.
1:13But Liu was not happy because he knew that roses could contain pesticides,
1:18which shouldn't be anywhere near the food you eat let alone stuck directly into it.
1:23So he contacted the merchant and asked for his money back.
1:27The merchant said no.
1:28So Liu filed a complaint, like a simple consumer report to his local government office,
1:33probably expecting a refund or maybe a little fine for the merchant.
1:37But little did he know that his complaint would trigger the biggest food safety investigation in China's recent history.
1:44When the local regulator went looking for the shop that he ordered from,
1:49they couldn't find it, which didn't make sense because the app listing looked completely legitimate.
1:54Thousands of orders, glowing reviews, beautiful photos.
1:58According to the platform, the cake shop named
2:01Sweet Words Love Letter was a nationwide chain with 378 locations across China.
2:08But when investigators showed up at the registered address, nothing.
2:12No kitchen, no staff, not even a sign.
2:16Turns out, not a single one of those 378 locations existed anywhere in China.
2:22The business licenses were all forged,
2:24and the same fake license number had been copy-pasted across 10 different regional listings.
2:30In other words, the entire brand was a ghost.
2:32Over the next 10 months,
2:34what started out as a single consumercomplaint in Beijing
2:38escalated into one of the most dramatic investigations in Chinese regulatory history.
2:447 government task forces, over 200 investigators pulled from across the country.
2:49We're talking a serious crackdown across every major food delivery platform in China
2:54that exposed a dirty industry practice known as ghost delivery at an epic scale.
3:00A shadow network of 67,000 fake shops, 3.6 million fraudulent orders.
3:06The result?
3:08Around $530 million in fines, with the biggest portion of the fine landing on the parent company of Temu,
3:15which somehow managed to make the whole thing even worse.
3:18Now, why should you care?
3:20Because this story isn't really about food.
3:23It's about something much deeper that most of the Western world does not seem to fully understand.
3:29Remember the whole controversy about lead paint in Chinese toys?
3:33The contaminated baby formula?
3:35For years, the West has held this negative stereotype about products coming out of China.
3:40And brands like Temu haven't exactly helped change that perception.
3:45But what if the real explanation is more systemic than just a cultural stereotype?
3:51What happens when competition and market forces get so brutal
3:55that somebody starts cutting corners without any regard for consumer safety?
3:59Because I don't think that's just a China problem, it's a global problem right now,
4:03and that's what we need to explore.
4:05But before we dive in, in this age of super convenient delivery services,
4:10think about how much personal information you hand over every time you place an order.
4:14Your name, your address, your payment details.
4:18You trust a platform to handle it responsibly, right?
4:21But as we're about to find out, these platforms might not be able
4:25to always vet who's on the other end of that transaction.
4:27And speaking of your personal data ending up in the wrong hands.
4:31Right now, an entire industry of data brokers, people search websites,
4:35and background check companies are quietly scraping the internet to build highly detailed profiles on you.
4:42And that's exactly where scammers and identity thieves go to buy your personal data,
4:47use it to impersonate you, open credit cards in your name, and steal your money.
4:52Imagine someone else taking out a loan under your stolen identity and you don't even realize it until it's too late.
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5:24Think of it as taking yourself off the internet,
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6:01Now let's get back to the deep dive.
6:07To truly understand the scale of the competition when it comes to delivery services in China,
6:12I was wondering how far we needed to go back in our research
6:16because there are just so many players and we obviously cannot cover every one of them.
6:21But the truth is, for better or worse, The most well-known player outside China is Temu,
6:27which goes by a totally different name in China,
6:30so I thought this might be an interesting place to start.
6:32In 2006, a 26-year-old Chinese software engineer
6:36sat down for a very expensive lunch somewhere in the United States.
6:40When I say expensive, I mean crazy expensive.
6:43The lunch cost $620,000.
6:47In today's money, that would be about $960,000.
6:52Almost a million dollars for a single meal.
6:54His name was Colin Huang, and he was brought along by his mentor,
6:59a Chinese-American billionaire named Duan Yongping,
7:02who paid for that much money to win a charity auction for the privilege of having lunch with a certain individual.
7:08That certain individual was none other than Warren Buffett,
7:12one of the richest men in the world and arguably the greatest investor alive.
7:16Life wasn't supposed to turn out this way for Huang.
7:19He grew up in Hangzhou, China, as the only son of two factory workers.
7:23As a kid, he wore hand-me-down clothes from his mother's colleagues.
7:27But soon, everybody would find out just how academically gifted he was.
