Do you shop at Temu? For those who don't, or might generally be unfamiliar, it's been the hot e-commerce portal of recent times. It's a site with a seemingly endless variety of products, from soup ladles to office furniture, with prices that are usually much lower than comparable goods bought elsewhere. It's the great success story of its developer and owner, China-based PDD Holdings (NASDAQ: PDD).
But success like this has attracted the scrutiny of the Biden administration, which wants to curb the legal loophole that lets Temu thrive in this country. If the government succeeds in doing so, will PDD Holdings' business take a serious hit?
Low prices, high popularity
That loophole is commonly referred to as the de minimis exception, part of this country's Tariff Act of 1930. De minimis (Latin for "of the smallest") exempts imported goods from U.S. tariffs and taxes if they're valued at less than $800 in the aggregate.
The great appeal of Temu -- the international shopping portal and mobile app operated by PDD Holdings -- is its ultra-low prices. A smartphone that looks like Apple's iPhone 15 Pro Max was recently priced at less than $137, for example. An electric guitar with features very similar to those of a $600 (at least) Fender Stratocaster retailed on the site for a mere $63.54. PDD Holdings also uses clever psychology to push its wares, with severely time-limited deals featured prominently on its site.
The company isn't exactly forthcoming about Temu. It doesn't break out the brand's results, so we can only rely on peripheral data to ascertain how it might be doing.
A recent article on retail industry site Chain Store Age, citing data from Statista and App Magic, reported that the Temu app has been downloaded a whopping 735 million times around the world -- for perspective, that's well more than double the entire population of the United States. In terms of monthly visits Temu exceeded 500 million throughout the first quarter of calendar year 2024.
Goods flowing into the U.S. through the de minimis loophole have become a torrent lately. According to a fact sheet on the exemption published by the White House in mid-September, the annual number of shipments coming in under de minimis across the last decade has surged from 140 million to over 1 billion.
The government claims that the surge "makes it more challenging to enforce U.S. trade laws, health and safety requirements, intellectual property rights, consumer protection rules, and to block illicit synthetic drugs such as fentanyl and synthetic drug raw materials and machinery from entering the country."
So the administration is attempting to do something about it. The fact sheet is clearly part of a broader effort to sway the public and build support for reform -- if not an outright repeal -- of the de minimis exemption. The president can't do that unilaterally, but with this initiative the White House is applying pressure on Congress to act accordingly.
The twin beasts of competition and regulation
Yet Temu's best days might be behind it, as competitors ramp up their efforts to capture some of the magic of the highly successful site, and (to some degree) its novelty wears off with consumers. In PDD Holdings' most recent quarterly earnings report, company officials warned that its current triple-digit percentage growth rates were unsustainable, and profitability was sure to drop.
If the Temu backlash results in legislative changes, those anticipated slowdowns could become very pronounced. After all, it's not only the U.S. government that's concerned about low-balling Chinese retailers like PDD Holdings, Alibaba's AliExpress, and privately held fashion retailer Shein. This summer the 27-country European Union was busy hammering out a proposal to slap import duties on low-priced products from outside the economic bloc. Temu and other China-based sites are the main targets of this effort.
PDD Holdings admitted its vulnerability in the latest 6-K filing with the U.S. Securities and Exchange Commission (SEC) that detailed those quarterly results. In the section headlined "Risks related to our corporate structure," the company wrote of de minimis that "If this exemption were to become unavailable to these orders, or if the exemption threshold were to decrease, our business, financial condition and results of operations may be materially and adversely affected."
The fact that it's not placing any estimates on this potential adverse effect, nor does it break out Temu results on their own, indicates the unit is critical to the company's recent success. So its loss could be quite substantial. Because of this black-box quality of the Temu operation, I think PDD Holdings is a stock to avoid just now despite its great success with the portal.
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Biden Administration Cracks Down on Cheap Shipping "Loophole." How Could It Impact PDD Holdings Stock? was originally published by The Motley Fool