Arkansas Sues Temu for Data Theft. Temu Surpasses Target.

Arkansas Sues Temu for Data Theft. Temu Surpasses Target.
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Temu was only founded two years ago. However, the company is everywhere on Instagram and TikTok, offering cheap goods that are mostly manufactured in and shipped out of China. The revenue growth of Temu’s parent company has been explosive, at 86% in the 2nd quarter of 2024. According to Comscore, Temu’s unique visitors in the U.S. were 70.4 million in August, compared to Target’s 67.8 million and Amazon’s 238.3 million. For a company founded just two years ago, this is quite an extraordinary feat. The fact that this is a Chinese company whose CEO is a data mining specialist adds a more troubling undertone to the success.
 
When Chinese companies are experiencing prohibitive tariffs (electric vehicles) or outright bans (TikTok from all government devices) and Beijing-based equities are shunned by Wall Street, how has this Chinese retailer become so big in the U.S.? Will it last?
 
Here are the topics we’ll cover in this blog.
 
Chinese (Not Really Irish or Cayman Islands)
Explosive Growth
Walmart Wiped Out Main Street Merchants. Will Temu Wipe Out Walmart?
Arkansas Attorney General Sues Temu
The Atacama Desert in Chile
Fossil Fuels, Oil and Fast Fashion
“Shop Like a Billionaire”
 
And here is more information on each point.
 
Chinese (Not Really Irish or Cayman Islands)
Temu is owned by PDD Holdings. PDD Holdings is run by Chinese executives. The Chairman and co-CEO Lei Chen is a data scientist who specializes in data mining, according to the company’s investor relations page. During the earnings calls, the co-CEOs answer questions in Chinese. The C-Suite is all Chinese and four out of six board members are Chinese (with one from Singapore and the other Dutch). The press releases list Dublin and Shanghai as the company headquarters.

Chinese equities have been out of favor with investors since the Holding Foreign Companies Accountable Act became law (Dec. 18, 2020). While no publicly-traded Chinese mega-cap companies are currently at risk of being delisted from the NYSE or the NASDAQ stock exchanges, many top flyers are trading at all-time lows, including Alibaba and Weibo. PDD Holdings has had wild swings in price, surging to $200/share in February of 2021, and plunging to $35/share in March of 2022. PDD traded at $99.90/share at the close of trading on Sept. 20, 2024.
 
Do Western investors and consumers know that PDD Holdings (Temu) is a Chinese company with a data mining scientist at the helm, or do they really believe that Temu is owned by the Irish?

Explosive Growth
Temu offers $16 shoes, $10 t-shirts, furniture with prices to challenge Ikea and even semi-automatic toy guns with “realistic shell ejection” (price $11). With prices that low, how is it that Temu’s parent company PDD Holdings enjoyed a 33% profit margin in the 2nd quarter of 2024, while Walmart and Amazon only managed 3% and 9%, respectively? While financial engineering could be at play, a few things are sure. The merchant-sellers are not getting rich and the laborers making the goods are likely to be exploited. Hundreds of Chinese merchants staged a protest at the Temu offices in Guangzhou, China on August 1, 2024, complaining about unjust fines levied by the company or payment that was being withheld on goods that were already sold (source: CNN).

In the 2Q 2024 earnings call, PDD Holdings’ co-CEO Lei Chen explained that the higher margins were a “mismatch between the business investment and financial reporting cycle.” All the management team at PDD warned that profitability will decrease in the coming quarters, due to “changing consumer demand, intensifying competition, uncertainties in [the] global environment,” and increased corporate investments. CFO Jun Liu warned repeatedly that profitability doesn’t follow a linear path and that it would fluctuate in the short term and then “track lower” in the long term.   

