Temu’s Growth Faces Challenges Amid Rising Tariffs on Chinese Goods
PDD, one of the largest e-commerce companies in China, introduced Temu as its cross-border marketplace in 2022. This platform allows Chinese merchants to sell their products directly to buyers worldwide, often undercutting larger retailers.
By the end of 2024, Temu had amassed 292 million monthly active users (MAUs) globally, with 185.6 million of those users located in the United States as of last August. Additionally, it became the world’s most downloaded shopping app on both iOS and Android in 2024.
However, Temu’s rapid growth might be jeopardized by new tariffs proposed by the Trump administration that will increase costs on Chinese imports. The “de minimis” rule, which previously exempted shipments worth less than $800 from customs duties, is set to be revised. Under the new regulations, imports from China could face tariffs as high as 245%, with items valued at less than $800 now subjected to taxes of 30% of their declared value or $25 per item. This amount is set to rise to $50 per item after June 1. Such developments pose a significant threat to PDD as it relies on Temu to expand its business footprint beyond China and compete with Amazon and other leading e-commerce platforms.
Moreover, Temu’s tightening budget for ad spending could have ramifications for Meta Platforms (NASDAQ: META). Over the past few years, Meta has benefited from Temu’s significant advertising expenditures, making it crucial for investors to monitor Temu’s decision to cut ad purchases across platforms such as Meta’s Facebook and Instagram, as well as Alphabet‘s Google and other U.S. advertising services.
The Impact of Temu’s Growth on Meta’s Performance
The year 2022 was challenging for Meta, with its revenue and earnings per share (EPS) declining by 1% and 38%, respectively. Contributing factors included Apple’s privacy changes on iOS, intense competition from ByteDance’s TikTok, and various macroeconomic pressures impacting ad sales. With a decline in revenue growth, the Reality Labs segment, focused on augmented and virtual reality products, continued to incur significant losses.
This combination of challenges caused Meta’s stock to fall to a seven-year low of $88 per share in November 2022. However, Meta’s share price has since surged over 460%, now trading around $495. From 2022 to 2024, the company’s revenue and earnings per share experienced compound annual growth rates of 19% and 67%, respectively, despite ongoing inflation, rising interest rates, geopolitical issues, and trade tensions affecting the market.
Three primary factors have fueled this recovery. First, Meta collected more first-party data to reduce reliance on Apple’s third-party systems for targeted advertising. Second, to counter TikTok, it expanded its short video service, Reels, across Facebook and Instagram. Lastly, a slowdown in China’s economy and its strict regulatory environment prompted many Chinese e-commerce and gaming firms to increase their advertising on Facebook and Instagram to reach more global customers. Among these was Temu.
Assessing the Potential Impact of Temu’s Ad Spending Cuts
In 2023, Meta’s revenue from China surged by 85%, reaching $13.7 billion, accounting for 10% of the company’s total revenue. However, by the second quarter of 2024, ad sales in China began to slow as the growth peaked during 2023.
Nonetheless, revenue from China rose 34% to $18.4 billion in 2024, now representing 11% of Meta’s total earnings. In comparison, U.S. revenue grew by 20% to $59.7 billion, total Asia-Pacific revenue, including China, increased by 24% to $45.0 billion, European revenue rose by 23% to $38.4 billion, and revenue from the Rest of the World grew by 22% to $17.9 billion.
It is noteworthy that China has become Meta’s fastest-growing market, despite the blockade of its platforms like Facebook, Instagram, WhatsApp, and Messenger in the country. The growth largely stems from increased ad expenditures from Chinese companies looking to attract overseas customers.
Meta does not disclose the specific revenue contributions from individual advertisers such as Temu. However, Morgan Stanley estimates that Temu spent about $1.4 billion—equating to approximately 1% of Meta’s total revenue—on ads in 2024. While losing 1% of ad revenue might not appear concerning for Meta, Temu was part of a larger group of Chinese cross-border ecommerce marketplaces that ramped up their advertising on Facebook and Instagram over the last two years. Other companies like Alibaba‘s AliExpress and Shein likely also contributed significantly to Meta’s ad revenue growth.
Evaluating Meta’s Vulnerability Amid Trade War Dynamics
Initially, it might seem that Meta is less susceptible to rising tariffs and the ongoing trade conflict, given its revenue primarily comes from advertising rather than physical goods. However, the company remains heavily reliant on Chinese advertisers like Temu, which poses a risk if tensions between the U.S. and China escalate without constructive trade negotiations.
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