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This is a follow-up article about Temu, the cross-border e-commerce platform of China’s 3rd biggest e-commerce company Pinduoduo. If you are not yet familiar with Temu, we suggest checking out our first and second articles and the results and price comparison of our first test order. There is also a series of videos with background information on Temu from an interview with Bloomberg.
In the first part of the update, we looked at some key figures and events surrounding Temu’s growth. In this second part, we will take a closer look at the Temu model for cross-border e-commerce. A longer version of the two parts of this article, including proprietary information from the Six Degrees Intelligence database, appeared on TechBuzz China Insider on June 23rd.
For Temu, PDD Holdings has copied the same approach it has previously used for Pinduoduo’s Duoduo Maicai, its community group buying platform: ‘subsidize aggressively in the first stage, cutting operating and customer acquisition costs in the later stage, eventually achieve profitability’. PDD even transferred a lot of staff from Duoduo Maicai to Temu. [1]
For products that don’t show much quality difference, like cucumbers, Duoduo Maicai would simply use the supplier with the lowest price. In March 2023, Temu launched a comparable bidding system. The message being that only by lowering prices could merchants get traffic and sales. [1]
Horse racing
Like other units in PDD Holdings, Temu only has three management layers and few internal meetings. At the same time, the culture is extremely hierarchical and authoritarian, with no questions asked about orders from above.
As you will also find in other Chinese (internet) companies, PDD uses a corporate culture of ‘horse racing’, in which several teams fiercely compete for the same goal. The team that is the most successful gets upgraded, while the others get downgraded. The worst-performing teams are even disbanded and merged into better-performing teams, while their managers are demoted to other businesses. Only when they perform well in their new business unit can they be promoted again. Meanwhile, the disbanded team is replaced by a new team to continue the internal horse race.
Engineers that get moved to other teams need to delete their own source code, and staff internally use nicknames to maintain a level of anonymity, with people not really knowing who works on what within the company.
Within teams, there is also competition and a 7-2-1 policy is maintained: 70% can stay, 20% can stay but won’t get a (full) bonus, and 10% will be eliminated. PDD also found that young people from rural areas are more eager to be successful in this culture than residents from first-tier cities and will recruit accordingly. Because the salaries at PDD are 2-3 times the industry average, people get trapped in a golden cage and stay despite the many complaints about its work culture. Meanwhile, well-performing executives get enormous bonuses in the form of company stock issued over several years, which also stimulates staff retention. [1]
The consignment model
Temu is not a regular marketplace like Amazon, and neither is it a drop-shipping platform like Wish. Both Pinduoduo and Temu use an approach called ‘fully managed’ (全托管, quan tuoguan). Merchants agree on a selling price to Temu and ship goods to Temu’s warehouse. Temu then takes over and handles all shipments to the consumer, marketing and customer service while it also determines the selling price to the consumer. Temu’s own gross margin is the difference between the merchant’s and its own selling price. [3]
Pinduoduo studied Shein before entering the international market with Temu. While it did not copy Shein’s model, it did learn from Shein’s strong control over supply chains and product quality. [2]
Momentum Works [3] calls this the ‘consignment model’ and recently summed up its advantages:
- Compared to other channels like Amazon, merchants do not have to manage the complexities of marketing, fulfilment, and customer service. That would encourage more suppliers to join the platform.
- Consumers will get a consistent experience (e.g. when I order six items from different suppliers, they all arrive at the same time in one package) and customer service.
- The platform can maximise operational efficiency without worrying about working capital requirements or inventory risk.
- Logistics providers will just need to interface with the platform instead of a large number of individual sellers – a boost in productivity.
In recent months, other cross-border e-commerce companies like Lazada, AliExpress and TikTok have started copying the same model. [3]
Temu has been inviting large brands to join the platform, but like AliExpress before it, it has found this difficult because brands want to control their own pricing and don’t want to be associated with a discount platform. Still, some Chinese brands like Xiaomi, Lenovo and Huawei have joined. [4]
Next-Gen Manufacturing (according to Temu)
Temu’s model is largely a copy of PDD Holding’s domestic model for Pinduoduo: it connects China’s low-end supply chain to (foreign) price-sensitive consumers. It is built on so-called Next-Gen Manufacturing (NGM). Manufacturers normally produce too much of a product, and retailers find it hard to forecast demand, resulting in excess inventory and waste. These inefficiencies end up in the price consumers pay. According to PDD, it avoids such waste by giving merchants insights into fast-changing consumer preferences, helping them to design better products and improve forecasts.
In Temu’s theory, products match better with consumer needs, who need less convincing and therefore, less marketing spending is needed. Combined with getting goods directly to consumers and reducing the need for warehouses, the cost reductions would add up to 50%. Temu claims to be passing on these savings to the consumers, while manufacturers have economies of scale and can negotiate better procurement from their suppliers. [5]
Sound pretty utopian, doesn’t it? Reality might be a bit harsher …
Pressure on merchants
In the early months of Temu, PDD would use stories of merchants quickly getting rich on Temu to attract more merchants to the new platform. Merchants that had trouble selling on Amazon or were even facing a possible ban on Bezos’ marketplace flocked to Temu. [1]
Many merchants that signed up with Temu quickly cleared out old stock. So far, so good. But by March, merchants in China had started to complain about Temu on Chinese social media. Mismanagement, inconsistent and unfriendly policies, and mounting pressures were the main grievances. [6] Some merchants are even considering leaving the platform.
