Will EU finally rein in Chinese online giant Temu?

Confronting Temu with the EU's allegations is like doing business with the popular Chinese shopping app. You'll get the information you want in many bits and pieces, just as Temu customers get their goods in lots of small packages.

It would take the length of this article just to line up the many pieces of information DW has received from Temu, one of which was Temu's standard phrase about "cooperating fully with [EU] regulatory authorities."

Temu appears to be used to responding to allegations, most probably because the company is constantly confronted with them.

In early 2024, the European Toy Association found safety risks in 95% of children's toys sold on Temu. The German Consumer Protection Association has repeatedly issued warnings, with the last such formal notice to stop its unlawful behavior or face a lawsuit sent this spring.

In October, the pressure on Temu increased again after the European Commission launched a formal investigation into the shopping platform's business model. Prominent on the EU executive arm's long list of complaints is the claim that Temu is exporting products to the EU that do not comply with the bloc's standards. Moreover, the Commission accuses the online retailer of offering fake discounts to customers, publishing fake reviews, insufficient vendor information, and having an addictive app design.

What's Temu's business model?

Outside of China, Temu first emerged in the United States in September 2022 with the claim it wants to give Americans greater access to Chinese products. Since then, the marketplace has experienced rapid growth not only in the US but at a global level.

From teeth-whitening powder to garden shears, Temu offers thousands of items at unbeatable prices. The products it sells usually arrive in various separate shipments directly from China. It is estimated that in Germany alone, 400,000 packages from Temu and the Chinese fashion marketplace Shein arrive every day.

Temu is in a position to offer its products at unbeatable bargain prices because it operates solely as a marketplace, meaning Temu customers usually receive their package directly from a manufacturer's or seller's warehouse in China. Temu only handles the financial transactions and, in some cases, the shipping. In any case, Temu acts only as an intermediary, earning a commission for its services.

This setup allows Temu to forgo stocking inventory almost entirely, thus reducing its costs. In turn, the practice also means longer delivery times for customers.

Alexander Graf, a German platform-economy expert, says longer delivery times are key to Temu's low-price business model.

"The Western e-commerce industry has evidently focused too long on shorter delivery times," said Graf, who is co-founder and co-CEO of Spryker, a software firm for e-commerce based in Berlin and New York. Apart from that, Temu's app "encourages consumers to shop more frequently," he told DW. 

Temu's strategy seems to be working nicely, given that it was the most downloaded iPhone app in the US in 2023, according to Apple.

So, within only two years, Temu has grown at a pace that it's become a rival to online retail behemoth Amazon, still the dominant player in the market, according to Graf. But Amazon is "struggling to compete with Temu on its main platform," he added. 

Under efforts to curb the rise of Temu in the US, Amazon, meanwhile, has launched its Amazon Haul advertising platform also featuring a colorful range of inexpensive items, but with noticeably longer delivery times compared to Amazon's core service.

Who owns Temu?

The owner of the shopping app that has alarmed consumer advocates is PDD Holdings. Listed on the US tech exchange Nasdaq, the firm noted the Irish capital of Dublin as its "principal executive office" in a 2023 filing with the US Securities and Exchange Commission (SEC). It had previously listed Shanghai as its main office.

PDD's key brand is the e-commerce platform Pinduoduo, owned by Chinese billionaire Colin Huang. Specific revenue and profit figures for Temu do not appear in PDD Holdings' financial statements, and the company remains tight-lipped. "As part of the Nasdaq-listed PDD Holdings, Temu does not disclose separate financial or operational metrics," a company spokesperson told DW.

Since April 2023, Temu has also been operating in Germany, though it has not disclosed how many people it employs here.

Temu unfazed by EU investigation

The EU investigation against Temu, launched on October 31, is the second probe against a Chinese e-commerce platform following action against the online retailer Aliexpress. The bloc's so-called Digital Services Act allows the EU Commission to scrutinize any online retailer classified as a "large platform" with more than 45 million users.

The EU Commission investigation has given Temu until early December to offer so-called remedies and make adjustments to its business model. If it fails to comply, the platform will face hefty fines.

EU taxation policy helps Temu advance

A major issue not addressed by the EU probe, however, is Temu's practice of exporting its goods to Europe largely duty-free. Under EU rules, shipments valued at under €150 can be imported without paying any tariff, says taxation expert Roger Gothmann, who believes that Temu's success relies hugely on exploiting the loophole.

"A large portion of shopping baskets on Temu stays under €150. Without this [duty-free] threshold, Temu couldn't offer such low prices," he told DW.

The CEO of Taxdoo, a Hamburg, Germany-based company offering accounting and VAT software for online merchants, believes closing the loophole could potentially slow down Temu's growth in Europe. He suspects that Temu deliberately splits larger orders to stay under the duty-free threshold. Spot checks by customs officials have confirmed Temu is using this strategy, he said.

Despite the duty-free status of many of Temu's imports, the shopping app still has to pay so-called import value-added tax (VAT) to the tax authorities in Ireland, where it's based, Gothmann added. Theoretically, the Irish state would then have to distribute Temu's tax payments to other EU states like Germany, where it is conducting its business. Yet, data-sharing remains cumbersome and is rarely carried out, Gothmann criticizes, and advocates for stricter oversight of marketplaces like Temu and the enforcement of existing laws. Equipping authorities with modern analytical tools could also be helpful, he said.

Unsurprisingly, Temu denies claims it violates EU taxation rules, asserting that its growth "does not depend on duty-free imports" and that it "does not split packages" to evade customs checks.

While the EU has proposed eliminating the duty-free limit by 2028, and wants to establish an EU-wide data hub for customs data, Alexander Graf believes Temu's rise cannot be stopped. Pointing to the dominance of Temu's parent company, Pinduoduo, which "outpaced existing platforms in Asia within five years," he said: "In any case, the industry must adapt to Temu's new business model. The number of packages arriving from China is unlikely to decrease."

This article was originally written in German.