Temu and Shein’s Rising Popularity Has Wall Street Watching Over China’s Impact on Tech Profits – NBC 7 San Diego

• Earnings reports from Amazon, Meta and eBay may raise questions about the impact of discount stores Temu and Shein.
• Two China-linked companies have seen huge growth in the U.S. thanks to an intense marketing campaign and very low prices.
• They are investing heavily in Google and Facebook, while creating new competition for e-commerce players like Amazon, eBay and Etsy.

Temu and Shein have found huge success in the U.S. by launching an intensive online marketing campaign and offering customers inexpensive goods from China, whether it’s a pair of shoes for $3 or a smartwatch for $15.

The rise of discount shopping apps, as well as Chinese company ByteDance’s TikTok Shop, has created new competition for American e-commerce companies Amazon, eBay and Etsy.

Much of the growth, some industry experts say, is the result of a loophole in trade law known as the de minimis exemption, which allows packages shipped from China worth less than $800 to enter the U.S. duty-free. Amazon’s chief public policy officer, David Zapolsky, calls it a “troubling trend” that global regulators should scrutinize more closely.

“I think there’s a question about the extent to which some of their business models are subsidized,” Zapolsky said in a recent interview with CNBC, speaking broadly about Chinese companies. “At a very tactical level, there are rules about what can be shown as a list price versus a sales price, and I think those rules aren’t always enforced.”

The topic of Temu and Shein’s growth will loom over tech earnings this week as Amazon reports second-quarter results alongside Meta, eBay, and Etsy. Investors will be watching for any commentary on Temu and Shein’s impact on e-commerce markets and discussion of their ad spending, which has helped fuel Meta’s recent expansion.

The tech earnings season got off to a rocky start last week. Alphabet reported a small revenue beat late Tuesday but missed estimates on YouTube ad sales, sending its shares down 5% Wednesday. Tesla shares fell 12% that day, their biggest decline since 2020, on weaker-than-expected earnings and a second straight quarter of falling auto revenue.

This week’s calendar also includes reports from Apple and Microsoft, as well as Intel, Qualcomm, Block and Snap.

In Amazon’s report on Thursday, the company is expected to show revenue growth of about 11% to $148.6 billion, according to LSEG. However, net income is expected to rise 63% from a year earlier, reflecting the company’s heavy cost-cutting efforts, including eliminating tens of thousands of jobs.

While retail is no longer Amazon’s growth engine, it’s still the business that generates the majority of its revenue. And third-party sellers now account for more than 60% of the goods sold on the site. That’s where Temu and Shein come in, as sellers now have new ways to get products to American consumers. They’re able to offer such low prices in part because they cut out the middleman, selling directly from factories in China to consumers around the world, and using slower shipping options.

Shein launched in the U.S. in 2017 and has recently flooded Google and Facebook with ads to fuel its expansion. It is reportedly valued at $66 billion. Ten, owned by PDD Holdings, debuted in the U.S. in 2022 and has quickly invested billions of dollars in marketing, most notably through its “Shop Like a Billionaire” TV spot that aired during this year’s Super Bowl.

Amazon has continued to emphasize its delivery prowess and focus on speed in the face of growing competition from Temu and Shein. CEO Andy Jassy noted in February that recent changes to the company’s fulfillment network have allowed Amazon to invest in faster deliveries while profitably expanding its low-cost product offerings.

“We have a saying that it’s not hard to lower prices, it’s hard to afford to lower prices,” Jassy said on the company’s fourth-quarter earnings conference call. “Same goes for adding choice. It’s not hard to add a lower (average selling price) choice, it’s hard to afford to offer a lower ASP choice and still be in line with the economics.”

Given the economic benefits for Temu and Shein, officials in the U.S., European Union and other countries are considering closing trade loopholes and increasing tariffs on cheap goods, which could limit the further development of these platforms.

A spokesperson for Temu told CNBC in a statement that the increase is not dependent on the de minimis exemption. Prices on the site are competitive, the representative said, because of the company’s factory-direct model, which eliminates the need for “numerous middlemen and their associated costs.”

Shein did not respond to a request for comment.

Will the advertising campaign continue?

Meta has other concerns, as there are some signs that Temu may be cutting back on ad spending. Barclays data from May showed that Temu’s new customer count peaked in the third quarter of 2023 and has declined in each of the last two quarters. The company said Temu may have adjusted its marketing efforts to focus on existing customers rather than new app metrics.

“Meta investors are concerned about a potential slowdown in the US from outbound advertisers from China, particularly Temu, and the new buyer activations data suggests that some of that concern is justified and is likely factored into Q2 guidance, which indicates a roughly 6 percentage point slowdown in ad revenue growth,” Barclays wrote in a note to clients in May. The firm recommends buying Meta shares.

In April, Meta issued a weaker-than-expected forecast, which sent shares tumbling. Chief Financial Officer Susan Li said on an earnings conference call that the company wasn’t quantifying China’s contribution in the quarter, but said ad revenue in the Asia-Pacific region rose 41% from a year earlier, making it the fastest-growing region, with growth boosted by e-commerce and gaming.

A Meta spokesman declined to comment on the matter.

EBay has shrugged off the idea that Chinese rivals are stealing share, with CEO Jamie Iannone telling analysts in May that the site’s diverse selection sets it apart. Etsy, meanwhile, has taken steps to emphasize its sellers’ role in sourcing or creating artisanal goods.

Temu and Shein may be short-lived U.S. phenomena. Wish, founded in San Francisco in 2010, gained popularity for its ultra-cheap goods direct from China, leading to a valuation of $14 billion when it went public in 2020. Then users fled and the business collapsed. Wish was acquired by Singaporean company Qoo10 earlier this year for $173 million.

Bank of America analysts wrote in a May note that Amazon and Walmart are the most “insulated” from Chinese competition.

“Shipping time data suggests that Temu/TikTok/Shein’s shipping speed lags behind industry leaders, which could limit its adoption over time,” the analysts wrote. “We believe that improving shipping times will be an important factor in long-term competition.”

Temu’s delivery time ranges from four to 22 days on average, while Shein products arrive in three to 14 days, Bank of America said. Amazon has taken steps to increase delivery speeds from two days to one day or less.

Amazon remains by far the largest online retailer in the U.S. and is expected to capture about 40% of e-commerce sales in the country this year, according to eMarketer. However, while it has long billed itself as the “lowest-priced retailer in the U.S.,” Amazon has shown it is aware of the growing popularity of Temu and Shein.

Amazon said in a June meeting with Chinese retailers that it plans to launch a discount store that will mostly feature no-brand products priced under $20, according to a presentation seen by CNBC.

As The Information reported last month, citing a person familiar with the company’s plans, the storefront will use the same de minimis rule used by platforms like Temu and Shein.

Amazon’s Zapolsky said the company has not taken a position on whether lawmakers should restrict de minimis deliveries. Regardless, he said, Amazon needs to win over consumers.

“We know we have to compete with them,” Zapolsky said, “to convince customers that they can get the best quality and the best prices from Amazon.”

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