Why PDD’s earnings miss will slow Temu’s SEA expansion

After a rapid rise that showed no signs of slowing down, Chinese ecommerce firm Temu has recently faced significant bumps in the road.

In late August, PDD Holdings, the firm’s parent company that also owns Pinduoduo, recorded US$13.4 billion in revenue for the second quarter of 2024, an 86% growth year on year. This was below analysts’ expectations.

Image credit: Timmy Loen

Worse still, the company’s co-CEO Zhao Jiazhen warned of an “inevitable” decline in profitability in the long term. The firm’s shares fell 29% following its earnings results, wiping out US$55 billion in market capitalization.

Temu was a shining star in the global ecommerce landscape in recent years, as it rapidly took market share and expanded into more than 70 countries and regions worldwide as of July.

Now, it appears that market analysts and even the company itself have realized that while aggressive subsidies and promotions fueled this expansion, Temu can’t rely on them for sustainable growth and profitability. So where will it turn, and what does it mean for the firm’s competitors in Southeast Asia?

The region’s incumbents like Lazada and Shopee have been nervously eyeing this new entrant as it gobbled up market share in the last couple of years. But they can breathe a bit easier today, as while Temu is in Southeast Asia to stay, investing heavily in Europe and the US is far more important to its bottom-line profitability. Here’s why.

Tough sledding in SEA

Low-cost products have a huge market in Southeast Asia, but it is also a battleground where the likes of TikTok Shop, Lazada, and Shopee are vying for dominance. As a latecomer, Temu lacks a differentiated competitive advantage.

The region’s countries have different economies and languages, as well as unevenly developed logistics networks, all of which require Temu to adopt a tailored approach and invest heavily in each market.
And it takes years and, seemingly, a boatload of investment to see results.

Alibaba-owned Lazada only recently turned a corner and reported its first profitable month. Since 2016, Alibaba has invested around US$7.6 billion into Lazada, a lot to come away with what is likely a meager profit.

In addition, regulatory pressures are making it harder for Temu to compete in Southeast Asia.

In late July, the company officially launched in Thailand and implemented its signature heavy promotions to entice consumers. Soon after, Thai Prime Minister Srettha Thavisin ordered an investigation into whether Temu’s taxes and operations comply with local regulations.

Photo credit: Temu

Europe beckons

Strategy shift