7:31He won a medal in a mathematics Olympiad, which earned him a scholarship
7:35to Hangzhou Foreign Language School, which was one of only 16 schools in all of China for academically exceptional kids.
7:43As a college student, He interned at Microsoft Beijing,
7:47where his monthly stipend as an intern was already more than both of his factory worker parents' earnings combined.
7:54Then he went on to get his master's degree at the University of Wisconsin
7:58and joined Google as an engineer the same year Google went public in 2004.
8:03And now here he was, sitting across from the legendary American billionaire.
8:08In Huang's own words, he was a phoenix soaring out of a chicken coop.
8:12A common Chinese expression for someone extraordinary rising from the humblest of beginnings.
8:17And what Buffett told them was so simple and so obvious that the lesson sat with him for nearly a decade.
8:24Buffett's whole thing was, if you apply common sense to a problem,
8:27the answer is usually staring you right in the face.
8:31The problem is that most people are too blinded by their own biases,
8:35too caught up in what everybody else is doing, to see it.
8:38The lesson would go on to form the very foundation of his vision for a startup
8:43that Huang started in 2015 when he founded Pinduoduo.
8:47And in just under 10 years,
8:49Pinduoduo would go on to briefly surpass even Alibaba
8:53to become the most valuable Chinese e-commerce company in the world.
8:57So what's the difference between Pinduoduo and Temu?
9:00Honestly, not much.
9:02Temu is the international version of Pinduoduo,
9:05under the same holding company called PDD Holdings.
9:08Now, here's something I've always found curious about Chinese companies with global presence.
9:13Why do they always separate their international version from their domestic version?
9:18You see the same thing with TikTok, which is just the international version of Douyin
9:22under the same parent company ByteDance.
9:25For video apps like TikTok, the reason makes sense—
9:29because of China's censorship laws.
9:31If Douyin started allowing international content in,
9:34it would be nearly impossible to meet the domestic censorship standards.
9:38So ByteDance split the app into two versions, one for China,
9:42one for the rest of the world.
9:43But for an e-commerce app like Temu, censorship has nothing to do with it.
9:48One of the reasons is actually geopolitical in nature.
9:51By 2022, the writing was already on the wall for Chinese tech companies in the West.
9:56Huawei had been blacklisted from U.S. networks.
9:59TikTok was already under fire from U.S. lawmakers and regulators.
10:03So rather than exporting the existing Pinduoduo brand to the West, they created a new brand called Temu
10:10and incorporated it as an American subsidiary in Boston, Massachusetts.
10:14Multiple analysts have confirmed that this was a deliberate move to sidestep geopolitical scrutiny
10:20and build consumer trust with Western audiences,
10:23while the operations, supply chain and the ownership remain entirely Chinese.
10:28But another reason for separating out Temu was that Pinduoduo's business model simply does not work outside of China.
10:35Pinduoduo was built on this concept of group buying,
10:39meaning instead of shopping alone, you would recruit your friends and family to buy the same item together.
10:45The more people who joined, the lower the price dropped for everybody.
10:48And the way those deals spread was through WeChat.
10:52If you don't know what WeChat is,
10:54it's China's super app, which is like WhatsApp, Facebook,
10:58Apple Pay, and Amazon all rolled into one single app.
11:01Over 90% of China's 1.4 billion people use it every single day.
11:06So deals spread virally through WeChat groups, especially among older
11:10demographics in smaller cities and rural areas.
11:13But obviously, WeChat has almost no users outside China,
11:17so that entire model collapses the moment you cross the border.
11:20So Temu strips all of that away and replaces it with something simpler
11:25and more familiar to Western consumers.
11:27It just ships directly from Chinese factories to your doorstep in America or Europe,
11:32cutting out the middleman entirely.
11:34And yet, the name should tell you everything about where this company came from.
11:38The company says the name Temu comes from the motto "Team up, price down,"
11:43which reflects Pinduoduo's original roots of encouraging group buying.
11:48So to me, it sounds like Temu is an unusual acronym for team up.
11:53Except when you're shopping on Temu in the U.S., there is no teaming up,
11:58there is no group buying.
11:59So I guess the brand kind of got lost in translation there.
12:02But the price down or cheap part, that made it over just fine.
12:07And that obsession with cheap is what led Huang to found Pinduoduo in 2015.
12:12At the time, he looked at China's digital commerce world and saw two distinct categories of players.
12:18The first category was traditional e-commerce.
12:21In China, Alibaba was the OG, having been doing this since 1999.
