Alibaba, long troubled by the e-commerce startup Pinduoduo eating up its dominance, adopted a same strategy its rival used in terms of maintaining user growth and market share by launching a massive 10 billion RMB subsidy campaign. 

On December 11, the day before Dec.12th online shopping festival that somehow serves as a backup of the already crazy Nov. 11th festival, Alibaba's Juhuasuan (聚划算), a sub-platform of Taobao focused on flash sales, officially announced that it would spend at least 10 billion RMB in subsidies to lower the prices on brand-name products and boost sales. According to the company, the benefit will go beyond the carnival and is expected to last a long time.

Industry insiders believe that the move is crucial for Alibaba to use Juhuasuan to foray into lower-tier cities, and finally compete directly with Pinduoduo, which performs well in the regions.

According to data from iiMedia Research, with the just-launched subsidy event, Juhuasuan has brought more than 5 million visits on Dec. 12th In tier-3 cities and rural areas. The platform's gross merchandise volume increased by 41% compared to last year.

Despite experiencing the strongest urbanization in the world, China's lower tier cities, towns and rural regions still account for 50% of the country's population of more than s 1.3 billion. Robin Xing, Chief China Economist at Morgan Stanley told CNBC that these areas "will be the major driver of growth in China in the next 10 to 15 years."

That claim is easily verified, since while China recorded the slowest economic growth in 28 years last year, it turned out to be a great year for Pinduoduo, as the company's business has grown 234%, mainly attributable to consumers from rural regions.

The company is only 5 years old today and already went had its IPO in the U.S. last year. But going public did not change its heavily relied-on strategy of burning cash on subsidy to retain and attract customers,. As China's economy suffers, even customers in tier-1 and 2 cities found Pinduoduo's low-priced offers attractive.

Pinduoduo first announced that it will offer 10 billion RMB in cash subsidies, back in May, one month before JD.com's anniversary and own shopping festival on June 18th. Its active customers reached 536.3 million in 2019, an increase of 39% compared to last year, putting the company well within reach of Alibaba, which has slightly less than 700 million shoppers.

And that is exactly why Alibaba is worried. The e-commerce giant has been able to maintain dominance on the Chinese market despite facing challenges from smaller rivals such as JD.com and Suning in the past. Alibaba was able to lead the market and the shopping festivals it invented out of thin air was adopted by nearly all big and small e-commerce players. However this time, it is going as far as to adopt a strategy first used by its rival: subsidy.

The move is also reminiscent of what Amazon has done in the past, lowering prices and losing money just on deliveries in order to build customer dependence.   

Although the so-called rural market is large enough, winning the market is not easy. 

Taojiji (淘集集), an e-tailer that also targets consumers in lower-tier cities and small towns, declared bankruptcy recently, with an estimated monthly loss of about 200 million RMB. Tremendous amount of money was spent to attract new users and subsidize shopping, but the users who were brought in by the subsidy did not stay on the platform after the subsidy subsided. 

Analysts from iiMedia believe that China's under-served markets have their own rules, unlike people in higher tier cities who value the platform's credibility and pursue better quality, consumers in the smaller towns attach importance to price advantages. When the subsidy is over, the users take to their heels easily.

Due to the lavish subsidy campaign, Pinduoduo's losses are also expanding. The company posted a much wider-than-expected quarterly loss as it fought bigger rivals with massive subsidies, driving its shares down by nearly a quarter and wiping almost $11 billion off its value on November 20.

However, the company never intended to stop subsidizing, so it has had to repeatedly dip into investors' piggy banks to fund the program. "When there is an opportunity we should spend our money aggressively, we shouldn't put [it] into the piggy bank," said Huang Zheng, founder and CEO of the company. 

"The overlapping users between Pinduoduo and Mobile Taobao reached more than 100 million. So I think the primary purpose of Taobao's subsidy campaign is not to succeed in the rural market but to maintain its users," Li Weilong, an analyst of the e-commerce consulting firm Dolphin (海豚智库), told Pingwest. "Pinduoduo snatched quite a few users from Taobao through generous subsidies. Since the attacker's strategy proved to be sharp, Taobao had to keep up with it," he added.

Will the confrontation end one day? "Only when one side fails or the attacker achieves its goal," said the analyst. But before that day comes, cutthroat competition between the two parties will benefit consumers.