Temu: Touching the United States to cross the river|Future focus

Author | Li Xiaoxia

Edit | Dong Jie

Pinduoduo's overseas business, Temu, has grown to a certain scale, which has become a huge curiosity from the outside world. At least judging from the regulatory policies that continue to come out of the country, its impact is huge enough. In fact, it is.

Temu's revenue is mainly composed of the basic commodity markup (the difference between the supplier's supply price and the actual selling price is included in the commission income category) and the commission of the entire logistics fulfillment from warehousing, cross-border, trunk line to distribution. In Pinduoduo's financial report, it is reflected in the revenue of trading services.

In Q3 last year, Pinduoduo had already shown Temu's muscles to the outside world with transaction service revenues that doubled year-on-year and doubled month-on-month, and in Q4, the same plot was staged again.

In the fourth quarter of last year, Pinduoduo's revenue reached 88.9 billion yuan, a year-on-year increase of 123%, of which transaction service revenue was 40.2 billion yuan, a year-on-year increase of 357%, and the key factor was Temu.

According to the forecast, Temu's GMV for the entire fourth quarter may be in the range of $7 billion to $8 billion, which is comparable to the GMV data for the first three quarters of last year combined. According to the estimation of Dolphin Investment Research, Temu's revenue in the fourth quarter is about 26 billion.

The brilliant performance of "Black Five" not only brought about the expansion of income, but also the confidence in the market. Temu's GMV target for 2024 has also been raised all the way, from $30 billion to $350, and then the number has become $45 billion, or even $60 billion.

At the earnings conference, Pinduoduo management revealed that Temu has entered 50 countries and regions, but in just two weeks, Temu has launched at least four new sites - Georgia (West Asia), Mauritius (Africa), Malta (Southern Europe), and Kazakhstan, of which Kazakhstan is Temu's first site in Central Asia.

However, this "giant ship" across the Pacific Ocean has also encountered potential dangers after more than a year of riding the wind and waves.

Put your eggs in more "baskets"

Despite the global spread of the site, the US market has always been the core position of Temu, as previously reported by 36Kr, the US market contributes about 60% of the platform's GMV.

Temu's development is inseparable from a key ingredient – the U.S. "de minimum" tariff exclusion policy, which at its core, exempts individual U.S. consumers from tariffs on imports worth $800 or less. Both Temu and SHEIN are the biggest beneficiaries of this exemption rule.

U.S. Customs data shows that up to 1 billion packages entered the U.S. through "de minimis terms" in 2023, with one-third of them coming from Temu and SHEIN.

Now, this door is facing the possibility of closing at any time.

In June last year, the U.S. Congress introduced two bills to try to eliminate tariff and tax exemptions on goods valued at less than $800. Recently, members of the United States Congress and the National People's Congress once again proposed to terminate this clause. Although the coordination did not reach an agreement, the goal was the same: to create barriers to e-commerce imports, especially e-commerce imports from China.

This means that a large number of duty-free packages from China will be hit. Once the sword of policy falls, the cost of Temu will rise, which will eventually have an impact on profits.

In addition, the pressure faced by TikTok in the United States has also become a thunder ambush on Temu, and I don't know when it will be detonated.

In March, the U.S. House of Representatives Energy and Commerce Committee voted to pass a bill against TikTok that would require ByteDance to divest TikTok or TikTok would be taken off the shelves.

Goldman Sachs believes that the policy landscape for cross-border business is changing rapidly, including the recent passage of the U.S. House of Representatives Energy and Commerce Committee on bills that focus on foreign applications. Until further policy clarity is made in major countries, investor interest in Pinduoduo may be dampened in the short to medium term.

Last year, the market was still skeptical about whether Temu could bring incremental valuation to Pinduoduo, but with the disclosure of the third quarter report, this doubt was dispelled, and the market began to consider valuing Temu. However, with the uncertainty of overseas regulation, the market has become cautious again in the valuation of Temu, although Pinduoduo's Q4 performance is still strong.

In the face of potential policy changes and market risks, TEMU's current focus is on compliance, preferring to slow down the pace of expansion and ensure that all compliance preparations and market research are in place to avoid a situation that is difficult to reverse.

An important manifestation of this is the reduction of dependence on the single market. Temu wants to reduce the share of GMV in the U.S. from 60% to 30% this year, according to The information. Temu's biggest competitor, SHEIN, is also pushing the bill, with its share of the U.S. market falling from nearly 40 percent to just over 30 percent in the past two years.

Previously, a widely circulated expert minutes also mentioned that before April 2023, Temu's idea was to achieve a certain scale in the U.S. market and then spread it globally, but after the compliance risk was revealed, the group changed its original strategy and began to develop sites around the world, especially rich countries and countries with large manufacturing cost differences with China, and a small share of a single country.

