The EU's DSA and Temu: Assessing the Long-Term Risks for PDD Holdings and E-Commerce

The European Union's Digital Services Act (DSA), enacted in 2022, has emerged as a seismic force reshaping the global e-commerce landscape. At the center of this regulatory storm is Temu, the fast-growing cross-border platform owned by PDD Holdings (NASDAQ: PDD). With the EU investigating Temu for alleged violations of the DSA—ranging from inadequate risk assessments to the sale of counterfeit goods—the stakes for PDD Holdings and the broader e-commerce sector have never been higher. This article examines the financial and operational risks posed by the DSA, evaluates the potential for fines, compliance costs, and reputational damage, and assesses whether this crisis signals an opportunity or a warning for investors.

Temu's DSA Dilemma: A Regulatory Flashpoint

The European Commission's preliminary findings against Temu are stark. In October 2024, a mystery shopping exercise revealed that the platform's risk assessments failed to address the high likelihood of counterfeit and unsafe products—such as baby toys and small electronics—reaching EU consumers. The Commission criticized Temu for inaccuracies in its risk evaluations and for not meeting DSA standards on algorithm transparency, addictive design features, and consumer data access. If the investigation concludes that Temu is in non-compliance, the company could face fines of up to 6% of its global annual turnover—a figure that could exceed $10 billion given Temu's explosive growth.

The DSA also mandates that Temu establish an EU-based operator to enforce product safety compliance under the General Product Safety Regulation (GPSR). National authorities could compel the removal of unsafe products, further complicating operations. These measures, while aimed at protecting consumers, risk stifling Temu's business model, which relies on low-cost, fast-moving inventory and minimal overhead.

Financial Resilience vs. Rising Costs

PDD Holdings' Q1 2025 financial results highlight both its strengths and vulnerabilities. Total revenue rose 10% year-over-year to $13.18 billion, driven by online marketing and transaction services. However, operating profit plummeted 38% to $2.22 billion, and net income fell 47% to $2.03 billion. The decline was attributed to “substantial investments in the platform ecosystem,” including logistics and merchant support. While these investments signal long-term ambition, they also expose the company to rising compliance costs.

Under the DSA, PDD Holdings could face compliance costs averaging $430 million annually for a single large tech firm—a burden exacerbated by the EU's regulatory complexity, which has ballooned from 27 pages in 2015 to 931 pages in 2024. For context, Amazon's DSA compliance costs alone are estimated at $430 million per year, and the company is actively challenging its designation as a “Very Large Online Platform (VLOP).” If Temu's DSA-related expenses escalate, they could erode PDD's already thinning profit margins.

Investor Sentiment: A Tug-of-War Between Optimism and Caution

The regulatory spotlight on Temu has created a polarized investor sentiment. Institutional investors like BlackRock and Vanguard have maintained large stakes in PDD Holdings, citing its strong balance sheet ($50.2 billion in cash as of March 2025) and strategic partnerships, such as its collaboration with DigitBridge to support SMEs. Billionaire David Tepper's Appaloosa Management has also increased its position, betting on PDD's long-term resilience.

Yet, the risks are undeniable. PDD's stock has lost 23% of its value over the past year, reflecting concerns over regulatory headwinds in the EU and U.S. (where Temu faces product safety investigations). The EU's E-Commerce Action Plan, which includes eliminating the duty-free import threshold for low-value goods, could further pressure Temu's cost structure. Additionally, the BEUC's complaints against Temu for deceptive practices—such as fake reviews and restricted customer support—threaten to damage the brand's reputation.

Sector-Wide Implications and Competitive Dynamics

Temu's DSA challenges are not isolated. Amazon, Zalando, and Shein are also navigating the DSA's stringent requirements, with Amazon's legal battle over its VLOP status setting a potential precedent. If the EU's broad interpretation of “systemic risk” prevails, it could force platforms to absorb massive compliance costs, fragment the market, and create opportunities for regional competitors. For example, Zalando's stock has declined 20% year-to-date in 2025, reflecting investor uncertainty.

The DSA's focus on algorithmic transparency and data access is also reshaping the sector. Platforms like Temu, which rely on AI-driven personalization and “dark patterns” to drive sales, face pressure to reengineer their models. This could reduce their competitive edge against more established players like Amazon, which has leveraged its logistics and advertising ecosystems to offset regulatory costs.

Is This a Buying Opportunity or a Warning?

The question for investors is whether Temu's DSA challenges represent a strategic buying opportunity or a red flag. On one hand, PDD Holdings' $50.2 billion cash reserves and aggressive investments in logistics and technology suggest a capacity to weather regulatory storms. The company's recent focus on localizing operations in the EU—such as establishing warehouses—also mitigates some of the risks associated with the GPSR.

On the other hand, the potential for fines, compliance costs, and reputational damage cannot be ignored. The EU's regulatory environment is increasingly discriminatory toward U.S. and Chinese tech firms, with combined annual costs for the five largest U.S. tech companies reaching $2.2 billion in compliance alone. For PDD, the stakes are high: a non-compliance decision could force a strategic pivot or even retreat from the EU market.

Conclusion: Navigating the Regulatory Crossroads

Temu's DSA challenges underscore a broader trend: the EU's determination to enforce digital sovereignty and consumer protection at the expense of global tech giants. For PDD Holdings, the path forward hinges on its ability to adapt its business model to comply with the DSA while maintaining profitability. Investors should monitor three key factors:
1. Regulatory Outcomes: Will the EU's investigation lead to fines, operational restrictions, or a precedent-setting ruling?
2. Compliance Costs: How will PDD balance its ecosystem investments with the financial burden of the DSA?
3. Competitive Positioning: Can Temu maintain its low-cost edge in a regulatory environment that favors established players?

For long-term investors, PDD Holdings' strong balance sheet and market penetration in the EU suggest resilience. However, the regulatory risks are material. A strategic buying opportunity may exist if the stock corrects further on short-term fears, but caution is warranted until the EU's enforcement actions clarify the playing field. In the e-commerce sector, the DSA is not just a regulatory hurdle—it's a redefinition of the rules of engagement.