A Chinese challenge to Amazon

Spencer Soper, Bloomberg Tech Daily Newsletter, July 5, 2024.

Temu has taught Amazon.com Inc. an important lesson: US shoppers can be patient if it saves them money.

News broke last week that Amazon is planning a low-priced store for apparel and home goods shipped directly to US shoppers from China, signaling that the ecommerce giant is taking seriously the threat posed by discounters like Temu and Shein.

Amazon helped change the way people shop by building a vast network of warehouses designed to stockpile products and quickly send them to customers. That model requires products manufactured in China to be shipped by sea in bulk to the US and trucked to warehouses around the country.

The upside is that products are close to shoppers, enabling delivery in just a day or two. Amazon has been investing in sharpening that delivery advantage over rivals with warehouses closer to consumers to increase the number of products they’ll receive quickly.

That’s not what Chinese rivals like Temu have been doing, in part because they can’t afford to compete with such a cost-intensive strategy.

Bulk shipments of products from China are typically subject to tariffs, which were increased to about 25% in 2018. And Amazon pays for its warehouses through fees charged to online merchants and customers via the $139 annual cost of an Amazon Prime subscription.

Temu and Shein are operating what’s often described as the factory-to-consumer model. Products are shipped in smaller batches from Chinese factories to warehouses close to Chinese airports. When US shoppers place orders, the products are put on US-bound cargo planes and sent directly to customers. But it takes a week or two for shoppers to get what they purchased. The lower delivery costs let Temu and Shein offer prices that Amazon has been unable to match with its costly logistics operation.

The consumer packages shipped from China slip into the US without tariffs thanks to a century-old loophole called “de minimis,” which essentially means any shipment with less than $800 in products enters the US tax-free.

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