Temu, the online marketplace challenging rivals Shein and Amazon, is facing a backlash from suppliers in China over its aggressive effort to radically reshape its business model.

The Chinese group, owned by $177bn ecommerce giant PDD Holdings, had in recent weeks sought to recruit Amazon merchants who hold goods in warehouses in the US and EU, according to several suppliers approached by Temu who spoke to the Financial Times.

The move appears to be designed to protect Temu’s business if governments close a tax loophole that has supercharged its growth, while cutting down delivery times by storing goods closer to shoppers. The shift would allow it to sell bulkier and higher-margin products such as furniture and home appliances.

Launched in September 2022, Temu rose to prominence by copying fast-fashion retailer Shein’s model of selling cheap and lightweight goods flown from warehouses in China directly to shoppers in the west.

The pivot to hiring suppliers with overseas warehouses means Temu is moving from a “fully managed” to “semi-managed” model, in which a merchant in its marketplace takes on shipping, warehousing and last-mile delivery costs previously handled by the online platform.

Speaking to the Financial Times, several Chinese suppliers in the southern manufacturing hub of Guangzhou have cast doubt on the move, which requires them to shoulder more risk to sell on the platform.

“The way Temu is treating its suppliers feels unsustainable,” said Hong, a leggings manufacturer in the city’s Haizhu district. “I feel like it cannot last that long.”

Another common complaint among suppliers is Temu’s tactics to get merchants to slash prices.

Temu found success by offering what suppliers described as an “easy” way to shift unsold inventories by sending goods to its China-based warehouses. “This is why it attracted so many sellers, including those with no cross-border experience,” said Bing Gongsun, a merchant who sells electronic products on all the major ecommerce platforms.

One merchant in Guangzhou received up to 30,000 to 50,000 orders a day during the early months of Temu’s operation. Today, that has fallen to 3,000, a drop they blame on its push to sign up many more suppliers in an effort to play them off against each other ad drive prices down.

Several other suppliers spoke of the unreliability of predicting sales on Temu, which can decide which merchant’s goods are promoted most to shoppers, depending on which is selling the cheapest products or has recently joined the platform.

Many said they stopped working with Temu because it started issuing more fines over issues ranging from faulty packaging to customer complaints over mismatches between the product and online description.

“They take a fine from you if there is a customer complaint, even if it’s not your fault. If there is a fault with one item in the batch, then they will fine you for the whole batch,” said one seller who declined to be named.

Some have taken the issue into their own hands, with dozens of suppliers swarming company offices in Guangzhou to protest against the practice of handing out fines. One supplier showed the Chinese press evidence of 279 fines issued by the platform, to a total of Rmb114mn ($16mn).

A Temu spokesperson said the protesters “were unhappy with how Temu handled aftersales issues related to quality and compliance issues with their products”, adding that the company was “actively working with the merchants to find a solution”.

Many merchants said they were willing to work with Temu under the fully managed model, given its rapidly growing sales volumes. Bernstein analysts forecast that this year Temu would generate $54bn in gross merchandise revenue — the total value of goods sold on its platform — up from an estimated $17bn in 2023.

But these people added that the company’s pricing tactics made them reluctant to shift to the semi-managed model. “We could take on all this cost and then find that our product doesn’t sell when it gets to the US,” said Bing.

Chinese e-commerce group; Temu flow diagram

To overcome this resistance, Temu is promising to promote sellers by giving their products top slots on its platform if they sign up for the semi-managed model. “Temu is prioritising giving consumer traffic on the platform to merchants with inventory in the US,” said Hong.

He added that Temu was providing a $3 subsidy for each order to sell certain clothing through the semi-managed system. Even with the incentives, Hong said the model was not favourable to smaller merchants. “Most of us sold on Temu because the company handled the logistics and warehouse costs. A lot of us can’t afford this,” he said.

Temu said the FT’s “reporting is not representative of the seller experience on Temu”, adding: “The feedback we receive from the vast majority of our merchants reflects a positive experience, with many appreciating the increased exposure and sales opportunities our platform provides.”

The change in its business model comes as it prepares for a US and EU crackdown on a tax loophole that exempts low-cost parcels from import duties.

The FT reported this month that the European Commission was drawing up plans to scrap the €150 threshold under which items can be bought duty free. Last year, 2.3bn items below the limit were imported into the EU, according to the commission.

The US has signalled that it plans to change the “de minimis” rule that allows shipments below $800 to arrive without paying import duties.

The adaptation would also solve Temu’s problem of “fulfilment efficiency”, said Hu Jianlong, founder of Shenzhen consultancy Brands Factory. It typically takes nine to 12 days for Temu to deliver packages from China to US shoppers, while Amazon can offer same-day or next-day delivery because it stores products in warehouses in the outskirts of large cities.

Some of Amazon’s top Chinese suppliers have warehouses in the US and other significant markets. They are willing to take on this cost because Amazon is seen as a “reliable” platform to make a profit, said several merchants.

“Amazon is the key marketplace,” said Brand Factory’s Hu. “Most successful sellers rely heavily on Amazon, which fosters a deeper trust in the platform. In contrast, emerging platforms haven’t yet earned the same level of trust.”

In response to the rising challenge of Temu and Shein, Amazon has gone on the defensive.

In recent months, the US ecommerce company has cut the commission it takes from clothing makers from 15 to 8 per cent, while reducing the delivery and marketing costs for merchants, according to the suppliers. Amazon did not respond to a request for comment.

Last month, Amazon also started recruiting Chinese suppliers to replicate Shein and Temu’s model of shipping goods directly from China to the west, in an effort to challenge them on offering low prices.

“Amazon was slow to react. But now all the platforms are copying each other,” said Bing, the merchant. “There is an industry joke that they are all pirates stealing from each other.”