Be it a dress for $9.99, a pair of earrings for $2.99, or even absurd items like a croissant lamp for less than $10, Temu and Shein have made their names by selling clothes and household items at dirt cheap prices, rising to challenge global e-commerce giants like Amazon in the process. 

The two Chinese companies owe much of their whirlwind success in the U.S. and elsewhere to exploiting customs loopholes that have allowed them to import piles of consumer goods from China while paying little or no import duties.

But as governments in Washington and elsewhere catch up to Shein and Temu’s success at gaming the global trade system, the two companies are having to respond by altering their business models and pushing into new market segments. 

Whether or not they prove nimble enough to pull off these changes is a question with high financial stakes. Temu’s Chinese owner PDD has already seen its share price collapse this year amid doubts about its revenue and profit outlook. Shein, meanwhile, is trying to drum up investor support for a potential initial public offering in London it had hoped would fetch it a $64 billion valuation.    

“It is a bit of a house of cards that they’ve built,” says Ed Sander, an analyst with Tech Buzz China. “They’re trying to fix the foundation and they’re agile and quick to respond to any challenges. But if all these factors start working against them, it can be very problematic down the road.” 

Pressure on the two Chinese companies ratcheted up in the U.S. last week after the Biden administration proposed new rules that will remove the so-called de minimis exemption on a range of Chinese imports. To date, that exemption has allowed Temu and Shein to ship goods under $800 directly from Chinese warehouses to American consumers without paying duties.

The changes may take months to finalize. But the U.S. isn’t the only country rethinking its  rules. The European Commission is working on plans to impose custom duties on imports below its current threshold of €150 ($161). Turkey slashed its threshold down to €30 ($33) last month, while Brazil imposed a 20 percent tariff on overseas purchases under $50 in June.

“It’s a bit of a house of cards that [Shein and Temu] have built…if all these factors start working against them, it can be very problematic down the road.” 

Ed Sander, an analyst with Tech Buzz China

Other aspects of the Chinese e-commerce companies’ operations have come under scrutiny. South Korea launched investigations into Temu’s handling of consumer data and alleged false advertising earlier this year. British lawmakers meanwhile share their U.S. counterparts’ concerns about Shein’s labor practices and the use of cotton sourced from Xinjiang in its products, and have demanded more transparency over its supply chains.

Temu and Shein have adopted different strategies to adapt to the growing international pressure.

Temu’s basic system — like Shein’s — involves getting suppliers to drop goods off at warehouses in China; thereafter, the company handles everything from pricing and shipping to delivery and aftersales. In March it moved towards a new “semi-managed” model, where merchants have to deal with cross-border logistics and customs compliance themselves — reducing Temu’s reliance on the de minimis provision. To push suppliers to make the switch, the company has been directing customer traffic towards those operating the new system.

In addition, the company has recruited new sellers with their own inventories in the U.S. and Europe. This new model already accounts for a quarter of Temu’s total sales in the U.S. market, according to a recent research report by analysts at Goldman Sachs.

“This also allows Temu to sell a much broader scale of products, including furniture, bikes, and all those kinds of things that don’t fit in a package on an airplane,” Sander says. 

Another workaround for Temu is shipping products through other countries. The company has expanded its network of overseas warehouses both by building its own and certifying facilities that meet its standards. According to Sander, it started shipping from Vietnam to Europe and the U.S. earlier this year, and plans to do so from Mexico as well. Both countries have free trade agreements with the U.S., minimizing import duties and tariffs.

Shein began preparing even earlier, having realized its current model would prove unsustainable, says Hu Jianlong, founder of Shenzhen-based e-commerce consultancy Brands Factory. In fact, Shein voiced its support for a “complete makeover” of the de minimis exemption a year ago, in a letter sent by executive vice chairman Donald Tang to the American Apparel & Footwear Association last July.

Shein has also diversified its supply chain by manufacturing in other countries, such as Brazil and Turkey. Moreover, it has introduced a ‘print-on-demand’ model, where suppliers complete basic garments in China, but apply the design in the U.S. “So now the product is considered to be ‘Made in America’,” Hu says. 

For sure, both Temu and Shein could simply pay any extra duties and tariffs on U.S. imports when the government ends the de minimis exemptions. Analysts say the companies would look to pass on the extra costs by squeezing suppliers, although they may have some scope to raise prices for consumers. Temu’s current prices are around 60 percent lower than those charged by Amazon for a range of products from slippers to women’s jeans to hair brushes, according to Goldman Sachs’s research. 

“They will have to divide the damage between their own margin, the margin of the merchant and the consumer price. So they will spread that out over these different stakeholders,” Sander says. 

Still, further U.S. tariffs on Chinese goods may eat into Temu and Shein’s razor-thin margins. In addition, extra customs checks on their imports as the de minimis exemptions are lifted may cause unwelcome delays on deliveries to customers. 

“If and when this change goes into effect, it’s quite realistic that there’s going to be some period of time when deliveries just stop or start taking weeks as the system races to readjust to the increased volume,” says Juozas Kaziukenas, founder of Marketplace Pulse, an e-commerce intelligence firm.

Given the political headwinds, Temu may shift its focus towards more friendly markets, such as Southeast Asia and South America. It is hoping to reduce the U.S.’s share of its total sales from 60 percent last year to 30 percent by next year, The Information reported in March.

But the companies themselves seem to recognize their futures will be more problematic. “High revenue growth is not sustainable and a downward trend in profitability [is] inevitable,” said Lei Chen, chairman of Temu’s owner PDD, in an earnings call last month. The same goes for Shein, whose IPO plans remain in limbo. 

A Temu spokesperson said the company’s growth is not dependent on the de minimis policy and it remains “committed to compliance with all relevant standards.” A Shein spokesperson said import compliance is a top priority for the company. 

Both Shein and Temu are also now trying to shift their reputation for selling bargain-basement goods by offering more premium products from up-market brands. 

“Can they realistically challenge these broad retailers like WalMart, Amazon or Target, or are they stuck being just a place to get cheap, unbranded goods? That transition is where they’ll spend more time, while dealing with countries trying to limit their growth,” says Kaziukenas. 

However, both companies have had a hard time recruiting brands to their platforms, says Sky Canaves, a senior analyst at the marketing research company Insider Intelligence. 

“For established brands outside of China, you have to question what is the appeal of establishing a presence on a platform that’s known for low cost goods of sometimes questionable quality,” she says.

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