12:27Think Amazon.
12:28You can order anything—
12:30electronics, clothing, household goods, birthday cakes—and it ships right to your door.
12:35And then in 2004, JD.com entered the market.
12:39And by 2010, JD.com was already offering same-day delivery in China's major cities.
12:46The dominant players here were Alibaba and JD.com,
12:49essentially splitting China's urban middle class between them.
12:53But there was one thing that neither of them offered,
12:56something we now takefor granted but back then didn't even know we needed—
13:00hot food delivery.
13:02This created the second category of hot food delivery,
13:05think DoorDash or Uber Eat but on a truly giant scale.
13:10Eleme, which literally means "are you hungry" in Chinese,
13:14was the first startup to crack this in 2008.
13:17Meituan followed in 2013.
13:19You open the app, order hot noodles or bubble tea,
13:23and a rider on an electric bike shows up at your door in under 30 minutes.
13:27By 2015, this was already a massive industry
13:31with tens of millions of daily users across China's major cities,
13:35and Meituan and Eleme had carved it up almost entirely between them.
13:40So that was the landscape, okay?
13:43Traditional e-commerce on one hand, hot food delivery on the other.
13:47And where Huang thought that Pinduoduo could fill a gap was in the first category of e-commerce.
13:53Alibaba and JD.com were mainly chasing premium brands and wealthy urban consumers in tier 1 cities.
14:00The hundreds of millions of ordinary working people in smaller cities and rural areas,
14:05those who just wanted the lowest possible price on everyday goods, had been almost completely ignored.
14:12That was going to be Pinduoduo's market, and it worked beyond anyone's wildest expectations.
14:17Within its first year of launch, Pinduoduo had already crossed 100 million users.
14:23Within 2 years, it had sold more merchandise than JD.com managed in its first decade.
14:293 years from founding, Pinduoduo went public on the NASDAQ
14:34at a valuation of $24 billion, one of the fastest-growing companies in internet history.
14:40And then in 2020, Huang stepped down as CEO and in 2021 as chairman,
14:46a full year before Temu launched in September 2022.
14:49So technically Temu was launched under the new group CEO Chen Lei,
14:54but the philosophy remained the same: cheap above everything.
14:58Within months of launching, Temu became the most downloaded app in the U.S. App Store.
15:04Americans who had never heard of Pinduoduo suddenly couldn't escape Temu.
15:08Things were going great except at home.
15:11Because while Pinduoduo was focused on expanding Temu, the second category
15:16of food delivery services was exploding.
15:18The two main players that specialize in hot food delivery,
15:22Meituan and Eleme were completely dominating the delivery market with over 90% market share.
15:28And they were so successful that they started branching out to what's known in China as instant retail —
15:34basically fast grocery delivery on top of their hot food delivery.
15:38This was Pinduoduo's territory and they started feeling pressure to go on the defensive.
15:44But why were Meituan and Eleme so successful?
15:48Simple.
15:49People were opening their food delivery apps not just every single day but multiple times a day.
15:55And now, besides getting takeout, they had the option to order groceries as well.
16:00Compare that to how often people open an e-commerce app to order a product.
16:05Not that often, right? Maybe once a week?
16:07In other words, this was becoming a battle for attention that traditional e-commerce
16:12players like Pinduoduo were losing out on.
16:14And they had to do something about it.
16:16In fact, other traditional e-commerce players like Alibaba
16:20had actually seen this coming years earlier, acquiring Eleme back in 2018 for $9.5 billion.
16:28JD.com launched its own hot food delivery service in early 2025.
16:32And Pinduoduo, feeling the heat on their home turf, committed over $1.4 billion
16:38to expand and defend their grocery delivery business in late 2025.
16:43So, are you getting the picture of how cutthroat the competition is in China?
16:47Suddenly, everyone was fighting on everyone else's turf.
16:51By 2025, the platforms were spending billions of dollars subsidizing food orders
16:57just to steal customers from each other.
16:59They were deliberately losing money on every single order
17:02just to win market share.
17:03One estimate put the total amount burned on subsidies at over 100 billion RMB,
17:08that's roughly $14 billion in a single year.
17:12Restaurants were getting more orders than ever but making less money.
17:16Riders were delivering more food than ever but earning less per delivery.
17:21And somewhere in that race to the bottom,
17:23corners started getting cut systematically, at a scale nobody had fully grasped yet—
17:28until one customer in Beijing filed a complaint about his rose cake.
