TEMU solves the "impossible triangle": low price, not low quality

This article mainly discusses the "semi-hosting" model launched by the cross-border e-commerce platform Temu. This is a new attempt different from the original "full hosting" model. It aims to reduce merchants' costs and improve users' shopping experience while ensuring product quality and service, thereby achieving a win-win situation for the platform, merchants and consumers.

With the entry of Temu, "semi-hosting" is becoming the hottest topic in cross-border e-commerce this year.

On March 15 this year, Temu piloted a semi-hosted model in the United States, one of its largest markets, and launched investment promotion for multiple categories. Earlier, Temu had already started recruiting semi-hosted merchants in Europe, Southeast Asia, Japan and South Korea, covering vertical categories such as clothing and jewelry, furniture and home furnishings, beauty and personal care, outdoor sports, and industrial equipment.

Compared with the full-hosting model where merchants only need to ship goods to domestic warehouses and the platform takes care of everything, the biggest difference of Temu's semi-hosting model is that merchants can independently choose logistics and warehousing service providers, and the fulfillment method is more flexible.

However, the platform requires semi-managed merchants to shorten the last-mile logistics time to within 7 days, and the delivery speed is much faster than that of fully-managed merchants, which means that merchants must set up overseas warehouses.

Temu said that under the semi-hosting model, Temu hopes to recruit four types of partners: traders with export experience, domestic brand owners, factories with export processing experience, and sellers with FDA (U.S. Food and Drug Administration) qualifications.

"Everyone says that the wind is blowing," Zhang Yi, a cross-border e-commerce seller, told wujicaijing. He joined a Temu semi-hosted group filled with source factory merchants like Zhang Yi who previously operated on Taobao and JD.com.

In addition to Temu, AliExpress and SHEIN are also actively exploring the semi-custodial model.

AliExpress started to pilot semi-hosting in August last year and officially launched it in January this year. All merchants can apply to join. The platform has also introduced a number of incentives, including logistics subsidies, commission reductions, on-time delivery subsidies, and free warehouse fees.

SHEIN, which is known for its strong control over the supply chain, launched a platform model in May last year and started semi-hosted investment promotion in early May this year. Merchants can have greater autonomy in product selection, pricing and operations, and are responsible for local delivery themselves.

Among the "Four Little Dragons Going Global", only TikTok has not yet announced its semi-hosting plan. It prefers to adopt a "one country, one policy" approach, such as adopting a self-operated model in Southeast Asia and a full-hosting model in Spain, Saudi Arabia and other countries.

If full trusteeship is the keyword for cross-border e-commerce in 2023, then semi-trusteeship is the trend of the entire industry in 2024. This model innovation is a new move for cross-border e-commerce to solve the "impossible triangle" of platforms, merchants, and consumers.

The rise of cross-border e-commerce companies such as Temu has broken the traditional transaction chain of "merchant-middleman-consumer" in the import and export industry, replacing it with "merchant-platform-consumer". The elimination of middlemen has greatly reduced the operating pressure of upstream merchants and freed up more profit space; the unlimited shelves and personalized recommendation algorithms of e-commerce have also given overseas consumers more choices.

In the traditional middleman model, the biggest beneficiaries are traders who connect the supply and demand sides and control the pricing power on both ends; but in the era of cross-border e-commerce, merchants who can only provide low-priced and low-quality goods have been eliminated. The production costs of most commodities have been optimized to a more reasonable level; at the same time, with the abundance of supply, overseas consumers no longer just pay for low prices, but hope to buy better products at lower prices.

The "impossible triangle" of cross-border e-commerce is thus formed: the platform needs to make profits from both merchants and users; merchants hope to make more profits while reducing operating costs, that is, paying less to the platform and making more money from users; consumers hope to get more high-quality and low-priced goods while enjoying platform discounts and merchant concessions.

In the new environment, the market foundation of platforms buying low and selling high no longer exists, and cross-border e-commerce platforms such as Temu will no longer act as traditional middlemen. The only feasible path is to continuously balance the interests of the three parties through model innovation and move towards the optimal solution of the "impossible triangle".

01

Over the past two decades, the development history of China's cross-border e-commerce has essentially been a history of model innovation.

The basic paradigm of the first generation of cross-border e-commerce was to open stores overseas. Sellers of all sizes flocked to international e-commerce platforms such as Amazon. Some were eliminated, while others fought their way out and grew into "big sellers" that dominated one side.

The rise of "DaMai" has largely circumvented the control of middlemen over the cross-border trade value chain, becoming a model for many businesses to follow. This epoch-making model innovation has created the first wave of Chinese e-commerce going overseas.