According to research firm Bernstein's estimates, Temu will spend more than $3 billion on ads in 2023 in the U.S. market alone, making it one of the largest online advertisers in the U.S. That should change this year. More than one industry source said that Temu will reduce advertising investment in the United States this year, and then increase advertising in other countries and regions.

Some Temu merchants told 36Kr that the platform is calling on suppliers to prioritize stockpiling best-selling products for markets such as Europe, the Middle East, Japan and South Korea, which is the focus of Temu's expansion in the coming year.

The Japanese market, which was not launched much last year, has been growing well recently, reaching the 1 million downloads that took 45 days to reach in the U.S. market just 35 days after its launch last year. In January, Temu had more than 15 million users in Japan, more than half of the average number of users of Japan's three major integrated e-commerce platforms (Amazon, Rakuten, and Yahoo!).

Temu's growth in Japan has also attracted the attention of local mobile payment company Paypay, which has been supporting Temu payments since April.

Scale and profit, both hands

But for now, Temu is still losing money. While putting more eggs in more baskets, Temu is still trying to find a way to narrow its losses.

Previously, 36Kr had dismantled the cost of Temu, and the fulfillment cost has always been the majority. Last year, fulfillment costs in the U.S. market accounted for nearly 30% of total costs.

Temu logistics and fulfillment link consists of three parts, the first is the domestic first journey, the seller can choose to stock the goods in advance in the VMI mode or according to the actual order delivery JIT mode to send the goods to the domestic warehouse, the freight is shared by Temu and the seller; Finally, the third-party logistics partner completes the final delivery of the goods to the user.

Earlier, in the process of trunk transportation, Temu would provide full-link services through logistics service providers such as J&T and Yuntu, but now Temu is more done by purchasing capacity in sections by itself, in order to reduce costs and diversify risks.

Last year, Temu cooperated with shipping companies such as Matson, ZIM, CMA CGM, Maersk, and COSCO Shipping to launch shipping logistics and distribution methods, also for the purpose of reducing logistics expenditures.

According to people familiar with the matter, the overall cost reduction effect of these methods is less than 5%, and in addition, due to the long arrival time, sea freight has not been rolled out in large quantities.

Now, Temu puts more hope on "semi-managed", in which merchants can choose not to use Temu's designated warehouse logistics service provider, and flexibly decide on the warehousing and logistics plan in a way that suits them. As for the pricing power of goods, it is still in the hands of Temu, which is different from the AliExpress POP "semi-custodial" model - the platform serves as a logistics fulfillment service, while the goods, pricing, and operation are handed over to the merchants.

At present, "semi-custodian" is still in the process of attracting a large number of merchants, and the number of merchants has reached tens of thousands, some of which are from merchants who have warehouses in the United States and can deliver goods by themselves, and the other part is the original "fully managed" merchants, who have opened new "semi-custodial" stores on the platform.

According to people familiar with the matter, if the semi-custody goes well, the fulfillment cost in the U.S. market is expected to fall to about 18%. According to previous official information, "it is planned to be launched in the United States on March 15 and expanded to Europe and other sites at the end of March." 36Kr learned that following the opening of semi-hosting in the United States, Temu has recently launched this model in Canada.

The exploration of "full custody" has allowed Temu to explore the goods suitable for this model, and "semi-custody" also has the type of goods that fit it, at present, the focus of "semi-custody" on the development of commodity categories include large goods, charged products and other products with high customer unit prices, such as jewelry.

The biggest change brought about by the launch of this model is that the pass rate of product listing review has increased, "10 products can pass 7 or 8 pieces, much higher than 'full custody'", some merchants said.

Timeliness is an important requirement for merchants of Temu's "semi-custodial", in terms of delivery timeliness, sellers have two options: "delivery within 1 working day" and "delivery within 2 working days", at the same time, within the scope of the delivery area, the delivery time required by the platform (excluding the time limit for stocking) is 2-5 working days, calculated down, the merchant's delivery time range is about 4-9 days (taking into account the weekend two days).

In the "fully managed" mode, Temu's logistics time takes 7-15 days. In addition to directly reducing logistics costs, "semi-managed" improves the performance efficiency, and is also conducive to the increase of markup rate and customer unit price, thereby diluting logistics costs. At present, the unit value of goods under the "semi-managed model" is 30% or more higher than that of the "fully managed model". According to 36Kr, under the latter model, the unit price of Temu is about $40, and it is estimated that the unit price of "semi-managed" can be increased to at least $50.

In addition to the promotion of "semi-custody", it is reported that Temu's share of direct cooperation with airlines will also be greatly increased this year, reducing the possibility of making price differences among logistics service providers.

What is certain is that Temu's huge losses will not continue this year, and as Kaesong continues and the "semi-custodial" model is explored, it is not impossible to achieve the rumored GMV target of $60 billion.

But more importantly, it must be ready to "backstab" itself in the United States, an important market, at any time.