17:36If you still haven't fully grasped how competitive the e-commerce market is in China,
17:41let me give you this additional fun fact:
17:43Amazon itself tried to crack the Chinese market for 15 years
17:47and eventually walked away with less than 1% market share.
17:52They were beaten by Alibaba and JD.com,
17:54and mind you, this was long before the current food delivery wars.
17:58China's e-commerce battlefield was simply too brutal,
18:02too fast, and too local for even the world's biggest retailer to survive.
18:07And when competition gets that brutal, it can create different incentives for players to try to get an edge.
18:13In this case, those incentives somehow converged on a shadow industry practice
18:18known in China as "Yuling Waimai" or "ghost delivery."
18:22It means exactly what it sounds like.
18:24When you order food on any of these delivery platforms,
18:27the shop you think you're ordering from may not actually exist.
18:31The official term for these fake storefronts is "Youling dianpu" or ghost shops.
18:36You have no idea who made your food, where it was made, or under what conditions.
18:42Now, I have to make this quick distinction between ghost shops and ghost kitchens.
18:47Ghost kitchens, which also exist in many parts of the West, including the U.S.,
18:52are perfectly legal.
18:54They are delivery-only kitchens with no dining space,
18:57which is a way for restaurants to save on rent and overhead costs.
19:02You can track their locations because they have legitimate business licenses.
19:06Ghost shops, on the other hand, are the fraudulent version —
19:10fake storefronts with forged licenses,
19:13rerouting your orders without your knowledge to whoever will make the food cheapest.
19:17And according to our research, in the hot food delivery sector,
19:21ghost kitchens have also been around for quite some time in China.
19:25By 2021, Chinese media investigations were already reporting that roughly one-third
19:31of restaurants listed on major delivery platforms had no physical storefront,
19:35meaning there are a lot of ghost kitchens in China.
19:38Again, these ghost kitchens themselves are perfectly legal in China
19:42as long as they have valid food operating licenses and real physical addresses.
19:47China's food safety laws require this regardless of whether a kitchen offers dine-in service or not.
19:53The problem arises when it comes to non-hot food delivery items like cakes and desserts,
19:59mainly because orders can be placed a few days in advance.
20:03That gives plenty of time for GoShop to quietly auction your order off
20:07to the cheapest unlicensed third-party baker nobody's heard of.
20:11Let me come back to how auctioning someone's order off is even possible in the first place
20:16because there's a whole another hidden layer to this.
20:19Anyway, for now, the Go Shop here is the fake storefront that took your order,
20:24the one with the stolen food photos,
20:27the forged business license, and no real physical address.
20:31It never intended to make your cake.
20:33And the third-party unlicensed baker at the other end?
20:36Also illegal.
20:38So by the time your cake arrives,
20:40two separate illegal operations have touched your order and you had absolutely no idea.
20:46So who are the people running these ghost shops?
20:48As a matter of fact, who are these unlicensed bakers at the other end of the chain?
20:53We don't know.
20:54Based on the investigation reports,
20:56the ghost shop operators were deliberately designed to be invisible.
21:01Chinese regulators described them as having no fixed abode and untraceable as real persons,
21:07meaning they were opportunists who had figured out how to game the platform system to make money.
21:12Setting up convincing digital storefronts, buying or forging the necessary licenses,
21:17and essentially running an arbitrage business from behind a screen.
21:21And the bakers?
21:22Investigators traced one order to a rundown residential building,
21:26like someone's apartment,
21:28just ordinary people baking out of home ovens,
21:31and no food safety certifications.
21:33Getting properly licensed as a cake producer in China,
21:36requires a dedicated decorating room,
21:39commercial refrigeration,
21:40and passing hygiene inspections—
21:43costs that these small operators simply could not afford,
21:46so they operated without licenses.
21:48And with only about $10 US income they can make,
21:51after deducting all the platform fees,
21:54you already know what kind of ingredients they were working with.
21:57For context, a 6-inch cream cake made with decent ingredients,
22:02could cost about $8 in materials alone.
22:05Do the math.
22:06And here is the thing,
22:07we don't have to speculate about what happens,
22:09when unlicensed operators make your food,
22:12without proper ingredients or proper refrigeration.
22:16We have a real example,
22:17one that happened just weeks before Liu filed his complaint about the rose cake,
22:22and that shocked all of China.
22:25On May 20th, 2025, in Anhui Province,
22:28which is about 4 to 5 hours south of Beijing by high-speed train,
22:32A local food influencer was selling homemade tiramisu from a street stall.
