Shopping on cheap e-commerce sites such as Shein and Temu (which PDD Holdings owns) can be alluring for bargain hunters looking to save money. Paying just a few dollars for clothes and other items can make it easy to justify waiting for a package to arrive rather than paying more money for quicker delivery via Amazon (AMZN +3.83%) or another retailer.
By pricing products aggressively low, Chinese e-commerce sites generate impressive sales numbers and become among the most popular shopping sites in the U.S. But changes could soon alter the ability for those sites to continue offering extremely low-priced goods. That would be welcome news for Amazon and companies that may be struggling to compete against Temu and Shein.
NASDAQ: AMZN
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New bill could eliminate a key loophole for Chinese sites
Many Chinese e-commerce platforms and retailers have benefited from a loophole that allows them to bring low-cost goods into the U.S. without having to pay costly tariffs. Doing so enables them to keep their prices low, often much lower than Amazon and other sites can. If packages are coming in at less than $800, they are able to avoid scrutiny and the tariffs that accompany more valuable shipments. This is known as the "de minimis" provision.
But that could be coming to an end for many items. Lawmakers have been aware of these issues and recently introduced a new bill that would prevent companies such as Temu and Shein from being able to take advantage of this loophole for imported textile, apparel, and leather products.
However, this isn't the first time regulators have considered addressing this issue. Last year, U.S. Senators introduced the De Minimis Reciprocity Act of 2023, which would have targeted countries such as China, which they believe are taking advantage of the loophole to circumvent tariffs.
Whether this new bill will eventually pass into law is anyone's guess, but as Temu and Shein rise in popularity, there will inevitably be more of a spotlight on their operations. And if the companies continue to succeed and generate impressive sales numbers, thanks in part to getting around tariffs, it may only be a matter of time before regulators close that loophole.
The impact could be significant for Amazon and Temu
The threat from sites such as Temu and Shein is undeniable for Amazon. For shoppers who are willing to wait and who don't need fast delivery, using cheap Chinese sites can result in drastic cost savings, and that can be imperative now more than ever, as costs have been increasing significantly in recent years. Duties can vary significantly depending on the type of item and its value. It can range from just a few percentage points to more than 20% plus state taxes.
However, any increase in cost can result in Chinese merchants needing to raise their prices accordingly. The smaller the gap between something that can be bought on Amazon and Temu or Shein or another site, the easier it is for customers to justify buying from Amazon, utilizing a Prime membership, and taking advantage of potentially faster shipping speeds. Amazon has been reportedly looking at targeting low-cost shoppers more aggressively through the launch of a new discount store, which would more directly compete against Shein and Temu.
Amazon's growth rate has been slowing down
A challenge for Amazon these days is that its growth rate isn't as strong as it has been in the past. And with the U.S. and other countries potentially entering a recession in the near future due to slowing growth and consumer spending, things could soon go from bad to worse for the e-commerce giant.
AMZN Revenue (Quarterly YoY Growth) data by YCharts
Finding a way to accelerate its growth rate, such as by targeting low-cost shoppers who are turning to Chinese e-commerce sites, could be one way for Amazon to turn things around, which is why a bill to close a tariff loophole and news that the company is launching a discount store could be great news for investors.
Is Amazon stock a buy?
Shares of Amazon have performed fairly well this year, rising by 17%, which is comparable to the S&P 500 and its gains thus far in 2024. But at a price-to-earnings multiple of 42, investors are paying less of a premium for Amazon stock than they have in the past (previously, the multiple was well over 60 and even 70 times earnings).
As a top e-commerce company and one of the biggest names in tech, buying Amazon's stock at any kind of discount can be advantageous for investors. The company may face some headwinds in the near future due to potentially slowing economic conditions, but in the long run, it's still an excellent growth stock to buy and hold.
