Temu’s outstanding performance in Pinduoduo’s third-quarter report has propelled it to the podium, but amid the glory, Chinese factories are shedding tears in silence.
In the latest financial report, Pinduoduo’s total revenue doubled. On the night of the report’s release, Pinduoduo’s market value approached that of Alibaba, marking a historic moment in e-commerce.
Behind this rapid growth, analysts attribute much of the success to Temu, which remains somewhat hidden.
Guohai Securities’ research report estimates that “Temu’s revenue contribution in Q3 2023 is approximately CNY 16.2 billion, significantly exceeding expectations for commission income. This is mainly due to strong GMV growth, enhanced platform purchasing scale effects, and a decrease in subsidies leading to an increase in take rates.”
According to 36Kr, Temu’s sales for the third quarter of this year have surpassed $5 billion, reaching $80 million in daily GMV just one week after its one-year anniversary in September. If this trend continues, Temu could achieve its annual goal of $15 billion in sales after “Black Friday” and Christmas. Zhongjin is even more optimistic, estimating Temu’s annual GMV to reach $18 billion.
However, behind Temu’s apparent success, Chinese factories are facing significant challenges.
On social media, Temu is dubbed the “price butcher,” utilizing a fully managed model to relentlessly lower shipment prices, squeezing merchants’ profit margins to the limit. However, the fully managed overseas model comes with high warehousing and management costs, leaving merchants struggling.
“Profit of 7,000 yuan for 400,000 orders” and “Temu’s zero-cost purchases have become a disaster zone! Sellers are being driven mad by refund demands,” starting from October, many Temu sellers began collectively closing their shops, even forfeiting a deposit of 1,000 yuan.
“For foreign trade, I’ve done it before, but low profits, high loss rates, and no return – I haven’t seen anything like this before; everyone is evaluating Temu like this,” said Zhang Fan, the owner of a hat factory.
In response, the reporter spoke with several Chinese factory owners, attempting to understand their real experiences opening shops on Temu.
**1. Losing 2 Million in Six Months, the Factory Gets a “Slashing”**
At the end of 2022, Chen Ran (pseudonym), who had not been operating his factory, was facing loan expiration and substantial compensation payments.
Chen Ran owns a factory in Yiwu that produces perfumes and aromatherapy products. The main product is a one-to-one replica of a well-known perfume, previously sold in tons to perfume processing factories. These factories would then distribute the product through small retailers.
“After the epidemic, the factory was not operating. We were losing 4,000 yuan a day. The factory loan was about to expire, and the workers were facing layoffs. Internal sales were stagnant, so, through a friend’s introduction, I opened a store on Temu,” Chen Ran explained.
With the idea that “not operating the factory is a loss, so why not try Temu,” Chen Ran invested money to establish a packaging processing factory, labeling products for the end consumer market. Two months later, he opened four stores on Temu.
“Temu is now fully managed, and we need to send our goods to their warehouse. In the early stages, we need to pay for shipping, warehousing (rent), management fees, and operational costs, among other expenses. The highest is the cross-border shipping cost. But I thought, as long as we can ship goods, the factory can start running again.”
“Once the goods were sent, the nightmare began.”
According to Chen Ran, he did not know the specific selling price and sales situation of the product on Temu; the fully managed model is a relatively closed operational state.
About two months after opening the store, Chen Ran suddenly received a call from Temu’s customer service. They informed him that the current sales situation of his product on Temu was not ideal, and they proposed two solutions: either reduce the price or send the goods back to the factory, but the shipping cost would be borne by Chen Ran.
After calculating the shipping cost and profit margin, Chen Ran agreed to the plan to reduce the profit by 50%. However, this price reduction did not bring about a change in sales. Before long, Temu’s customer service called Chen Ran again with the same reasons.
“The cost was 40 yuan, the selling price went from 50 yuan to 45 yuan, and finally dropped to 38 yuan for a clearance sale. After several communications, it reached the point of selling at a loss to clear the inventory.”
Sighing, Chen Ran said, “Overall, in less than six months, I lost 2 million yuan.”
Many Chinese factories have had similar experiences. Whether on social media platforms or within communities, there are numerous cross-border e-commerce entrepreneurs who have paid a high price to Temu, experiencing substantial losses or making minimal profits.
Due to the lack of profits, sellers who were initially willing to invest in product development and innovation can only rely on “rolling prices” to gain a competitive advantage. Eventually, the one with the lowest price wins, forming a vicious cycle.
A typical case is a seller on Temu with a considerable order volume of 400,000 per month, but the gross profit is only a few hundred yuan, and the profit from 400,000 orders is only 7,000 yuan, with an average profit of less than 2 cents per order.
“In Temu’s model, there is only a reduction in price and no increase. Sellers who relied on reducing prices to boost volume found that they couldn’t increase prices; this is the biggest problem with Temu’s mechanism,” said Zhang Fan.
After experiencing a rapid surge in the first half of this year, Temu has upgraded its platform rules several times. Many sellers have reported, “Now the storage overdue fee is as high as 500 yuan per day. Once the overdue period exceeds 7 days, the overdue products automatically become the property of Temu, and the overdue costs incurred during this period still need to be borne by the seller and cannot be deducted from the payment.”
This is also one of the reasons why many sellers are leaving the platform but forfeiting their shop deposits.
“Hoping to clear the inventory and get back the capital, but being told that there is no policy for the cancellation and refund of the deposit. Sometimes, even if the seller does not select the default price reduction option, the system will still automatically reduce prices. Faced with these issues, sellers cannot get back any of the wrongly deducted fees or the money lost due to unexplained price reductions,” mentioned a seller in a conversation with Zixiangxian reporter.