22:37She had over 10,000 followers on Douyin,
22:40where she marketed her tiramisu as pure handmade, no additives.
22:44People loved it.
22:46Lines formed.
22:47On that single day, she sold over 200 portions.
22:51But within 48 hours,
22:52nearly 200 of those customers got sick—
22:55high fever, vomiting, dehydration.
22:58The victims included students preparing for high school entrance exams,
23:02pregnant women in their third trimester, and families hospitalized together.
23:07One family bought a tiramisu to celebrate a birthday,
23:11and all ended up in the hospital.
23:13So, what went wrong here?
23:15Temperatures that day hit 30°C, which is 86°F,
23:20and the food influencer had left the tiramisu sitting in the open air,
23:24for morning till evening.
23:26Tiramisu apparently need to be kept between 2°C and 8°C,
23:30or 35°F to 46°F, to be safe.
23:34She had also used regular unsterilized eggs to cut costs.
23:38Initial testing found bacterial counts 120 times over the safe limit,
23:43with a positive test for Salmonella.
23:45And investigators found she had decorated some of the tiramisu,
23:49with oleander flowers.
23:51I didn't know this until I looked it up myself,
23:54but oleander is apparently toxic to humans.
23:57After it went viral,
23:59the food influencer apologized publicly,
24:01then deleted her social media accounts and disappeared.
24:04To be clear,
24:05this person was not a ghost shop operator specifically,
24:09but she's exactly the kind of unlicensed small operator,
24:12sitting at the bottom of the ghost delivery chain.
24:15Some cannot afford proper refrigeration or certified ingredients.
24:19Others don't even know they need them.
24:22They learned to bake from tutorial videos they found on Chinese social media,
24:26and they're making your food in conditions,
24:28that will make you never order delivery again,
24:31if you could see them.
24:32That's why food safety regulations exist.
24:35But did the delivery platforms, including Pinduoduo,
24:38really not know what was going on?
24:40Or were they in many ways incentivized to look the other way?
24:44None of them ever publicly admitted knowing anything about these practices,
24:48but one can reasonably infer it all comes down to the competition,
24:52the cutthroat competition, right?
24:54Take Meituan first.
24:56By 2025,
24:58even though Meituan held over 50% of China's food delivery market,
25:02JD.com entered the market with a disruptive strategy,
25:06offering zero commissions to merchants and rolling out massive subsidies.
25:11The move immediately shook the industry,
25:13and triggered an all-out price war,
25:15as platforms poured billions into discounts,
25:18to compete for both users and restaurants.
25:20In a subsidy war like that,
25:22the last thing you want to do,
25:23is slow down your merchant onboarding to verify licenses.
25:27More merchants means more listings.
25:30More listings means more orders.
25:33More orders means being able to hold off a giant competitor like JD.com.
25:37JD.com is actually the most problematic,
25:40because they were caught with the most number of ghost shops,
25:44of any platform after entering the food delivery market—
25:47over 43,000 ghost shops.
25:50Basically, they were the most desperate to catch up,
25:52because they were starting from zero,
25:54in a market dominated by a 50% player.
25:57In that case,
25:58you don't ask too many questions about the merchants,
26:00knocking on your door.
26:01And then there's Pinduoduo,
26:03and their situation is honestly more troubling,
26:06because competition alone doesn't fully explain it.
26:10Turns out, this wasn't their first rodeo with bad actors on their platform.
26:15Since 2018,
26:16Pinduoduo had been repeatedly investigated by Chinese regulators,
26:20for counterfeit goods, pirated books,
26:23and fake quality inspection reports.
26:26As of 2023,
26:27they were still on the U.S. Trade Representative's list of notorious markets
26:32for counterfeiting and piracy.
26:34So when ghost shops started popping up on their platform,
26:37it wasn't a new pattern.
26:39It was the same pattern playing out in a new category.
26:43The cheap-above-everything philosophy that made Pinduoduo so powerful.
26:47Also made it a natural home for anyone willing to cut corners to win on price.
26:51In case you want to argue that I'm just drawing inferences about,
26:55deliberate and systematic malpractice on these platforms,
26:58and that the reality is
26:59that there are just bad apples they couldn't identify
27:03out of hundreds of millions of orders?
27:05I said that's a fair pushback,
27:07but here's where it stops being inference,
27:10because when investigators looked closely at what these platforms had actually done,
27:14they found something very hard to explain away.
27:17Remember how I questioned earlier,
27:19about how it's possible,
27:21to just auction off people's orders to unlicensed third-party vendors?
