Wall Street is closely monitoring China's impact on tech earnings due to the rising popularity of Temu and Shein.

• The ongoing impact of discount retailers Temu and Shein could be raised by earnings reports from Amazon, Meta, and eBay.
• The two companies with links to China have experienced significant expansion in the U.S. due to an intense advertising campaign and extremely competitive pricing.
• E-commerce players like Amazon, eBay, and Etsy have been facing increased competition due to heavy spending on Google and Facebook.

In the U.S., Temu and Shein have gained popularity by advertising affordable Chinese products through online marketing, such as $3 shoes and $15 smartwatches.

The emergence of discount shopping apps and TikTok Shop from ByteDance has intensified competition for U.S. e-commerce companies.

Some industry experts claim that much of Amazon's growth is due to a trade loophole called the de minimis exception, which allows packages shipped from China valued at under $800 to enter the U.S. duty-free. David Zapolsky, Amazon's top public policy executive, considers this trend concerning and believes it should be further examined by global regulators.

"Zapolsky stated in a recent interview with CNBC that there is a question about the extent to which some Chinese companies' business models are subsidized. He explained that there are rules around what can be shown as the list price versus the sale price, but these rules are not always enforced."

The growth of Temu and Shein will be a key focus during tech earnings this week, as Amazon, Meta, eBay, and Etsy release their second-quarter results. Investors will closely monitor any comments about the impact of these two e-commerce marketplaces on the industry and their advertising spending, which has contributed to Meta's recent growth.

Last week, tech earnings season began with a negative outlook as companies reported disappointing results. On Tuesday, reported a slight revenue beat but missed estimates on YouTube ad sales, causing the stock to drop 5% on Wednesday. On Wednesday, shares of plummeted 12%, the largest drop since 2020, due to weaker-than-expected earnings and a second consecutive quarter of declining auto revenue.

This week's calendar features reports from , , , , , and .

According to LSEG, Amazon is predicted to experience revenue growth of approximately 11% to $148.6 billion in its report on Thursday. Additionally, the company's net income is expected to increase by 63% compared to the previous year, due to its cost-cutting measures, such as laying off thousands of employees.

Although Amazon's growth engine is no longer retail, it remains the primary source of revenue. Third-party sellers now account for over 60% of goods sold on the site. To meet the growing demand for affordable products, Temu and Shein have emerged as new options for merchants. These companies cut out intermediaries by selling directly from factories in China to consumers worldwide, allowing them to offer lower prices. They also use slower delivery options.

In 2017, Shein launched in the U.S. and has since flooded Facebook with ads to fuel its expansion, with a reported value of $66 billion. On the other hand, Temu, owned by Alibaba, debuted in the U.S. in 2022 and quickly invested billions of dollars in marketing, most notably through its "Shop like a billionaire" TV spot that ran during this year's Super Bowl.

Despite increasing competition from Temu and Shein, Amazon remains committed to showcasing its delivery expertise and emphasizing speed. In February, CEO Andy Jassy announced that recent improvements to the company's fulfillment network have enabled Amazon to offer faster deliveries while maintaining profitability in its selection of affordable products.

"Jassy stated on the company's fourth-quarter earnings call that while it is not difficult to lower prices, it is challenging to afford to do so while still maintaining profitability. Similarly, adding lower average selling price (ASP) selection is not difficult, but it is challenging to offer it while still making a profit."

Officials in the U.S., European Union, and other regions are considering closing the trade loophole and increasing duties on inexpensive goods, which could negatively impact the growth of Temu and Shein.

A Temu spokesperson stated to CNBC that the company's growth is not dependent on the de minimis exemption. The site's competitive prices are due to Temu's direct-from-factory model, which eliminates the need for multiple middlemen and their associated costs.

Shein didn't respond to requests for comment.

Does the ad blitz continue?

Meta is concerned about Temu's ad spend, as there are indications that the company may be reducing its advertising efforts. According to Barclays data from May, the number of new shoppers on Temu increased in the third quarter of 2023, but has decreased in the last two quarters. The firm speculates that Temu may be shifting its marketing strategy to prioritize existing shoppers over new app metrics.

Barclays advised clients to purchase Meta shares in May, citing data on new buyer activations that suggests some of the concerns about a US slowdown from outbound China advertisers, particularly Temu, are justified and likely reflected in the 2Q guidance which shows a 6-point deceleration in ad revenue growth.

In April, Meta's weaker-than-expected forecast caused the stock to plummet. During the earnings call, finance chief Susan Li stated that the company was not quantifying the contribution from China in the quarter. However, she mentioned that advertising revenue in the Asia-Pacific region increased by 41% from the previous year, making it the fastest-growing region. This growth was attributed to online commerce and gaming.

A Meta spokesperson declined to comment for this story.

EBay has dismissed the notion that Chinese competitors are taking market share, with CEO Jamie Iannone stating in May that the site's unique selection sets it apart. In contrast, Etsy has focused on highlighting the role of its sellers in sourcing or creating artisan goods.

In the US, Temu and Shein may be a short-term trend. Wish, founded in San Francisco in 2010, gained popularity with its ultracheap direct-from-China goods, leading to a valuation of $14 billion at its initial public offering in 2020. However, users left and the business struggled. Wish was acquired by Singapore-based Qoo10 for $173 million earlier this year.

According to a May note from Bank of America analysts, Amazon and Alibaba are the least vulnerable to competition from Chinese companies.

""Reducing shipping times will be crucial for long-term competition, as data suggests that Temu/TikTok/Shein's shipping speeds lag industry leaders, potentially hindering growth over time," the analysts wrote."

Bank of America stated that Amazon has accelerated delivery speeds from two days to a day or less.

Despite being the largest online retailer in the U.S., Amazon is aware of the growing popularity of Temu and Shein.

In June, at an event with Chinese sellers, Amazon announced plans to launch a discount store featuring unbranded items priced below $20, as per a CNBC report based on a presentation viewed by the network.

The storefront would adopt the same de minimis rule as platforms such as Temu and Shein, according to a report by The Information last month, which cited a source familiar with the company's plans.

Despite not taking a stance on whether lawmakers should regulate de minimis shipments, Amazon must still win over consumers, according to Zapolsky.

"Zapolsky stated that in order to convince customers of the best quality and prices from Amazon, competition is necessary."

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