SHARLA SABARUDDIN – APRIL 26, 2024
EDITOR: SHASHI BALASUBRAMANIAN
At barely 4 months old, an e-commerce company with one of the most downloaded apps of 2023 dropped $7 million to be featured in the Superbowl. Viewers deemed the “shop like a billionaire” jingle obnoxious, and whether or not this marketing attempt was a smart financial decision is up for debate. However, e-commerce company Temu has become a potentially strong rival to industry giants like Amazon. From a 99-cent whisk, to a slew of 3-in-1 household appliances, Temu offers outrageously low prices and steep discounts. The company has gone as far as offering free items to users that promote the application, heightening consumers’ temu-ptation to over-consume subpar-quality goods.
Despite its growing popularity, thanks to apps such as TikTok, Temu is developing somewhat of a sketchy reputation. From unresponsive customer service, undelivered packages, and mysterious charges, Temu has been subject to more than 30 complaints to the Better Business Bureau and currently has a BBB customer rating of less than 1.5 stars.
Users coming across Temu for the first time might also question the platform’s reliability. On top of offering unbelievably cheap consumer goods, their marketing strategies tend to provoke suspicion. Their brand seems to consist of awkward promotional reels with recycled scripts, a graphically overstimulating mobile app, and a website that immediately greets users with a distracting number of third-party advertisements. Despite this, the company has somehow garnered over $13 billion globally in 2023 alone… how is this possible?
A Controversial Business Model
Temu is owned by e-commerce giant Pinduoduo Inc., which provides direct access and connections to wholesalers throughout China, enabling Temu to significantly undercut its competitors. This strong backing also allows Temu to implement a “loss leader” strategy to aid its entrance into foreign markets, pricing items lower than the market cost to stimulate sales and improve brand exposure.
Temu’s employment of cash-burning strategies helped them expand to 45 countries in under a year but has also cost them over $3 billion. Experts doubt the sustainability of this strategy for this reason, but some researchers point out that the company’s losses may shrink to $1.9 billion by 2025 if the app continues to hit certain targets over time. This timeline is likely to become realized, considering the company’s recent 45% increase in downloads following their Super Bowl advertisement—a number surpassing even major competitors, like Target. This surge wasn’t fleeting either, as Temu has since maintained its position at the top of the App Store charts as the number one “Top Free App.”
Temu’s meteoric rise has meant capturing the market share of its biggest rival, Shein, which has resulted in a U.S.-based legal battle over alleged antitrust violations. Shein claimed Temu had mimicked Shein’s established platform to trick customers into believing they were the same brand. Temu also alleged that Shein had used “exclusionary practices” by requiring suppliers to sign exclusivity agreements to hinder Temu’s commercial growth. While both companies deny these allegations, it is hard to deny that Temu’s business model resembles that of its main competitor.
Temu operates similarly to Shein, sourcing products directly from suppliers engaged in small-scale production runs, based on demand. Unlike Shein, which directly engages suppliers, Temu serves as an intermediary connecting suppliers to consumers. This enables suppliers to concentrate on production while Temu handles tasks such as listings, marketing, and logistics. Under this arrangement, sellers cede control over pricing, return policies, and long-term sales growth planning. Additionally, Temu’s payment duration to sellers is notably extended, placing cash flow pressures on the sellers rather than on the platform.
Implications in the West
Spying and black market data selling claims aside, Temu’s rise has had major effects on the US e-commerce industry, and the influx of their imports has begun to agitate American politicians. Coined “a threat to the West”, any instance of rapid expansion of a Chinese platform seems to be perceived by regulators as a warlike threat. The American rivalry with China at the forefront of e-commerce has spurred deep distrust, and these suspicions have heightened ever since its Chinese sister company, Pinduoduo, was pulled from Google’s app store over “malware” concerns.
Pinduoduo was suspended after company malware was found to leverage specific vulnerabilities in devices predominantly sold and used in China, such as Xiaomi, Vivo, Oppo, and Samsung. The malware was allegedly able to bypass user security permissions, access data from other apps, and prevent uninstallation. Despite the company denying these claims, according to Kevin Reed, Chief Information Security Officer at cybersecurity firm Acronis, Pinduoduo has had a total of 83 permission requests to access biometric data as well as information via Wi-Fi networks and Bluetooth.
However, analysts say Temu is “not as aggressive” as its sister company, in that they have no reports of malicious functionality on either the official Google Play platform or Apple App Store. Despite this, lawmakers still caution against the use of Chinese-owned apps on the basis of data privacy breaches or interference from the Chinese government, albeit with no direct evidence to support such claims.
They do have evidence, however, of the extensive effect Temu has had on the American e-commerce industry. The influx of imports from China has almost doubled in volume in recent years. With Temu taking up more and more of China’s limited export space, the price of importing cargo by air has skyrocketed.
Temu constitutes a whopping 30% of packages coming into the U.S. from China. Despite this, Temu can avoid large import taxes through a loophole in U.S. import regulations called de minimis. The de minimis rule in the context of international trade states that packages worth less than $800 are exempt from customs duties. Chinese e-commerce platforms such as Temu and Shein make heavy use of this rule since this shipping method enables them to sell items at extremely low prices, at which point they aren’t subject to duties, taxes, or government fees that apply to typical retailers shipping overseas in bulk.
So, the question remains: is Temu a threat to the West? Maybe, but the greater threat this company poses has less to do with foreign surveillance, and more to do with the nature of the company itself. According to Republican senator and committee chair Mike Gallagher, “Temu is doing next to nothing to keep its supply chain free from slave labor.” Temu claims that its supply chain process has a reporting system where consumers and sellers can file complaints. More specifically, by that same system, sellers are required to sign a code of conduct specifying a “zero-tolerance policy” for the use of forced, indentured, or penal labor. However, given their sheer volume of suppliers, Temu’s ability to thoroughly inspect their supply line is dubious at best.
Temu does pose a threat—perhaps not to the American people, but most certainly to the suppliers they employ. They sell their products at unconscionably cheap rates—and this system has been enabled through American overconsumption. Though Temu does not directly engage in the manufacturing process, they’re responsible for establishing a huge market for the supplication of cheap goods, meanwhile neglecting to institute sufficient guardrails to prevent exploitation.
Moving Forward
Temu’s rise to popularity should serve as a reminder—not only for overzealous regulators but also for consumers to remain informed about the sustainability of their purchases and cautious in monitoring the security risks associated with them. Despite companies being responsible for regulating their supply chain, it is important to remember that without consumers actively purchasing and promoting products, there wouldn’t be a market for them to supply to. Temu’s rise also brings forth the importance of acknowledging the potential ethical implications and economic consequences of its business model on current traditional retailers and competitors. Regulators face a much bigger task that extends beyond “data breaching”— one that involves finding a balance between innovation, affordability, and professional ethics while navigating the ever-evolving landscape of e-commerce.
Featured Image Source: Calling the Shots
Disclaimer: The views published in this journal are those of the individual authors or speakers and do not necessarily reflect the position or policy of Berkeley Economic Review staff, the Undergraduate Economics Association, the UC Berkeley Economics Department and faculty, or the University of California, Berkeley in general.