However, as more and more participants participated, problems with the "big selling" model began to emerge: competition among merchants became fierce, low-priced, low-quality white-label products became popular, resulting in bad money driving out good money; the traffic prices of e-commerce platforms such as Amazon became increasingly high, and they even began to "target attacks" and ban Chinese sellers' accounts in batches.

Some merchants began to migrate to other cross-border e-commerce platforms. The once glorious "big seller" is coming to an end, and the era of Temu and other four little dragons going overseas has arrived.

Compared with the first generation of overseas merchants who painstakingly studied Amazon's rules, Temu and others have been rule makers from the very beginning, rather than adapters and followers.

The reason why the four little dragons can set the rules is that they rely on the powerful traffic aggregation capabilities of the Internet platform. Temu's full hosting model, which was launched in September 2022, is the first important new gameplay brought by the four little dragons to cross-border e-commerce.

In the past, if merchants wanted to sell a product to overseas consumers, they not only needed to operate stores, place advertisements, convert users, and encourage orders, but also needed to keep a close eye on every link of cross-border logistics and be responsible for after-sales service. However, most merchants do not have full-chain capabilities. Their advantage is low-cost production and manufacturing, but how to sell goods and fulfill contracts is not their forte.

To address this problem, the full-hosting model came into being.

In the fully managed model, merchants supply goods and ship them to domestic warehouses; the platform is responsible for store operations, product sales, warehousing and distribution, after-sales service, returns and exchanges, etc. This greatly reduces the threshold for cross-border e-commerce. Merchants do not even need to know foreign languages ​​to sell goods to foreigners. Temu, which pioneered this model, calls it "zero threshold for going overseas."

After realizing the potential of full hosting, AliExpress, SHEIN and TikTok quickly followed suit. By May 2023, with the entry of TikTok, full hosting became the new "standard" for cross-border e-commerce.

Around the full trusteeship model, a new balance has been established among platforms, merchants and consumers. The platform bears the operating, sales and fulfillment costs for merchants, and expands the pie and gains profit margins by leveraging its own advantages in technology, traffic, logistics, warehousing, and services; merchants have greatly reduced their burden by giving up some of their autonomy and can focus on R&D and production; consumers use the platform to pre-screen products and merchants, reducing the risk of one-sided pursuit of cheapness and "stepping on traps", and can buy more abundant products at more reasonable prices.

The innovation of the fully-hosted model quickly transformed into a new driving force for the development of the cross-border e-commerce industry.

According to the General Administration of Customs, the import and export volume of China's cross-border e-commerce reached 2.38 trillion yuan in 2023, a year-on-year increase of 15.6%, significantly ahead of the overall foreign trade growth rate. The proportion of cross-border e-commerce goods import and export in foreign trade has increased from less than 1% five years ago to about 5.7% last year.

But practitioners have gradually realized that full custody is not a panacea for all products and merchants.

In the fully managed model, the platform undertakes the entire chain of logistics and distribution, but the cost is still borne by the merchants in the end. In order to shorten the delivery time and ensure the user experience, the platform tends to choose faster logistics services, such as transoceanic air transport, etc. This results in the price of goods not being too low and the volume not being too large, such as cosmetics, jewelry, digital products, etc.

On the other hand, the needs of merchants are also differentiating. For factory-type merchants and small and medium-sized merchants, the full trusteeship model has lower overall costs; but for some leading merchants, they have production bases and warehouses overseas and their service systems are relatively mature. The full trusteeship model, which leaves logistics and warehousing to the platform, may not be worth the cost.

The entire industry is developing rapidly. Less than two years after cross-border e-commerce embraced full hosting, the "impossible triangle" reappeared. A new round of model innovation is ready to take off, and the semi-hosting model where the platform takes a step back has become the new focus of Temu.

02

The full hosting model cannot solve all problems and needs to be supplemented by the semi-hosting model, which has become a consensus in the cross-border e-commerce industry. However, unlike Temu, which took the lead and the other three small dragons followed suit in the full hosting model, the major platforms have different ideas on how to do semi-hosting.

AliExpress's strategy is to hand over brand operations to merchants, while the platform continues to be responsible for logistics fulfillment. Therefore, its semi-hosting is more suitable for those merchants who are more mature and need to build brands, or those who focus on product research and development and update and iterate products quickly.

Taking control of the logistics fulfillment link will help AliExpress maximize the value of its Alibaba "teammate" Cainiao under the semi-hosted model.

Temu's approach is exactly the opposite. Under its semi-hosted model, the platform is still responsible for store operations, product sales, after-sales service, etc., but merchants with stronger strength and more experience can solve warehousing and logistics problems more flexibly.

