An analysis of Temu’s cross border supply chain & logistics (1/2)

This article was originally published in Chinese. The views expressed are those of the authors and not of Momentum Works.  This is the first part (the summary), read the second part (Q&A transcript) here.
You can also find out more about Temu’s strategy and operations in Momentum Works’s “Who is Temu” report. 

1. Cross-Border Logistics Growth and Outlook

Growth in demand for cross-border logistics: In the era of the internet and rapid growth of cross-border logistics enterprises, the logistics industry, as a demand-derived sector, has further developed.

Exceeding expectations in air cargo: In the 3rd and 4th quarters of 2023, air freight rates exceeded expectations, significantly stronger compared to 2018 and 2019.

Rising stock prices of cross border logistics: Recently, the stock prices related to cross-border logistics have performed well, reflecting the industry’s positive growth trend.

2. Temu’s Logistics Cost Optimisation Strategy

Temu achieves air freight cost optimisation by selling small volume, lightweight products, focusing on selling items with smaller size and weight like jewellery.

By leveraging relaxed delivery time commitments and excess inventories, logistics costs are effectively reduced, allowing for a buffer period to choose the delivery timing with lowest costs.

Temu has adopted a strategy of mixing lightweight and heavyweight goods in its supply chain, using space and load capacity in collaboration with freight forwarders to achieve cost savings and improve operational conditions.

3. Temu’s Forecast of Cross-Border Logistics Volume

According to Temu’s sales forecasts, the demand for cross border air cargo in 2023 will increase significantly, expected to reach 2 million tonnes, equivalent to the transportation capacity of about 40 Boeing 747s or 60 Boeing 767s per day.

The company predicts that Chinese airlines might undertake the shipment of 15 full cargo planes per day, indicating a gradual increase in Chinese airlines’ participation in the field of cross-border logistics.

The increase in demand in the air cargo market has led to supply capacity becoming a bottleneck, impacting freight rates. In the fourth quarter of 2023, freight rates have rebounded, reflecting limited growth in capacity and influenced by US interest rate hikes.

4. Temu’s Cross-Border Logistics Supply Chain Advantages

Temu mainly sells unbranded goods, competing with Dollar General, Wal-Mart’s Great Value, Amazon’s Amazon Basics, etc.

Temu achieves high growth during seasonal demand peaks such as back-to-school and holiday seasons. Moreover, adapting to the consumer trend towards cheaper unbranded goods, it is poised to continue capturing market share.

Due to the existence of the <US$800 duty-free policy, Temu has an advantage in cross-border logistics costs, difficult to replicate by competitors. A warehouse strategy in Mexico may further optimise logistics costs, supporting stable performance in the coming year.

5. Deep Dive into Temu’s Cross-Border Logistics Cost Strategy

Low-cost cross-border small parcel freight: From Guangzhou to the US, cost of small parcel freight can be controlled at less than a dollar per parcel, and can be further reduced through bulk transportation.

Strategic advantage of using Mexico as a transshipment point: Establishing warehouses in Mexico, leveraging more flexible logistics systems and tariff policies between Mexico and the US, avoiding tariff costs associated with establishing warehouses in the US.

Change in air cargo price negotiation strategy: Due to limited supply capacity, airlines have more bargaining power in negotiating long-term prices this year, which may be higher than last year.

6. Analysis of Temu’s Cross-Border Logistics Costs

Chinese market shipping situation: The entry of small airlines into the market signifies that freight rates have begun to rise.

Impact of belly compartment: Increasing capacity in passenger plane bellies has little negative impact on freight rates, as the actual capacity sold is limited, and most passenger luggage occupies significant space.

Early or pilot nature of fast shipping will not reduce storage pressure at Guangzhou warehouses, as the scale-up of Mexican bonded warehouses is slow, and long-tail goods rely on air transport.

7. Temu’s Logistics Return and Supply Chain Strategy

Role of US warehouses: Handling returns, reducing freight costs, promoting local secondary sales.

Supply chain service provider selection: Temu chooses overstock and cost-effective suppliers without fixed large suppliers, preferring flexible and diverse small suppliers.

Freight forwarding service provider cooperation: Temu does not set up its own freight forwarding services to avoid increasing logistics costs and industry competition, entrusting multiple companies for collaboration and maintaining an open cooperative attitude.

8. Temu’s Warehouse Costs in Mexico

Warehouse costs within Mexico are rising. For example, in the Monterrey area, the rent is about 40 RMB per square metre per month; considering warehouse stacking, transportation, labour, and other costs, the daily cost of storing goods is about $0.55.

The Monterrey warehouse serves as a distribution centre. Goods do not stay in the warehouse for long but are quickly transshipped to the US, reducing long-term storage costs.

Investment decisions need to consider specific cost data. Before formal investment, detailed verification of land rent, labour, and other specific costs is required to guide specific investment actions.