27:25It has a name.
27:26It's called "Zhuan Dan Bao,"
27:28which roughly translates to "order transfer package."
27:31It was actually a third-party app that functioned like
27:34a hidden stock exchange for food orders,
27:37running secretly underneath the apps,
27:39you thought you were ordering from.
27:41What that means is that the moment your payment goes through,
27:44the ghost Shop takes your order and lists it as an open auction on Zhuan Dan Bao,
27:48and all the unlicensed bakers are bidding to fulfill it.
27:52Whoever offers to make it cheapest wins.
27:55It's basically a hidden bidding platform that was making a fortune,
27:58collecting transaction fees.
28:00Sort of like a hidden B2B platform, if you will.
28:03And here's the problem.
28:05Every single player in the delivery space, all 7 platforms—
28:09Meituan, JD.com, Pinduoduo, Alibaba's Taobao and Tmall,
28:14ByteDance's Douyin, and Ele.me, now rebranded as Taobao Shango—
28:19had independently signed formal cooperation agreements with Zhuandanbao.
28:24In other words, these were deliberate business arrangements,
28:27with signed contracts.
28:29The app was then built directly into their platforms,
28:33so that ghost shop orders,
28:34could be automatically rerouted with a single click.
28:38The official investigation found,
28:40that all 7 platforms knew or had every reason to know,
28:44that these arrangements violated consumer rights.
28:47And chose to do nothing about it.
28:49That's how we ended up with 3.6 million fraudulent orders across those 7 platforms,
28:55and 3.6 billion RMB or roughly $530 million in total fines.
29:02In the words of a senior official leading the investigation,
29:05"This was no minor violation.
29:08This was a new form of illegal activity that had become industrialized at scale."
29:13Ideally, this is where I wish I could just wrap up the video,
29:16saying everybody learned their lesson,
29:18cooperated with the government investigation,
29:20to get to the bottom of the fraud,
29:22and accepted their responsibilities.
29:24I wish it was that simple,
29:25because that's not how things played out.
29:32There's a perception in the West, and I think it's a pretty widely held one,
29:36that when the Chinese government decides to crack down on a company,
29:40that's basically the end of the conversation.
29:43Everybody falls in line. No pushback.
29:45Just compliance. Right?
29:47That's not what happened here.
29:49On December 3rd, 2025,
29:516 months after Liu filed his birthday cake complaint,
29:55a team of investigators from China's State Administration
29:59for Market Regulation,
30:00showed up unannounced at Pinduoduo's Shanghai headquarters.
30:04Think of them as the FTC and the FDA combined into one powerful agency.
30:10Their job was to access Pinduoduo's transaction records,
30:14interview relevant employees,
30:15and review internal documents,
30:17related to merchant verification and ghost shop activities.
30:21Pinduoduo wasn't even the primary target.
30:23It was just one of 7 platforms being inspected simultaneously,
30:28as part of a sweeping national food safety campaign.
30:31They thought it was going to be another routine inspection.
30:34But as investigators worked late into the night,
30:37they discovered a restricted area within the office floor inside the building,
30:42that employees were quietly leaving as the evening went on.
30:45When investigators tried to enter,
30:48Pinduoduo employees blocked the door.
30:51One investigator, an official named Guo Hui,
30:54had his hand crushed against the door by company staff—broken finger.
30:58The regulators called the police,
31:01the police showed up,
31:02and it still didn't stop.
31:04The following night,
31:05Pinduoduo's own head of security
31:07led a group that stormed back into the investigation site,
31:10shoved officers,
31:11and knocked Guo Hui to the ground.
31:13He ended up in the hospital with a head injury.
31:17In one of the most widely discussed moments of the raid,
31:20an employee was observed holding up a sign that read Silence and don't speak.
31:26When questioned, the employee reportedly crumpled the paper,
31:30and ate it in front of investigators.
31:32This was late at night on a Wednesday at one of China's biggest tech companies.
31:37People just randomly eating papers.
31:39Anyway, following multiple instances of brawls,
31:42the government responded by stationing a task force,
31:45of approximately 100 officials at the Pinduoduo headquarters,
31:49to maintain order and ensure they could access transaction data,
31:53which Pinduoduo tried to block by claiming system upgrades or missing backups.
31:58By the end of the week,
31:59at least 3 Pinduoduo executives had been detained by police.
32:03Within 2 weeks, the company had fired 30 employees,
32:07including a co-founder named Fan Jiezhen.
