From TikTok trends to your wardrobe in a matter of days – that’s the promise of Temu and Shein.
In just a few short years, these Chinese e-commerce giants have rewritten the retail rulebook, offering unbeatable prices and speed by shipping directly to consumers from China, leaving established retailers scrambling to keep up. Even Amazon, the erstwhile king of logistics, is rolling out its own version of this direct-shipping strategy.
Despite a growing chorus of legal and ethical concerns – including intensifying interest from U.S. watchdogs – these companies are still growing at a pace that would make most startups green with envy. Temu’s parent company, PDD Holdings, reported revenue of 7 billion yuan ($13 billion) in the second quarter of 2024, marking an 86% increase from the previous year.
And that meteoric growth is built on a supply chain model that’s as innovative as it is controversial. This approach has simultaneously impressed competitors and alarmed regulators.
So, what’s really going on here? How have Temu and Shein managed to rewrite the rules of global e-commerce so dramatically? What can other businesses sourcing from China learn from their playbook? And crucially, is it possible to replicate their success without falling into the same ethical and legal pitfalls?
Key Supply Chain Factors
Let’s start by unpacking their supply chain strategy.
1. Direct Factory Relationships: Cutting Out the Middleman (and Then Some)
The cornerstone of their model is direct communication with Chinese factories.
While established retailers often rely on a complex network of sourcing agents and middlemen, Temu and Shein maintain direct relationships with Chinese manufacturers. By eliminating middlemen, Temu and Shein significantly reduce costs.
Moreover, these factory relationships are managed by all Chinese teams, leveraging local knowledge, language skills, and cultural understanding to negotiate aggressively with suppliers. This approach results in dramatically lower prices compared to traditional retailers.
This strategy’s effectiveness is evident in the pricing: Shein’s average dress price in June was $28, compared to $40 at H&M and $80 at Zara, according to London-based research firm Edited.
2. Post-Production Cost Cutting
Temu and Shein also dramatically reduce expenses after production through two strategies:
- No Warehouses: Unlike traditional retailers, these companies don’t maintain large inventories. Instead, they ship products directly from Chinese factories to customers, eliminating storage costs and reducing the risk of unsold stock.
- Goodbye, Brick-and-Mortar: They’ve completely avoided physical stores, focusing solely on online sales. This strategy eliminates expenses associated with brick-and-mortar retail, such as rent, store staff, and maintenance costs. Instead, they sell exclusively through their own apps – with Temu ranking among the most downloaded on the App Store – and via popular social media platforms like TikTok.
This digital-focused model breaks from traditional retail. It allows Temu and Shein to offer low prices while staying flexible.
3. Tax Efficiency
Tax efficiency is another cornerstone of Temu and Shein’s business model, though this advantage may be short-lived.
Direct Exports: By exporting directly from China, these companies avoid VAT in their home country.
Favorable Import Regulations: They benefit from duty-free thresholds in their target markets:
- In the United States, they benefit from the “de minimis” rule, which allows shipments valued under $800 to enter duty-free.
- In the U.K., parcels worth less than £135 ($170) from overseas can be imported without incurring customs duty.
- The EU has a similar threshold of 150 euros ($165).
With the average transaction on Temu around $25, these companies operate well within these limits in all major markets.
No Physical Presence: Their lack of brick-and-mortar stores or legal entities in many countries where they sell further reduces their tax burden, often allowing them to sidestep local VAT requirements.
The million-dollar question (or should we say, the billion-dollar question): Can they keep those prices rock-bottom when the tax man finally comes knocking?
4. Speed and Agility
Speed is another hallmark of Temu and Shein’s approach. Despite not having local warehouses, they maintain rapid delivery times through extensive use of air freight.
The scale of their operations is staggering:
- Together, they ship approximately 9,000 tons of cargo daily from China.
- This volume is equivalent to 88 fully loaded Boeing 777 freighters, according to Forbes.
Their reliance on air freight, combined with strong purchasing power with suppliers, allows them to shift products extremely fast. This agility enables them to respond quickly to market trends and consumer demands, keeping their inventory fresh and relevant.
Challenges
This strategy fueled their rapid growth, but it’s also causing problems.
Quality Concerns
Temu and Shein face significant criticism over product quality issues. While low prices currently outweigh these concerns for many cost-conscious shoppers in the U.K. and U.S., this advantage may not be sustainable.
