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Temu has changed the world of online shopping. Its rapid growth means it can compete with Amazon in many markets. But this week, owner PDD Holdings saw its share price fall by the largest amount ever after it warned that sales growth would inevitably slow amid increasing competition and an economic slowdown. But the biggest threat to Temu may be changing regulations in the US and Europe.
The U.S. depositary receipts of Chinese e-commerce platform PDD fell nearly 30 percent in New York on Monday. The company faces aggressive competition from rivals such as ByteDance’s TikTok and Alibaba. PDD’s June quarter revenue of 97.1 billion RMB ($13.6 billion) fell short of expectations. The rapid revenue growth, which has more than doubled in recent quarters, is proving unsustainable.
Profitability is also likely to decline. PDD’s rapid growth is due in large part to its ultra-low-price strategy. As local competitors began to follow PDD’s strategy, the company had to spend heavily on marketing and advertising to retain customers. This is reflected in an almost 50 percent increase in operating costs last quarter, while general and administrative expenses more than tripled due to personnel expenses.
Another pillar of Temu’s success is a legal loophole that waives import duties on shipments to the US with a fair sales value of less than $800. In the European Union, under current rules, packages purchased online from a non-EU country are not subject to duties if their value is less than 150 euros.
Closing these loopholes is not easy. Changing the current rules would mean that local online shoppers would have to pay import duties on cross-border purchases. This, in turn, would mean higher costs when buying a wide range of products from abroad – and not just when shopping on Temu. This has raised fears that high import duties and other taxes could potentially be imposed on items such as clothing.
Nevertheless, Temu’s increasing market share in recent months has increased calls for a more detailed regulatory review of the current import tax exemption. The EU is working on a proposal to close this loophole. Lawmakers in the US are also pushing for tougher action.
PDD’s shares have risen 24 percent over the past year, significantly outperforming Alibaba, whose shares have fallen by more than a tenth, and Temu’s second-biggest rival, JD.com, whose value has fallen by almost a quarter over the same period.
Still, PDD trades at just eight times forward earnings, a small fraction of global peers like Amazon, reflecting a slower growth forecast. Temu has proven that a global expansion strategy is the way to go when the domestic e-commerce market is saturated. But even that seems to be fraught with difficulties at the moment.