32:10When the fines were announced in April 2026,
32:13Pinduoduo received 1.5 billion RMB,
32:17roughly $210 million US dollars,
32:19the single largest individual fine,
32:22in the history of Chinese food safety regulation.
32:24To put that in perspective,
32:26their competitor JD.com had over 43,000 ghost shops,
32:30which is far more than Pinduoduo's 9,463,
32:34and paid a way smaller fine because they cooperated.
32:38Pinduoduo, on the other hand, according to the official finding,
32:42repeatedly refused to provide relevant materials without justification,
32:46submitted false information,
32:48and used violent and obstructive tactics to interfere with law enforcement.
32:53So regulators had no choice but to assume that all 9,463 of their problematic shops,
33:00had completed fraudulent transactions,
33:02and apply the maximum penalty to every single one.
33:06That's the math of obstruction.
33:08So the obvious question is, Why?
33:10Why would Pinduoduo, one of China's most powerful companies,
33:15pick a fight with government regulators,
33:17knowing it would face serious consequences?
33:20Nobody knows.
33:21Their share price dropped 6.5% as rumors of the fight began to circulate online,
33:27but the only public statement the company made was via a spokesperson to Nikkei Asia,
33:32that "this account was false and bore no relation to reality." That's it.
33:38No explanation, no apology, nothing.
33:40But one can reasonably speculate what was going on.
33:44Pinduoduo likely knew that their exposure was significant,
33:48not just the ghost shops but also the signed cooperation agreements
33:52with Zhuan Dan Bao, the secret auction platform.
33:55And speaking of Zhuan Dan Bao, they got raided as well.
33:59After the fines were announced in April 2026,
34:02all 7 platforms were immediately ordered to cut off cooperation with them entirely.
34:07Strangely enough,
34:08Zhuan Dan Bao itself never got formally fined,
34:11but their app was pulled from official app stores,
34:13so their entire business model of being a shady middleman is effectively dead.
34:18Anyway, back to Pinduoduo, because here's the thing,
34:21this ghost shop scandal wasn't the first time,
34:23they got caught doing something like this.
34:26Just days after their IPO in 2018,
34:28the same government agency that would fine them in 2026,
34:32launched an investigation into widespread counterfeit goods,
34:35being sold on the platform.
34:37We're talking fake TVs, pirated children's books,
34:40infant formula selling for just $1 when the real thing costs $130.
34:45State broadcaster CCTV named and shamed them directly,
34:50warning that selling fake products was a line that no platform could cross.
34:55China's biggest publishing houses took them to court,
34:58over pirated books sold at over 50% discounts,
35:01falsely labeled as authentic.
35:03The company's response?
35:05They said they were being unfairly attacked,
35:08and maliciously targeted with negative press.
35:11Then they claimed to have removed 10.7 million suspicious items,
35:15and shut down 1,128 stores in a single week.
35:19This was apparently good enough for the regulators,
35:21because they didn't face a formal fine.
35:24In other words, they got away with a promise to do better.
35:28Except they didn't get better,
35:30and their response to the latest scandal was to obstruct the investigation,
35:34and receive the biggest fine in Chinese food safety history.
35:37And yet, even the $210 million fine is barely a rounding error,
35:42for a company generating $15.4 billion in net profit.
35:47In other words, the fine represents about 1.4% of their annual profit.
35:52Just a drop in the bucket, really.
35:54Clearly, this whole pattern goes beyond simple competitive pressure,
35:59or wanting to gain market share,
36:00although that's a big part of it.
36:02It's almost like the core philosophy that drives everything they do—
36:06being the cheapest option no matter what—
36:09ends up overriding every other obligation,
36:12whether that be moral or ethical.
36:14And I am sure that wasn't the founding vision of the founder Colin Huang,
36:19who built the company,
36:20to serve the hundreds of millions of ordinary working Chinese people,
36:24that Alibaba and JD.com were underserving—
36:27the factory workers, the farmers.
36:29But somewhere between that founding vision,
36:33and a $54 billion empire after the founders' exit,
36:36something got lost.
36:38By January 2026,
36:40Chinese regulators had expanded their investigation into separate allegations,
36:45of fraudulent shipping practices
36:47and tax violations.
36:49Then in early 2026,
36:51Pinduoduo was separately fined again,
36:54this time by tax authorities,
36:56for failing to submit quarterly merchant tax data,
36:59as required under the new 2025 platform regulations.
37:03But here is what I keep coming back to at the end of this whole thing.
