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Temu has changed the world of online shopping. Its rapid growth has allowed it to rival Amazon in many markets. But this week, shares in its owner, PDD Holdings, fell by the most on record after the company warned that revenue growth would inevitably decline amid increased competition and an economic slowdown. But the biggest threat to Temu may be changing regulations in the United States and Europe.
American Depositary Receipts of Chinese E-Commerce Platform PDD It fell by almost 30 percent In New York on Monday, the company faces aggressive competition from rivals including ByteDance’s TikTok and Alibaba. PDD sales of 97.1 billion yuan ($13.6 billion) for the June quarter missed expectations. Its rapid revenue growth, which has more than doubled in recent quarters, is proving unsustainable.
Profitability should also start to be affected. A large part of PDDPDD’s rapid growth is due to its ultra-low pricing strategy. As its local peers began to follow PDD’s strategy, it had to splurge on marketing and advertising to keep customers. This is reflected in its nearly 50 percent increase in operating expenses in its most recent quarter, while general and administrative costs tripled due to staff-related expenses.
Another pillar of Temu’s success has been a loophole that allows import duties to be waived on shipments to the United States with a fair retail value of less than $800. In the European Union, under current rules, packages purchased online from a non-EU country are not subject to customs duties if their value is less than €150.
Closing these loopholes is not proving easy. A change to current regulations would mean that local online shoppers would have to pay import duties on cross-border purchases. That, in turn, would mean higher costs when buying a wide range of goods from abroad, and not just when buying in Temu. This has raised concerns about the potential for high import tariffs and other duties on items such as clothing.
However, Temu’s growing market share in recent months has accelerated calls for greater regulatory scrutiny over the current import tax exemption, with the EU Working on a proposal In the United States, lawmakers have also pushed for tough action.
PDD shares have gained 24 percent over the past year, significantly outperforming Alibaba, whose shares fell more than a tenth, and Temu’s second-biggest rival JD.com, which fell nearly a quarter over the same period.
Still, PDD trades at just eight times forward earnings, a tiny fraction of global peers like Amazon, reflecting a slower growth outlook. Temu has shown that a global expansion strategy is the way forward amid a saturated e-commerce market at home. But even that now appears to be fraught with difficulties.