Temu has changed the world of online shopping. Its rapid growth means it rivals Amazon in many markets. But this week, shares of its owner PDD Holdings have fallen the most on record after it warned that revenue growth would inevitably trend downwards amid rising competition and an economic slowdown. The biggest threat to Temu, however, may be changing regulations in the US and Europe.
Chinese-owned ecommerce platform PDD’s US depositary receipts fell nearly 30 per cent in New York on Monday. The company faces aggressive competition from rivals such as ByteDance’s TikTok and Alibaba. PDD’s sales of Rmb97.1bn ($13.6bn) for the June quarter missed expectations. Its rapid revenue growth, more than doubling in recent quarters, is proving unsustainable.
Profitability should start taking a hit, too. A big part of PDD’s rapid growth has been thanks to its ultra-low pricing strategy. As local peers started following PDD’s strategy, it has had to splurge on marketing and advertising to keep customers. This is reflected in its nearly 50 per cent increase in operating expenses in its latest quarter, while general and administrative costs more than tripled due to staff-related expenses.
Another pillar of Temu’s success has been a loophole that waives import tariffs for shipments into the US with a fair retail value below $800. In the European Union, under current regulations, packages that are bought online from a non-EU country are not subject to customs duties if their value is under €150.
Closing these loopholes is not proving straightforward. A change in the current regulations would mean local online shoppers are charged import tariffs on cross-border purchases. That in turn would mean higher costs when buying a wide range of products from overseas — and not just when shopping on Temu. This has raised concerns over the potential for steep import fees and other duties on items such as clothing.
Nevertheless, Temu’s surging market share in recent months has accelerated calls for further regulatory scrutiny on the current import tax exemption, with the EU working on a proposal to close the loophole. In the US, lawmakers have also been pushing for a crackdown.
PDD’s shares have gained 24 per cent in the past year, significantly outperforming Alibaba, whose stock is down more than a tenth, and Temu’s second-largest rival, JD.com, which is down nearly a quarter over the same period.
Even so, PDD trades at just eight times forward earnings, a small fraction of global peers such as Amazon, reflecting a slower growth outlook. Temu has proved that a global expansion strategy is the way to go amid a saturated ecommerce market at home. But even that is now looking fraught with difficulty.