37:07Putting aside what's actually happening to Pinduoduo,
37:10you cannot guarantee that more competition,
37:14and the twisted corporate culture of each of these giant companies,
37:18in a super crowded market,
37:20won't produce more illegal practices and more victims.
37:24The ghost shop problem might have been resolved temporarily,
37:28but I am sure there will be more shady practices popping up,
37:31that will go unnoticed until real victims emerge in meaningful numbers.
37:36They are probably taking place right now as we speak.
37:39If anything,
37:40the economics that created the ghost shops haven't changed,
37:44and will only get more cutthroat,
37:46which will encourage more cost-cutting behaviors.
37:49The consumer expectation of impossibly cheap, impossibly fast delivery,
37:54will only get higher.
37:56So what are you supposed to do?
37:58Let me leave you with one last example,
38:00of someone who pays the price of cheap every single day:
38:03the delivery rider.
38:05There are approximately 15 million delivery riders in China.
38:09They are the human infrastructure,
38:10that makes 150 million daily orders physically possible,
38:14and the average rider earns about 63 cents per delivery.
38:18So if you work a 10-hour shift making 30 deliveries,
38:22How much do you earn?
38:23About $18 US dollars.
38:26That's less than $2 an hour.
38:28In September 2024,
38:29a rider in Hangzhou collapsed and died after working 16-hour days.
38:35His death sparked protests among riders calling for a union and an 8-hour workday.
38:41By most accounts, nothing fundamentally changed.
38:44And the reason why riders take these risks isn't necessarily recklessness.
38:49It's math.
38:50Meituan's algorithm for delivery riders,
38:53which the company calls Super Brain,
38:56keeps tightening delivery windows based on actual completion times.
38:59If most riders can consistently deliver in 10 minutes,
39:03the algorithm gradually cuts the standard delivery window,
39:07from 12 minutes down to 10.
39:08If certain riders regularly finish in just 8 minutes,
39:12the system labels them high-efficiency benchmarks,
39:15and raises overall performance expectations.
39:19What that means is, if a rider delivers in 8 minutes,
39:22the next deadline could also become 8 minutes.
39:25Miss it and face the consequences:
39:28negative reviews, reduced income,
39:30lower priority for profitable orders,
39:33and potential suspension from the platform entirely.
39:37One rider describes the system as "racing against death."
39:41This is what cheap actually costs.
39:44The bottom line is, the cheap has to come from somewhere.
39:47It comes from manufacturers running on margins so thin,
39:51they cannot afford quality control.
39:53It comes from riders earning 63 cents per delivery running red lights in the rain.
39:59It comes from bakers making your birthday cake for $10,
40:02in a residential apartment with questionable ingredients,
40:06and no food safety certification.
40:08And perhaps most importantly,
40:10because of these realities and questionable practices,
40:14it's China's reputation at large that suffers on the global scale.
40:19We all know the Western stereotypes associated with "Made in China" labels,
40:23or Temu being the butt of many jokes.
40:25China's solar panels,
40:27which now accounts for over 80% of global supply,
40:30and its EV batteries are genuinely world-class products,
40:34that still get overshadowed by past scandals,
40:37like cheap fake goods, contaminated baby formula, and lead in children's toys.
40:43When you mess with people's health, that stuff really sticks.
40:47I'm just saying,
40:48if there's anything I've learned from researching this industry,
40:52it's that China's ghost shops and ghost delivery scandal,
40:55isn't really a story about China's dishonesty,
40:58at a national level.
40:59It's a story about what extreme competition and a misguided corporate culture,
41:04does to any system when the only measure of success,
41:07is how cheap you can make something.
41:10In fact, what was most surprising for me was the way these big Chinese tech companies,
41:15are increasingly acting in a way,
41:17that suggests they don't really fear the Chinese government,
41:20as much as the West makes them out to be.
41:22How else can you explain Pinduoduo's repeated violations of regulations,
41:27and in the end,
41:28still walking away with a fine,
41:30that's supposed to be punitive but amounts to barely 1% of their annual profit?
41:36What's going on there?
41:37Are they too big to be punished now?
41:39What does that mean for consumer safety not just for China,
41:43but for the rest of the world.
41:44This should make all of us very uncomfortable as consumers,
41:48especially because it's really hard to figure out,
41:51how they should be held accountable.
41:53If you found this video insightful and feel like you learned something,
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43:04Of course, I'm Stephen Park.
43:05Thank you for watching all the way to the end.
43:08And as always, stay curious.

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