The news: Temu parent PDD Holdings reported a steep drop in profits and the slowest revenue growth in three years in Q1, a warning sign as tariffs and depressed consumer sentiment in its home market challenge its operating model.
By the numbers: PDD’s Q1 performance fell significantly short of expectations, which management attributed to “changes in the external environment” and heightened investments in merchant support amid uncertainty.
- Total revenues rose 10% YoY to RMB 95.7 billion ($13.7 billion), RMB 5.9 billion ($824 million) less than what analysts were expecting.
- Net income sank 47% YoY to RMB 14.7 billion ($2.1 billion), RMB 11 billion ($1.5 billion) short of the consensus estimate—an indication of the financial toll tariffs are taking on PDD’s bottom line.
An existential crisis: PDD’s sudden slowdown reveals just how poorly its business model is equipped to handle the combined pressures of tariffs, the end of the de minimis exemption, and intense price competition in China’s retail ecosystem.
- US shoppers are already turning away from Temu—and fellow Chinese ecommerce operator Shein—due to higher prices in response to tariffs and the removal of the duty-free benefit.
- While Temu faces fewer trade barriers in other markets, a growing movement worldwide is pushing to eliminate de minimis for low-value Chinese imports. The EU has proposed a flat €2 ($2.27) fee on packages worth under €150 ($170.02), while the rest of the G7 nations are also discussing tariffs on ultra-cheap goods from China.
- PDD’s price advantage at home is also fading. The company’s management noted that, as a third-party marketplace, it is unable to offer Chinese consumers the government subsidies that have been critical to driving the country’s retail sales growth in recent quarters.
- At the same time, PDD is plowing tens of billions of yuan into promotions and other incentives to stay competitive with the likes of Alibaba and JD.com—as well as make sure its merchants can survive both domestic and global uncertainty. Those investments sapped profits in Q1 and will continue to do so as the company continues its RMB 100 billion ($14 billion) merchant support plan.
Shein in a similar spot: Most of what ails PDD is also hitting Shein, which must now reshape its business model to accommodate protectionist trade policies. To add to the fast-fashion retailer’s troubles, it now faces regulatory heat in the EU after a government investigation found that several of its sales tactics breached the bloc’s consumer protection rules.
- Shein was found to offer “false discounts” that misrepresented products’ previous prices, display deceptive product labels and untrue or misleading sustainability claims, and use web design to pressure shoppers into completing purchases.
- The company was also faulted for “incomplete and incorrect” information regarding returns and refunds, and for hiding its contact information to make it harder for customers to reach out.
- Shein has until late June to respond with solutions to the EU’s concerns; failure to comply could result in fines amounting to a percentage of its EU sales.
Our take: Both the macroeconomic and regulatory environments are extremely unfriendly to Temu and Shein at the moment. Neither company has much recourse as more governments put up trade barriers to protect domestic interests. While Temu parent PDD has a larger war chest to weather uncertainty, difficulties in its domestic market will limit its ability to invest in international markets.
Go further: Read our FAQ: How the US-China Trade War is Affecting TikTok Shop, Temu, and Shein.