Walmart Wiped Out Main Street Merchants. Will Temu Wipe Out Walmart?
In the 1980s, Walmart made it impossible for Main Street merchants to compete with the rock-bottom prices of Chinese-made goods. Stores on Main Street were shuttered as Walmart megacenters began showing up across America. Today, Walmart is worth $635 billion. Amazon’s market value is an astonishing $2 trillion. PDD Holdings market capitalization is $136 billion. PDD specializes in agricultural products in China (with Pinduoduo) and competes with Amazon here in the U.S. with Temu.
 
One of the major risks to Temu and PDD Holdings’ ultimate success, which is acknowledged by co-CEOs Lei Chen and Jiazhen Zhao, is the uncertainty of what they call the rapid shifts of the “external environment.” Many problems lie under the umbrella of this phrase, including geopolitical, supply chain and environmental challenges. The international tension between the U.S. and China has been well-publicized. Global supply chain challenges have escalated due to wars in the Middle East and Ukraine. The world is on fire, and consumers increasingly care about a company’s commitment to reduced CO2. Does all of this get thrown out the window in order to buy $10 shoes and clothes? (So far, sadly, the answer to that for many consumers is, "Yes.")

​Are there other challenges?
 
Arkansas Attorney General Sues Temu
According to Tim Griffin, the attorney general of Arkansas, “Temu is not an online marketplace like Amazon or Walmart. It is a data-theft business that sells goods online as a means to an end.” Having a data mining specialist as the CEO doesn’t help Temu’s case. Is it a coincidence that Walmart is an Arkansas company? (You might remember that the U.S. began a war on Huawei less than a month after Tim Cook, Apple’s CEO, joined Trump’s American Workforce Policy Advisory Board in February of 2019.)

The Atacama Desert in Chile
While PDD holdings acknowledges that environmental protection is one of the challenges the company faces, it offers no plan for going green. Meanwhile, the clothing dump of discarded fast fashion in Chile’s Atacama Desert is visible from space. PDD Holdings hasn’t filed an environmental impact report in at least four years, so it’s difficult to know the exact scale of the massive CO2 footprint Temu and Pinduoduo have. Temu’s cheap goods are at the forefront of fast fashion and overconsumption, with over a million packages shipped around the world daily (according to TechBuzzChina).

Fossil Fuels, Oil and Fast Fashion
Cheap clothing is mostly made of polyester, which is an oil-based product. From its origins (oil wells), to production (chemicals), to leaching those micro-plastics into our bodies and water supply when worn and washed, and finally taking up to two centuries to decompose, polyester is one of the worst CO2 footprints known. Sadly, this fact is not well-publicized, perhaps because there is a lot of money to be made up and down the supply chain. (India’s wealthiest man is a polyester magnate.) Learn more in my Fast Fashion blog. (Click to access.)

“Shop Like a Billionaire”
Temu’s Super Bowl Ad featured animation, sparkles and a Shop Like a Billionaire theme song.
Everything from furniture to skateboards and clothing cost just 99 cents to $10 bucks in the ad. Campaigns on social media platforms, including TikTok and Instagram, target young consumers with hard-to-resist prices. Despite all of this, the Unique Visitors in the U.S. declined from a high of 90.5 million in July 2023 to 70.4 million in August of 2024. Will concerns about exploited labor, shafted merchants, clothing waste and data privacy, or a backlash against polyester, trend on social media, or will the ads continue to attract more and more unsuspecting consumers?
 
Bottom Line
Temu’s business model is troubling, as exhibited by the merchant protests in China. It is owned by a Chinese data mining specialist. PDD’s executives are promising to “adopt the necessary policies to vigorously support high quality merchants and tackle low quality ones.” However, the lack of mention of environmental policies, labor justice, merchant support or data privacy is quite deafening. The tricky maneuver of listing Dublin as the company headquarters, while the CEOs conduct quarterly meetings in Chinese, is something a meme stock investor might miss. However, eventually all these concerns could add up to a meteoric rise and spectacular crash and cautionary tale. I wouldn’t buy the merchandise or stock of this company. If I had in the past, I’d do everything in my power to scrub my information, including credit card and financial data, from their app and website.
 
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