How Temu makes money from super-cheap goods like $10 smartwatches

Stefani Reynolds | Afp | Getty Images

Bargain e-commerce company Temu has had a whirlwind 2023.

Quietly launching its app in September 2022, it only took the company a few weeks to top app store charts, edging out Amazon, Walmart and even fast-fashion brand Shein. By February 2023, the 5-month-old company made its TV debut during Super Bowl LVII, airing two commercial spots totaling an estimated $14 million.

Temu's popularity is largely due to its ultra-cheap knockoffs. Users can get an Apple Watch dupe for $10, Yeezy knockoffs for $4.99 and gaming consoles for $20. On top of the steep discounts, users are bombarded by coupons, free shipping countdowns, flash sales and discount wheels.

While on its face the company looks to be a Boston-based startup, it is actually backed by a well-known name in the Chinese retail space, Pinduoduo. 

"China is really the linchpin in Temu's strategy," said Neil Saunders, managing director of GlobalData Retail. "A lot of the products that are sold on Temu are manufactured in China. They're shipped directly from China to the U.S. So those labor costs compared to manufacturing in the U.S. and elsewhere are really low."

Temu's rise in popularity has also courted scrutiny from the U.S. government, accusing the website of exploiting de minimis shipping rules to undercut U.S. retailers. Under de minimis rules, shipments valued under $800 are not subject to duty taxes and undergo minimal customs checks.

Beyond that, a U.S. House committee accused the retailer of violating U.S. import law by using forced labor to supply its products.

Temu and Pinduoduo did not respond to CNBC's requests for comment

Watch the video above to learn what's behind Temu's success and what could disrupt the retailer's massive growth in the U.S. 

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