Washington’s perceived clampdown on duty-free imports of Chinese goods imposes another layer of uncertainty on consumer-sector mavens from Alibaba Group Holding Ltd. until Temu who is struggling to cope with the consumer crisis in the country.
Alibaba and smaller rival JD.com Inc. fell about 2% in Hong Kong on Monday, as investors weighed the potential fallout from US plans to start taxing packages worth less than $800. That all but slams closed a hole that Temu of PDD Holdings Inc. and fashion-focused competitor Shein has worked for years to ship hundreds of millions of packages in the US annually, carving out a market at Amazon.com Inc.’s expense. PDD fell 2.4% on Friday.
The move threatens to reshape parts of the US retail arena and dampen the excitement that has accompanied the meteoric rise of bargain bazaars such as Temu, Shein and Alibaba’s AliExpress. It also hit shares of other US-reliant retailers such as Australian fashion outlet Cettire Ltd. on Monday.
But analysts expect Shein and Temu to bear the brunt of the crackdown, depending on the extent and size of the tariffs imposed.
“While the market expects that the US Administration may announce action to change/reform the de minimis exemption, this is still considered a negative development,” the Citigroup Inc. analyst wrote. that Alicia Yap in a research note. “Lack of visibility into execution timing and potential impact will remain an overhang to share price performance in the near term.”
White House officials on Friday announced they intend to propose rules that would curb the use of the so-called de minimis exemption, which allows products costing less than $800 to go directly to consumers without customs declaration or duty. The measures are aimed at reducing tariff evasion and preventing fentanyl-laced shipments.
Investors have been preparing for the move for some time. The European Commission has kept the fast fashion industry in its sights since at least 2021, when President Ursula von der Leyen denounced it as “poison” because of the environmental impact of disposable clothes. US officials are also concerned about the prospect of other illegal substances – such as drugs – slipping into the country.
In separate statements, Temu and Shein pointed out that their growth does not depend on the no-tax policy. The two Chinese-linked companies said they will focus on business excellence and keeping consumers happy.
“Our success is anchored in our unique on-demand business model,” Shein said in its statement, adding that “it calls for de minimis reform to create a level, transparent playing field – where the rules are applied uniformly and equitably.”
Investors are adopting a wait-and-see attitude for now, though the impact is expected to be far-reaching. Amazon, for example, is under pressure from Temu and Shein — so much so that it’s building a discount marketplace on its platform for Chinese merchants to ship directly to the US.
“The clear positive is the potential reduction in competitive pressure from China-based exporters, which has an impact on overall marketing spending and demand,” wrote Morgan Stanley analysts led by Nathan Feather, who outlined how US retailers like eBay Inc. can benefit. and Etsy. However, they said, both of those companies “have Chinese seller bases.”
Shein, which is preparing for an initial public offering that could value the Chinese apparel giant north of $60 billion, pioneered the model of targeting cost-conscious Americans with $2 blouses and $10 shirts during the season of Covid. Temu jumped around 2022 with its catchphrase “Shop Like a Billionaire”, quickly becoming one of the biggest growth drivers of PDD globally.
Analysts estimate that Temu has a low percentage of total PDD business — even though a large portion of it comes from the US. Temu is likely to handle about $20 billion of total merchandise volume in the first half of 2024, with about 40% coming from the Americas, estimated Jefferies analyst Thomas Chong. And the explosive growth that crowned PDD as a market darling is showing signs of ebbing, battered by China’s relentless consumer slump.
As for Shein, it cannot afford any uncertainty before its market debut. And both are subject to heightened scrutiny in the US, as its relationship with China comes into focus ahead of elections in November.
“Geopolitical risks have long been a concern among investors, especially the tariff issue related to cross-border e-commerce,” Chong wrote. “Compared to overseas peers, we expect Temu to maintain its pricing advantage, as the former does not charge commissions and operates on a low-price model.”
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