It is not difficult to see that Temu is also playing to its strengths and avoiding its weaknesses. Similar to Pinduoduo in China, the core of Temu's operation is the goods rather than the merchants; the key KPI of the platform is to sell the goods well, and when fulfilling the contract, the merchants can choose different service models according to their own circumstances, so as to improve efficiency and reduce costs.

On the other hand, Temu also needs to further enrich its product supply and expand its price range through a semi-hosting model.

As mentioned above, the logistics and distribution costs of the full-hosting model are relatively high, and it is not suitable for low-priced, large-volume goods, such as furniture and household items. However, in the semi-hosting model, merchants can ship goods to overseas warehouses by sea in advance, and ship them on the spot after receiving the order, thereby reducing logistics costs while ensuring that consumers receive the goods quickly.

However, Temu does not intend to tie the semi-hosting model to certain categories, but hopes to analyze the specific situation. At a recent investment promotion meeting, the person in charge of Temu's beauty category investment promotion said that he hopes more brands will join and suggested that beauty sellers go for medium to high customer unit prices.

On the other hand, Temu is also providing merchants with lower-cost logistics options through cooperation with large shipping and airlines. In November 2023, Temu cooperated with Matsun, ZIM, CMA CGM, Maersk, COSCO Shipping and other companies to use ocean freight as a mode of transportation for cross-border e-commerce logistics, which is said to reduce logistics costs by 30% to 60%, saving billions of dollars compared to air transportation.

On April 11, a cross-border e-commerce charter flight loaded with 102 tons of cargo took off smoothly at Hong Kong Airport, marking the successful maiden flight of the "Dongguan Airport Center-Hong Kong-Europe" cross-border e-commerce charter flight. It is reported that the flight was for Pinduoduo's cross-border e-commerce business. With the smooth takeoff of this route, Pinduoduo's business lines in Japan, South Korea, Southeast Asia, Europe, etc. have been launched at the Dongguan Airport Center and gradually entered the normalized operation stage.

Both platforms are semi-hosted, but AliExpress allows merchants to operate on their own, while Temu allows merchants to do their own logistics. Although the methods are completely different, the basic logic of the two platforms is to influence the distribution of costs and profits by transferring autonomy, and readjust the triangular relationship between the platform, merchants and consumers.

Breaking the ceiling and driving industry development through model innovation indicates that cross-border e-commerce is bidding farewell to low-price drive and transforming towards model drive.

In the early days of cross-border e-commerce, the industry tended to trade price for volume. In order to sell as much volume as possible, middlemen would often try to lower prices upstream; in the fierce competition, merchants could only actively or passively become accomplices and provide lower-priced and lower-quality goods.

The vicious competition during this period has left many overseas consumers with the impression that Chinese products are cheap but of poor quality. At the same time, the asymmetric game between middlemen and merchants has driven the supply chain to a high degree of involution. Merchants cannot make money, so they naturally will not invest in research and innovation. In the "impossible triangle", only middlemen make real money.

But now, "trading price for volume" no longer works, and the entire middleman industry is on the decline.

The fundamental reason is that the domestic e-commerce industry has matured. Under the survival of the fittest and strict supervision, those suppliers who focus on ultra-low prices and poor quality lack room for survival and gradually withdraw from the stage. On the demand side, as more and more merchants go overseas and more and more products are available, young overseas consumers have higher expectations for Chinese products and higher requirements for services, which are all impossible to provide by the "price-for-volume" gameplay dominated by middlemen.

The rise of Temu has dealt a heavy blow to the "price-for-volume" model; full-hosting, semi-hosting and other model innovations have replaced price as the theme of competition between platforms and merchants. The three-party relationship dominated by middlemen has disintegrated, and platforms, merchants and consumers have readjusted their interests, giving the "impossible triangle" a new opportunity to break through.

03

The focus of competition in cross-border e-commerce has shifted from price involution to model innovation. The driving factor is not only the subjective willingness of platforms such as Temu, but also the substantial improvement in the average quality level of Chinese manufacturing.

From agents to Amazon "big sellers" to today's four little dragons going global, one of the significant changes in China's cross-border e-commerce is the fundamental change in product quality. The all-round upgrade of the domestic manufacturing industry has not only fundamentally changed the situation of rampant counterfeit goods in local e-commerce, but also gradually reversed the reputation of Chinese goods going global.

It is precisely because of the large number of high-quality and low-priced goods that cross-border e-commerce has a real chance to break out of price wars and gain longer-term returns through model innovation. The reason why the full-hosting and semi-hosting models have swept the industry in the past two years is not because e-commerce platforms cannot think of these ways of playing, but because China did not have a strong enough supply capacity before.

The four overseas dragons represented by TEMU have stepped out of price involution and solved the "impossible triangle" by relying on model innovation. In fact, they are crossing the river by feeling their way in domestic e-commerce.

