Biden administration cracks down on cheap ‘loophole’ transportation. How could it affect PDD Holdings stock?

Shopping at Temu? For those who don’t know it or may be generally unfamiliar, it has been the hot e-commerce portal of late. It’s a site with a seemingly endless variety of products, from soup pots to office furniture, with prices that are usually much lower than comparable goods bought elsewhere. It is the great success story of the developer and its owner, from China PDD Holdings (PDD 4.62%).

But such success has drawn scrutiny from the Biden administration, which wants to close the legal loophole that allows Temu to thrive in this country. If the government succeeds in doing this, will the business of PDD Holdings be seriously impacted?

Low prices, high popularity

This loophole is commonly referred to as the de minimis exception, part of the Tariff Act of 1930 in this country. the aggregate.

The big draw of Temu — the international shopping portal and mobile app operated by PDD Holdings — is its ultra-low prices. A smartphone that looks like AppleThe iPhone 15 Pro Max was recently priced as low as $137, for example. An electric guitar with features very similar to a $600 (at least) Fender Stratocaster retails on the site for just $63.54. PDD Holdings also uses clever psychology to promote its products, with very limited time offers prominently featured on its website.

The company is not exactly open about Temu. It doesn’t reveal the brand’s results, so we can only rely on peripheral data to determine how it might fare.

A recent article on retail industry website Chain Store Age, citing data from Statista and App Magic, reported that the Temu app has been downloaded 735 million times worldwide — in perspective, that’s more than double the entire population of the population. United States. In terms of monthly visits, Temu surpassed 500 million in the first quarter of calendar year 2024.

Goods flowing into the US through the de minimis loophole have become a torrent lately. According to a fact sheet on the exemption released by the White House in mid-September, the annual number of shipments falling under de minimis has increased from 140 million to more than 1 billion over the past decade.

The government says the increase “makes it more difficult to enforce US trade laws, health and safety requirements, intellectual property rights, consumer protection rules, and to block the entry into the country of illicit synthetic drugs such as fentanyl and of raw materials and machinery for synthetic drugs. .”

So the administration is trying to do something about it. The fact sheet is clearly part of a larger effort to sway the public and build support for reform — if not outright repeal — of the de minimis exemption. The president cannot do this unilaterally, but with this initiative the White House is putting pressure on Congress to act accordingly.

The twin beasts of competition and regulation

However, Temu’s best days may be behind it as competitors step up their efforts to capture some of the wildly successful site’s magic and (to some extent) its novelty wears off with consumers. In PDD Holdings’ most recent quarterly earnings report, company officials warned that its current triple-digit percentage growth rates are unsustainable and profitability is certain to decline.

If Temu’s reaction results in legislative changes, those anticipated slowdowns could become very pronounced. After all, it’s not just the U.S. government that’s worried about cut-price Chinese retailers like PDD Holdings, AlibabaAliExpress and private fashion retailer Shein. This summer, the 27-nation European Union has been busy hammering out a proposal to impose import duties on low-priced products from outside the bloc. Temu and other sites in China are the main targets of this effort.

PDD Holdings acknowledged its vulnerability in its most recent 6-K filing with the US Securities and Exchange Commission (SEC), which detailed those quarterly results. In the section titled “Risks Related to Our Corporate Structure,” the company wrote about de minimis that “If this exemption were to become unavailable for these orders or if the exemption threshold were to decrease, our business, financial condition and results of operations. may be materially and adversely affected.”

The fact that it doesn’t speculate on this potential adverse effect, nor highlight Temu’s results on its own, indicates that the unit is central to the company’s recent success. So his loss could be quite substantial. Because of this black-box quality of Temu’s operation, I think PDD Holdings is a stock to avoid right now, despite the great success of the portal.