Since July, things have been particularly heated at the headquarters of the booming e-commerce platform Temu in the southern Chinese metropolis of Guangzhou. Hundreds of Chinese retailers affiliated with the platform have gathered several times to protest against the exploitative practices of the e-commerce operator, which has rapidly become a serious competitor to Amazon in the USA and Europe.

The reason for the furore may seem trifling. The issue is that Temu – the international arm of online retail giant Pinduoduo – is imposing opaque penalties on shop operators on the platform for alleged product quality defects, which threaten to erase already slim profits. Temu justifies the action with reports of quality defects that have arisen from customer feedback. But the retailers say that the same products they offer on other platforms have not been subject to criticism.

The dilemma for retailers is that they can generate higher customer traffic on Temu, but are constantly forced to undercut market prices in order to keep their shop on the platform, or to be recognised by app users at all, thanks to the Temu algorithms. Temu is a prime example of the full-consignment model: The platform controls every single step, from marketing to the dispatch of goods. Ultra-low prices are dictated in order to attract customers, without taking the sales risk and excess inventory. Liability for actual or suspected quality problems is passed on to the retailers.

The protests at Temu shine a spotlight on business practices that allow China's leading e-commerce groups to offer breathtakingly cheap deals that fuel their expansion. Newcomers such as sells-everything retailer Temu and fashion-focused platform Shein are being streamlined, and transferred to the international stage with great success. The tech companies have found a way to connect Western audiences to the globally unrivalled industrial production structure and supply chain logistics in China, causing even the likes of Amazon and eBay to break out in a sweat.

The Chinese government doesn't know whether to laugh or cry. On the one hand, the international activities of the major shopping platforms are making a very welcome contribution to China's foreign trade momentum. In a year of notable economic challenges, the robust export economy is proving to be an essential stabiliser for growth. On the other hand, however, the Chinese economy is suffering from a latent deflation problem, which is undoubtedly linked to practices in domestic online trade.

Top dog Alibaba, with its Taobao and Tmall platforms and JD.com, have been joined by powerful competitors in the form of Pinduoduo and Douyin, the Chinese version of Tiktok's video service, which combines social media with e-commerce. The latter are fuelling drastically intensified price competition, with which tech companies are trying to generate growth in a weakened consumer economy.

Renowned brand suppliers, such as cosmetics giant L'Oréal, are also caught between a rock and a hard place. They are trying to establish themselves more strongly on Pinduoduo and other low-cost channels via live streaming events, but to their chagrin, are also increasingly ending up in the discount loop with their shops on JD.com and Alibaba's Tmall, where they are forced to offer discount campaigns and best price guarantees. Analysts are talking about a „race to the bottom“, i.e. a race to the bottom that requires a rethink in order to avoid unduly jeopardising the profitability of online retail from the perspective of platform operators and product providers alike.

The latest developments in China's consumer landscape are putting the business models of the leading platform operators to the test, and are prompting them to consider a change in strategy. After a long dry spell, traditional online retailers Alibaba and JD.com have once again managed to achieve mid-single-digit sales growth. However, this is only because they are now trying to keep up with the price competition fuelled by Pinduoduo and Douyin, with a stronger focus on unbranded cheap products.

Alibaba, in particular, is seeing adverse effects on profit margins. At a strategic level, the low-cost battlefield is compromising the efforts of recent years to move further up the consumer value chain with high-margin premium products. Now, however, it is essential to somehow keep up in the low-cost segment in order to limit losses in market share. On the stock market, however, investors are giving the thumbs down to Alibaba.

Significantly, China's consumers are beginning to react negatively to the sensory overstimulation caused by discount battles, which require a considerable effort to snap up bargains in good time, and to take part in live-streaming sessions. Inevitable fatigue can be oberved. The latest edition of the online shopping festival „618“, which ended on 18 June, provides some insight. Despite the considerable effort this time, gross merchandise value fell by 7% compared to the previous year.

In the US, Chinese offshoots such as Temu, Tiktok Shop and Aliexpress are generating a lot of enthusiasm among consumers. They are only too willing to reach for sensational low-cost offers, especially for non-essential consumption, i.e. knick-knacks, and see it as an excellent addition to Amazon or Walmart's online channel. In countries with recent high inflation rates, cheap consumption via China also provides a certain amount of economic relief.

In China itself, however, the competitive behaviour of online retailers is viewed more critically. It can be assumed that pressure is building up behind the scenes to prevent the undercutting race from continuing. Not only because the government reacts sensitively to any public uproar, and will undoubtedly look into the Temu case. Beijing's economic planners have long feared that the price war in e-commerce will not help to brighten the domestic consumer climate.