China’s Temu adopts tough tactics to secure suppliers in battle with Shein

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Chinese online marketplace Temu is scooping up manufacturers of cheap goods that had once worked with Shein, as its fast-fashion rival moves to clean up its supply chain ahead of a planned blockbuster US listing.

Singapore-based Shein ditched a number of suppliers based in southern China last year after auditors found they had been violating the company’s certification standards, according to multiple industry insiders with knowledge of the move.

Many of those suppliers responded by switching to selling items on Temu, owned by Nasdaq-listed PDD Holdings, which is spending billions of dollars trying to replicate Shein’s success in shipping ultra-cheap goods directly from warehouses in China to shoppers in the west.

Shein’s tight supply chain management is at the heart of its ability to offer low prices to lure Gen Z shoppers. But its rival Temu has adopted tough tactics to encourage merchants to its platform to sell to consumers in the US and Europe, offering items from $4 laptop bags, $50 three-piece suits and $9 car tyres.

Meanwhile, Shein, which was valued at $60bn in the latest fundraising round last year, is preparing to launch an initial public offering in the US as early as this year if it gets Beijing’s blessing.

At the same time that Shein sent its own auditors to inspect factories across China last year, an investor seeking to join last year’s round also conducted their own due diligence on the company’s supply chain, according to a person familiar with the move.

Shein found that many of its contract manufacturers did not meet its requirements, which included a minimum of 50 employees and at least 800 square metres of factory floor space.

“We used to supply Shein, but now we can’t supply them directly because we don’t meet their requirements on factory size,” said Louis Li, a bag factory owner in Guangdong, who added that after Shein cut ties with the smaller factories “we all went to Temu”.

Temu does not account for factory size when accepting new sellers. The Chinese group said it operated a marketplace rather than acting directly as a retailer and accepted “merchants with valid operating licences that are able to meet requirements for products”. While Shein recently opened a marketplace, it primarily places orders with suppliers that produce clothes under its own label.

Li, the bag factory owner, said he typically makes a profit margin of less than 20 per cent with Shein but about 15 per cent from Temu. However, if the product is selling well, Temu will source similar goods from other suppliers, forcing the factories to compete and cut prices further.

Shein touts its “long-term relationship” with its network of garment manufacturers as one of its competitive advantages over fast-fashion rivals such as Zara and H&M, forging those ties by paying quicker than the industry average. It has also adopted various strategies to give its suppliers incentives to deliver products within a matter of days.

“Shein rates suppliers by punctuality,” said Zhang Zhongbao, founder of Xingcheng Excellent Swimwear Consultancy, which helps swimwear makers find distribution channels. He explained that top suppliers got paid within one week, and the worst performing received payment after 45 days. “Slow payment is punishment for slow delivery,” he said.

Shein declined to comment.

Temu, which also pays quickly, has given suppliers another channel to sell excess stock, including products originally targeted at Shein.

“Shein is finding its merchant lock-in has been less robust than expected in light of Temu’s advances,” said Robin Zhu, an analyst at Bernstein.

Penny Lin, a garment factory manager in Zhejiang, said it doubled or tripled the production of clothes ordered by Shein and sent the remaining product to Temu or domestic platforms such as Alibaba’s 1688.

After targeting Shein suppliers in China, Temu is also going after Amazon’s sellers. In January, it held a recruitment seminar for suppliers in China that owned warehouses in the US and Europe.

Mo Yu, Temu’s director of women’s clothing, said the company wanted to compete with Amazon and Walmart more directly by allowing suppliers to handle logistics and delivery, in an effort to speed up the time it took to get products to consumers.

This marks a departure from Temu’s existing model, whereby merchants send goods to its warehouses in China for orders to be packaged and sent directly to western consumers.

It currently takes Temu between one and three weeks to deliver orders to the US, with its express service taking between four and nine days. By contrast, Amazon customers typically get their packages to US consumers within two days.

Mo said that, despite suppliers incurring more costs by having to deliver items from their US-based warehouses, Temu will provide generous “subsidies” to them to ensure that the platform “maintains its position as having the lowest price in the market”.

Some Amazon sellers said Temu’s tactics had led the US ecommerce giant to pressure suppliers to slash prices.

Owen Zhang, a toy factory owner in Guangdong who supplies companies with stores on Amazon, said the US group began to request “us to provide lower-priced products” in the second half of last year, just as Temu was conducting a multibillion-dollar advertising blitz in the US in an effort to expand market share.

Amazon said its “third-party sellers set their own prices” and that the company “offers optional tools to support them in offering competitive, low prices”.

This post was originally published on Financial Times

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