Temu Is Still Making Billions, but Its Aggressive Model Is Showing Initial Signs of Strain

Recent figures released by PDD Holdings, the parent company of Temu, present a somewhat surprising scenario. According to Bloomberg, profits rose by 18%, surpassing expectations, while revenues fell short at around $15.3 billion.

This asymmetric growth suggests emerging challenges in the Chinese platform’s aggressive expansion strategy.

The discrepancy isn’t trivial. Temu has aggressively pursued market share in the Western world through a marketing strategy that some might consider unsustainable. The company has invested billions in advertising, even featuring prominently during the Super Bowl, while subsidizing logistics and pricing.

This approach bears a dangerous resemblance to other tech giants that realized too late that growth at any cost has its limits:

• WeWork collapsed after years of cash-burning to fuel aggressive growth.
• Groupon, once valued at $16 billion, is now worth about 95% less.
• Wish, another marketplace for low-cost items, saw its valuation drop by more than 95% after going public when its subsidies became unsustainable.

PDD Holdings’ stock is far from its all-time highs, having lost up to 80% of its value due to the onset of a techlash against Chinese tech companies. However, it’s managed to maintain a bullish momentum through the volatility of 2024.

Still, Temu is increasingly facing regulatory challenges:

• President Donald Trump threatened to close the tax loophole that allows duty-free imports under $800.
• The European Union is investigating whether Temu is selling illegal products.
• Vietnam has suspended the platform’s business operations, similar to actions taken against Shein.

More from Xataka On

TikTok Is No Longer Just a Social Media Platform in the U.S. It’s a Retail Empire Growing Six Times Faster Than Shein and Temu

These issues aren’t isolated. They represent a global recognition that the ultra-cheap business model only thrives because it exploits regulatory loopholes that governments are starting to close.

Temu has begun shipping goods to U.S. warehouses in large batches to mitigate the impact of these changes, but this strategy erodes its already slim profit margins.

More concerning is the fact that PDD Holdings CEO Chen Lei has been warning about increasing competition since the summer. He’s also indicated that profitability will decline over time. This is an unusually pessimistic message from a Chinese tech leader.

• When a Chinese CEO publicly expresses concerns about the future, it often indicates that the actual situation is much worse behind the scenes.

The Temu situation isn’t just a challenge for one company but potentially the end of an era. Its model of ultra-cheap products shipped directly from China flourished during a specific period. That period was characterized by two key factors:

• Globalization
• Digital infrastructure

The opportunity for this model is now narrowing due to rising protectionism, inflation driving up logistics costs, and consumers becoming more aware of sustainability issues.

Temu may be realizing what Alibaba and others had to learn: The global market isn’t simply an extended version of the Chinese market.

The question isn’t whether Temu will overcome these obstacles, but whether its business model has a future in a world that’s becoming increasingly fragmented and regulated. In the end, that model is characterized by massive volumes, minimal margins, high turnover, and the outsourcing of nearly all labor and environmental costs.

For now, investors appear to remain optimistic. Only time will tell if this outlook is based on genuine hope or simply delusion.

Image | appshunter.io

Related | The Future of Temu and Shein in the U.S. Faces Two Main Problems: Tariffs and ‘De Minimis’