When domestic e-commerce first started, it went through a long period of chaos, with fake and shoddy goods rampant, and even made many people form the perception that "online shopping equals fake goods". It was not until a few years later, when Taobao vigorously rectified the supply, and JD.com and Tmall raised the B2C banner, that the fake image of e-commerce was gradually washed away.

One of the most obvious changes is that netizens born in the 1970s and 1980s still remember the fake goods sold on e-commerce platforms, but young people born in the 1990s and 2000s find it difficult to empathize with them. Middle-aged people like to talk about brands on WeChat Moments, while young people are more willing to find "substitutes" on new e-commerce platforms, which is actually a reflection of the generational change in consumption concepts.

By the time Pinduoduo rose to prominence, and even live streaming e-commerce prospered, domestic consumers no longer feared online shopping, and online retail accounted for more than a quarter of the total retail market. The standardized governance of e-commerce platforms is certainly important, but the overall improvement of the manufacturing industry and the elimination of most inferior supply are the fundamental reasons for the basic disappearance of counterfeit goods.

The supply-side "good money drives out bad money" has prompted the competition between e-commerce platforms to go beyond the simple low-price involution. Whoever has a more advanced model can win profits above the industry average. The rapid rise of Pinduoduo and live-streaming e-commerce is only a manifestation of cheaper goods; the deeper driving force is to reduce the intermediate links and more efficiently match supply and demand with the help of model innovations such as "Nongdi Yunpin" and live-streaming.

The same is true for cross-border e-commerce. Platforms such as Temu cannot rely on extremely cheap and low-quality supply to compete for the market. Instead, they need to innovate models such as full trusteeship and semi-trusteeship to reduce the intermediate costs of commodity transactions and ultimately achieve affordable prices and high-quality supply.

Similar to the evolution of domestic e-commerce from "merchant-centric" to "user-centric", Temu and others have launched model innovation based on massive high-quality supply, and the general direction is also to "stand on the consumer's side".

Overseas consumers have changed a lot in the past few years. In Europe and the United States, some older foreigners may have prejudices against Made in China; but as Chinese brands such as Xiaomi, BYD, and Transsion go global, the younger generation's perception of Chinese products has improved significantly. Especially in markets such as Southeast Asia, the Middle East, Africa, and Latin America, "Made in China" has become the most popular product category.

At the same time, overseas consumers have higher expectations for Chinese products. They hope to buy more high-quality and well-designed products at more reasonable prices, rather than just paying for cheap prices.

In the process of meeting the needs of users who want both, cross-border e-commerce platforms have explored a series of new ways to play. In the past two years, Temu has begun to shift its focus to reconstructing the value relationship between platforms, merchants and consumers. Full and semi-hosted models have emerged and quickly become the trend of the industry.

The birth of the new model is based on user pain points: full trusteeship solves the problem of uneven supply and prices on the platform, which causes users to be "dazzled by the choice", and at the same time unifies after-sales service standards to make consumers more at ease; in the semi-trusteeship model, after the user places an order, the goods are shipped directly from the local warehouse, and the cross-border logistics that originally took more than a week is greatly shortened, significantly improving the experience.

The model innovation of "standing in the shoes of consumers" has already taken root in the domestic e-commerce industry and has spawned new e-commerce platforms and formats such as Pinduoduo and live-streaming e-commerce. Now, the model innovation following the same logic is going overseas. While solving the pain points of consumers, it also gives Temu the driving force for rapid development and continues to expand the profit pie of platform merchants.

Model innovation is the long-term path to solving the "impossible triangle". The reason why full trusteeship and semi-trusteeship are popular and developing rapidly is that they have established a partial balance in the "impossible triangle" and are close to the optimal solution.

The structural changes on both the supply and demand sides have previously changed the domestic e-commerce industry and are now having a profound impact on cross-border e-commerce. The era of relying solely on low prices to conquer the world is over, and model innovation is the capability barrier of Temu.

Of course, no business model is perfect, but is the product of constantly adapting to market demand. After the semi-hosting model, Temu still needs to find a new model framework and find more answers to the "impossible triangle" in order to "stand in the shoes of consumers" in the ever-changing market environment and create greater incremental value for themselves and merchants.

References:

China Entrepreneur Magazine, "The second half of cross-border e-commerce begins, Amazon and Temu battle for hosting model"

Deep Sound, "How to understand the "semi-hosting" craze of cross-border e-commerce?"

36Kr, "From "full trusteeship" to "semi-trusteeship", Temu increases investment in Chinese manufacturing overseas"

E-commerce News, "Statistics Bureau: National online retail sales to reach 15.4 trillion yuan in 2023"

Blue Media, "Within less than two years of going overseas, Temu is creating another Pinduoduo"