At the same time, some new strategies introduced by the platform have further worsened the situation for sellers. In July of this year, Temu launched the “Zero-Cost Purchase” promotion, offering a full-metal microphone for free, applicable to new customers who download and register on the Temu App for the first time. However, many consumers have previously reported on social media that even after confirming receipt, they still need to
pay for the goods after the “Zero-Cost Purchase.”
Consumers who feel “deceived” express dissatisfaction, demanding refunds for damaged goods or unsatisfactory products. According to Temu’s platform rules, once consumers choose “refund for quality issues,” only a “refund-only” option is available.
Foreign customers have not experienced this kind of “fine print” before, so, motivated by the mindset of “losing if not refunded,” malicious “refund-only” requests come in swarms, pushing merchants to the brink of collapse.
A seller expressed, “Out of 200 orders, 190 were refunded, and there is a possibility of a 50,000 yuan fine from the platform due to quality issues.”
As snowflakes fall one by one, Chinese factories are also approaching the edge of being crushed.
**2. How Long Can Temu Continue to Sprint?**
When going global becomes a gamble of “lose all if one isn’t careful,” factories are starting to resist Temu one after another.
“Now, Yiwu has formed an alliance against Temu. Many factories are engaged in foreign trade, using TikTok and AliExpress, but they won’t use Temu,” Chen Ran said.
But there are also factories choosing to stay.
Although the fully managed model is like a black box, it does eliminate many troubles for factories that “only know how to produce and not how to sell.” After all, Amazon and AliExpress require setting up a store on the front end, and many factories only know how to package and ship, without the capability for marketing or operation, let alone building independent websites.
“The waters of cross-border e-commerce are too deep. With various training institutions, payments, customs, for peace of mind, it’s better to use Temu,” said Li Ling (pseudonym), who tried Temu for six months, even though the profit was meager.
Just as Pinduoduo was initially seen by factories as an exclusive channel for clearing inventory, leveraging China’s vast supply chain and surplus production capacity, Temu has found demand for clearance within the entire industry chain and can offer lower-than-cost prices to merchants.
However, unlike domestic business, under the fully managed model, low-price competition has only the options of entering the warehouse or exiting entirely.
The platform is the judge and controller, and once the merchant enters the warehouse, they can only adjust prices according to the platform’s requirements. However, during the price adjustment process, affected by product turnover costs and losses in the circulation process, cost calculations are lagging. Coupled with the long account receivable repayment time, many merchants, after a few months, only realize their losses when they calculate their accounts.
Temu is different from Pinduoduo. Although Pinduoduo also offers low prices, it is based on the natural internal competition of the industry, not the platform’s manipulation. Merchants still have the right to set prices, make decisions on listing and delisting, and, with products staying in China, the turnover of inventory on different platforms is more flexible for merchants.
However, Temu is different. As an overseas e-commerce platform, Temu incurs high international warehousing costs. For merchants, once the goods are unsold, the only option is to continuously reduce prices; otherwise, they will face high warehousing costs until these costs exceed the value of the goods themselves.
This is why merchants on Temu don’t make much money when they’re making a profit, but when they’re losing, they are sure to lose big.
In fact, for cross-border e-commerce, Temu has invested a lot itself. They also hope to minimize the platform losses caused by merchant exploration costs and become a long-term force in the market.
For example, the largest buying team is not only responsible for merchants’ recruitment tasks but also coordinates with merchants, including advising on what products to sell, how to price them, and how to reduce prices. This is also the advantage of the fully managed model. By collecting front-end data, consumer trends are gathered, and the platform analyzes corresponding strategies and measures, then allocates and strategizes for merchants.
In this process, Temu also takes on the costs of operations, logistics, warehousing, and more.
Additionally, Temu has high marketing costs overseas.
In February of this year, Temu spent a whopping $14 million to air two ads during the “Super Bowl,” setting not only the highest price in the history of ads for this event but also becoming the youngest brand ever to advertise during the “Super Bowl.” Recent reports reveal that Temu has committed to purchasing multiple ad units during the Super Bowl match scheduled for February 11 next year.
Merchants can’t make money, and the platform is burning money. Despite the vast imagination of income growth, where is the balance point for profitability? How long can the Temu model last? These questions, after the explosion of Temu, may need to be answered.
Of course, if we look at Pinduoduo’s cash flow, we can be optimistic about a prolonged battle. However, from the polarized attitude of merchants, the Temu model is not yet completely stable.
After all, when merchants begin to collectively resist, even if the global market is vast, how long can Temu’s advantages last?
In this struggle between Temu and merchants, a more critical point is that, while neither Temu nor merchants are making money, consumers as a third-party force are also beginning to show dissatisfaction.
Wood, who recently went to the United States for study, told the reporter, “In China, not only the sinking population uses Pinduoduo, but in foreign countries, the middle class sees consumption as a vote. They want to support environmentally friendly, worker-friendly, and animal-friendly enterprises, hoping for full-process traceability. Temu’s low prices will raise many ethical questions that won’t be easily accepted.”
And when foreigners gradually recover from the atmosphere created by Temu’s high ranking on the app store, high marketing spending, low prices, and a sense of novelty, more and more issues begin to surface. For example, an increasing number of consumers are questioning Temu’s model and posting reviews on social media about issues such as product quality, damaged packages, lost items, and more.
Therefore, although Pinduoduo, relying on the leading advantage of the Chinese supply chain, has seized the new opportunity of global consumption sinking, its dependence on an ultra-efficient business model still poses challenges to Temu’s expansion overseas.
In 2023, going global has become a must for e-commerce, consumer goods, and manufacturing. However, beneath the waves, the delicate relationship between Temu and Chinese factories makes people genuinely anxious.