A notable example of Temu’s quality control problems occurred when a customer ordered a croissant-shaped lamp but received an actual pastry. This incident, though amusing, highlights serious flaws in the company’s quality control and supplier vetting processes.
Similar lapses in due diligence have led to legal troubles for Shein, particularly regarding copyright infringement. In 2021, Shein settled a lawsuit with artist Magdalena Mollman after using her artwork on clothing without permission. The company attributed this to an “isolated instance” due to an “oversight in our internal processes.”
Despite these incidents, both companies continue to face lawsuits from artists, competitors, and (mostly) each other over intellectual property issues.
Environmental and Social Issues
Worse still, Temu and Shein’s current supply chain practices clearly violate many of the Environmental, Social, and Governance (ESG) requirements that are likely to be implemented in the coming years.
- Worker Welfare: There are serious questions about labour conditions in Temu and Shein’s supplier factories, including fair treatment and adequate compensation for workers. A report by Public Eye uncovered that Shein employees worked 12-hour shifts, six or seven days per week, earning between 6,000 and 10,000 Chinese yuan per month.
- Carbon Footprint: Their extensive use of air freight is particularly problematic from an environmental standpoint. Air freight generates approximately 80 times more carbon emissions than sea or truck shipping. The rapid growth of these companies has contributed to a 25% increase in greenhouse gas emissions from air freight operators compared to 2019 levels. Stricter ESG rules on shipping are likely imminent in the next few years, and this will be low-hanging fruit for regulators.
- Lack of Transparency: There’s little public information available about environmental practices in their supplier factories. The absence of robust environmental standards or audits raises concerns about potential corner-cutting to maintain low costs.
Tax
Temu and Shein’s business model has capitalized on certain tax loopholes, but these advantages may soon disappear:
- U.S. lawmakers have announced upcoming changes to the de minimis rule.
- EU legislators are reviewing similar regulations.
- While the U.K. hasn’t announced changes to its import threshold, pressure is mounting. Sainsbury’s CEO Simon Roberts recently called on the U.K. government to close the “loopholes” benefiting Shein and Temu.
Both companies maintain that potential tax changes won’t disrupt their operations. However, with some EU countries imposing duties of up to 30%, being made to pay these duties could significantly curtail their pricing advantage over competitors.
Supplier Discontent
Finally, Temu’s relationship with its own suppliers is showing signs of strain. Despite maintaining direct relationships with factories, their aggressive hard bargains and customer complaint policies have upset many suppliers.
In July, hundreds of Chinese merchants protested at Temu’s offices in Guangzhou, accusing the company of imposing unfair and exorbitant fines without proper justification.
What’s the Takeaway?
Temu and Shein offer valuable lessons for businesses with supply chains in China, but it’s a playbook that requires careful consideration:
- Prioritize Direct Factory Relationships: The power of direct communication with factories cannot be overstated. Across the board, businesses with Chinese supply chains are internalizing this crucial lesson. A 2023 McKinsey survey underscores this trend: deeper supplier relationships now represent 43% of the apparel industry’s total supplier base, up from 26% in 2019.
- Boots on the Ground: Establishing a local presence in sourcing countries is crucial. It enables effective negotiation, provides real-time market insights, and allows for better oversight of production and quality.
- Balance is Key: While aggressive cost-cutting can drive growth, it must be balanced with ethical practices, quality control, and regulatory compliance. Temu and Shein’s challenges highlight the risks of prioritizing price over all else.
- DON’T Ignore ESG! Even if ESG factors don’t seem like a big deal now, they’re likely to become increasingly important in the coming years. As we’ve discussed in previous articles, ESG compliance is becoming a critical consideration in business operations, investor decisions, and consumer choices. Ignoring these aspects might provide short-term gains, but it could lead to significant compliance challenges and reputational damage in the long run.
The Power of Local Presence in China
For businesses looking to source from China effectively, the lesson is clear: having your own team on the ground is invaluable.
The China Desk by Kinyu offers a solution for companies seeking to replicate this advantage while remaining ESG-compliant. By recruiting and employing dedicated, on-the-ground personnel in China on your behalf, the China Desk enables businesses to:
- Build strong relationships with suppliers
- Navigate cultural and linguistic nuances
- Gain firsthand market intelligence
- Ensure quality control and timely production
Ready to optimize your supply chain while mitigating risks? Let’s discuss how the China Desk can tailor a solution for your specific needs.