In Depth: ‘Exorbitant’ Fines Land Temu in Hot Water With Chinese Merchants

Chinese cross-border e-commerce platform Temu is under fire from merchants accusing it of imposing unwarranted and excessive fines [para. 1]. Over recent days, hundreds of merchants protested outside Temu’s offices in Guangzhou, demanding explanations and adjustments regarding these penalties [para. 2]. This was not an isolated incident, marking the second protest in July and part of a wider series of grievances this year [para. 4].

Temu, launched by PDD Holdings Inc. in September 2022, has rapidly expanded to 75 countries, including the U.S., where it has outpaced competitors like eBay in terms of monthly active users [para. 5]. A fundamental part of Temu's operation includes an "after-sales deposit" system where a portion of payments to merchants is frozen to cover potential fines for product defects [para. 6]. However, merchants have reported that these fines are often levied without justification or transparency [para. 7].

For instance, a denim seller who protested recounted being fined 2.1 million yuan but only having a small fraction of his deposit refunded after an earlier protest [para. 8]. Data indicates that combined fines and frozen deposits for over 100 vendors reached 142 million yuan, with merchants demanding proof of customer complaints [para. 9]. Another merchant specializing in womenswear faced a total financial impact accounting for nearly 35% of his sales, leading to severe losses [para. 10].

Market response to the unrest saw PDD’s New York-listed shares declining by 3.5% on Monday [para. 11]. Despite Temu’s success in attracting U.S. consumers and achieving high market penetration, the platform employs a business model where merchants must competitively price their products, often resulting in minimal profit margins [13, 15]. Complaints regarding hefty fines exacerbating these low margins are common, with even high-volume sellers struggling to turn a profit [para. 16].

Temu’s after-sales services rules grant the platform the autonomy to determine product issues based on customer feedback, store information, and product details, often without providing solid evidence to the fined merchants [17, 18]. Even with routine quality checks, merchants frequently find themselves penalized without clear explanations or documented proof of the alleged defects [19, 20].

In response to the protests earlier this year, Temu introduced a special approval process for refunding after-sales deposits to certain merchants but maintained that fines could not be refunded [para. 22]. Lawyers have indicated that the lack of detailed proof from Temu when imposing fines could legally compromise merchants' rights, with arbitration cases needing to be filed in the Hong Kong International Arbitration Center, which is a costly and lengthy process [25, 26]. As a result, many merchants find it financially unfeasible to contest these fines [para. 27].

During an earnings call in May, PDD Chairman and co-CEO Chen Lei emphasized the company's focus on consumer rights and ensuring compliance to attract legitimate merchants while eliminating fraudulent ones [para. 29]. Overall, while Temu’s rapid growth and market penetration demonstrate its immediate success, the apparent unfair treatment of merchants presents significant challenges and potential legal hazards for its business model [para. 30].