Being a Temu supplier isn’t a walk in the park. The platform gives merchants a capacity planning schedule, telling them how much to deliver every day. After delivery, it applies three-month payment. [1] In November, Temu also launched a JIT (Just in Time) delivery model for merchants, who could supply goods to Temu’s warehouse within 24 hours after receipt of orders. This saved Temu from having to expand its own warehouse capacity. Timeliness was key for merchants: delivering too late could result in out-of-stock and their products being removed from the webshop, while early delivery could result in additional storage fees. [4]
In December, Temu asked merchants to start paying for half of the shipping costs from factories to its Guangzhou warehouses. [7]
When products are not popular (anymore), Temu returns the goods, making merchants pay for the logistics. Merchants also face above-average return rates on Temu. While on Amazon, the average is 5-15% depending on the product category, return rates on Temu have been reported to be as high as 30%. [6]
After the Super Bowl commercials (see part 1 of this update), Temu’s warehouse reached maximum capacity. On March 15th, Temu stopped receiving goods at its warehouse without prior notice. Merchants couldn’t store their goods or have Temu ship them to the U.S. The closure lasted at least two weeks. As a result, many products were removed from the webshop because of insufficient stock (a standard Temu policy). Not only did merchants miss sales, but they were also fined by Temu for not having sufficient stock while being unable to replenish that stock. [6]
Pricing & quality policies
Merchants are also complaining about Temu’s aggressive pricing policy. As mentioned, unlike most marketplaces, Temu determines the sales price on the platform while simultaneously asking the merchants to provide the lowest possible prices.
Temu will constantly compare merchants’ prices to those on Alibaba’s 1688 wholesale platform. [8] When products prove popular, Temu asks merchants to lower their prices further. If the prices are too high for Temu’s liking, it will not put the products online. For standardized products with multiple suppliers, Temu uses a bidding system and selects the supplier with the lowest bid. Many merchants claim Temu’s policies have evaporated their margins while there is a growing danger of diminishing product quality. [6]
At the same time, Temu has full control over the price on its platform, selling products at a multiple of the price the merchants sell it for. It’s not uncommon for Temu to pay merchants RMB 10-15 ($1.30 – $2.00) while selling the goods to foreign customers for $8-$9. [8] Our own price comparison confirmed this.
To improve customer satisfaction, Temu has also implemented logistics fees and fines for merchants that violate product quality rules. [9] Every time a customer complains about a product, the merchant will be fined five times the purchase price. At the same time, items can be removed from the webshop if the customer gives a low product rating while actually having grievances about the delivery time, over which the merchant has no control. [10] As with Pinduoduo, to retain customers, Temu often assumes that a complaining consumer is right and their complaints are justified, and merchants are forced to pay the refunds and even receive additional fines.
There’s more bad news for merchants: Temu will start charging them for storage fees in its warehouse (in itself not uncommon with other platforms). Every extra day that goods stay in Temu’s warehouse will cost a merchant RMB 500 ($70). After 7 days, Temu can dispose of the goods (by sale or disposal) and charge any costs involved to the merchant, while any profits are held by Temu. [11]
Logistics
Temu’s contracts with logistical partners do not offer an exit mechanism, and if a partner wants out, it would be difficult to receive final payment. At the same time, the contract transferred all operational risks to the merchants. [12]
Outside China, Temu’s prices tend to be substantially higher than PDD’s, but Temu subsidizes the international shipping cost heavily. Shipping a package from Guangzhou to the U.S. costs about $14. J&T Logistics, the logistical company that Pinduoduo also uses in China, bears $4-$5 and Temu $9-$10. J&T is accepting this loss-making business because it is building market share because of an upcoming IPO. [7]
J&T has entered the U.S. and Australia and will be of great help to Temu’s deliveries. [1] It is expected that when J&T expands, Temu will bring down its logistical costs by shifting more business from traditional local couriers to J&T. [14]
With grumbling merchants, critical consumers, unsustainably loss-making logistics and governments that are launching new legislation to level the playing fields, it remains to be seen if Temu can turn its massive investments into building a customer base in a profitable business.
Sources:
[1] 白鲸出海, 2023-04-07, [2] Latepost, 2023-05-18, [3] Momentum Works, 2023-05-30, [4] LatePost, 2023-02-20, [5] Pandaily, 2023-03-17, [6] Pingwest, 2023-04-11, [7] Wired, 2023-05-26, [8] 36Kr, 2023-02-10, [9] KrAsia, 2023-04-13, [10] 黑夜之睛滚雪球Weibo account, 2023-02-26, [11] 出海必读, 2023-05-16, [12] 白鲸出海, 2023-04-07, [13] 36Kr, 2023-02-14, [14] Pingwest, 2023-03-06
