Shein tries to thread US-China needle

HONG KONG, June 5 (Reuters Breakingviews) – Shein is threading the world’s trickiest geopolitical needle. The fast fashion phenom, now worth $66 billion, is a formidable rival to Inditex’s (ITX.MC) Zara and H&M (HMb.ST) thanks to its marketing prowess and efficient Chinese supply chains – and despite the U.S.-China trade war. But rising American pressure is forcing it to tweak its business model right as it tries to list there.

Shein, pronounced “shee-in”, leapt to success by peddling $5 crop tops and $15 bikinis on its app – so affordable that some less environmentally conscious customers have claimed to wear them once and toss them. On an average day, the company pushes out more than 6,000 new designs to keep young buyers hooked. This speed entails some legal costs; it has been frequently sued by clothing makers who allege the company is ripping off their styles, logos and images. Shein denies doing so deliberately.

Shein can afford lawyers, however. Rivals are struggling to defend against its brutal combination of cheap prices and blistering-fast product development. Last year, its top line surged 46% to $23 billion, per the Wall Street Journal, surpassing $22 billion at H&M and outpacing the 18% growth at Inditex. It is now targeting $59 billion in sales by 2025 as it gears up for an initial public offering this year, according to the Financial Times.

As with contract electronics manufacturer Foxconn, Shein has been accused of unsafe working conditions, low pay, excessive overtime, and using forced labour as it seeks to wring efficiencies from its supply chains. It denies any wrongdoing, and claims its secret sauce is technology and data; it mines viral fashion trends and styles online and feeds the ideas in real time to its network of manufacturers, most of which are located in the southern province of Guangdong. These factories are integrated across a single platform that shares data on sales, capacity, procurement of fabrics and more.

The strategy is to push small batches of 100 to 200 units of a given style into the market, then crank up production quickly if they sell well. A Boston Consulting Group report notes that this model allows Shein to keep inventory turnover at just 40 days. That is far lower than Uniqlo-owner Fast Retailing’s (9983.T) 147 days, as estimated by Morningstar analysts. It also has a slick social media strategy that mobilises TikTok and Instagram influencers.

Another not-so-secret ingredient to success is a trade-war loophole. Overseas packages shipped directly to U.S. customers are exempt from the standard 16.5% import duty and 7.5% tariff on Chinese goods provided they are worth less than $800. Bernstein estimates the average order on Shein is worth around $80. Moreover, most of these packages are not subject to the usual customs inspections that check for intellectual property violations or banned cotton from Xinjiang.

OBSCURE ORIGINS

Shein has stayed low profile. Not much is known about its founder and CEO, Chris Xu. He is described as American-born and educated in some media reports, but as Chinese in others; references to the company’s roots in the eastern Chinese city of Nanjing have been removed from its online corporate history. The company sources in China, but only sells in overseas markets, and its structure is shrouded in mystery. Reuters reported last year that the group’s de facto holding company is based in Singapore, where Xu has become a permanent resident.

But American politicians see Shein as Chinese. Fashion might not pose the same user data security risks as TikTok’s short-form video apps do, but U.S. officials want to close the trade loophole, and two dozen lawmakers called for the Securities and Exchange Commission to halt Shein’s IPO until it verifies it does not use Uyghur forced labour.

In reaction Shein is setting up manufacturing hubs in Mexico, Brazil and potentially India. That will be expensive; the company’s net profit margin was a razor-thin 3.5% last year, according to the Wall Street Journal, far below bricks and mortar rival Inditex’s 13%.

Distancing itself from its Chinese roots won’t be enough. Questions of who controls the company and the depth of its ties to China will keep cropping up ahead of its highly anticipated market debut. The company last month raised $2 billion at a valuation one-third lower than the $100 billion price tag it secured than a year earlier, but it still remains among the world’s most valuable unicorns.

Nor will diversifying supply chains geographically necessarily appease environmental and social activist investors who are demanding and getting more visibility into operations. Shein’s latest ESG report falls short of its rivals’. H&M, for example, now fully discloses names and addresses of nearly all its suppliers and looks on track to reach its goal of having 100% recycled or sustainably sourced materials by 2030. Whatever its nationality, sustainability and transparency would look good on Shein.

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CONTEXT NEWS

Singapore-headquartered Shein has raised $2 billion in its latest fundraising round at a $66 billion valuation, the Wall Street Journal reported on May 18, citing people familiar with the matter. Existing investors Sequoia Capital, General Atlantic and Mubadala led the round.

The online fashion company, founded in China, generated $800 million in net profit from $23 billion in revenue in 2022, the report added, and plans to grow sales by 40% this year.

Separately, Shein is exploring plans to build a factory in Mexico as one of its manufacturing hubs outside China, Reuters reported on May 23, citing sources. The company also announced in April that it will invest 750 million reais ($149.90 million) in Brazil to establish a network of textile manufacturers.

Editing by Pete Sweeney and Katrina Hamlin

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