Illustration by Elham Ataeiazar
It’s no secret that Shein has ambitions to go public, however the fast-fashion juggernaut can have to beat a slew of hurdles before it may well win over Wall Street.
The digitally native retailer skyrocketed to prominence throughout the Covid-19 pandemic after shoppers across the globe fell in love with its fashion-forward designs, infinite assortment and dirt-cheap prices.
The corporate has a reported valuation of $66 billion and has tapped former Bear Stearns investment banker Donald Tang to be its executive chair and public face.
As Shein looks to rework itself from a $5 T-shirt company into a world powerhouse equipped to compete with legacy retail giants, a public offering has long been rumored to be its end goal.
But because it tries to cap off its meteoric rise with a U.S. market debut, those ambitions have been mired by its ties to China, together with mounting allegations that it uses forced labor in its supply chain, violates labor laws, harms the environment and steals designs from independent artists.
Shein is taking steps to deal with those issues and show U.S. regulators and Congress it may well be trusted to go public within the U.S., where scrutiny of companies founded in China has intensified in recent times. The corporate is facing increasing pressure from lawmakers, including an investigation from the newly formed House Select Committee on the Chinese Communist Party, and has found itself caught within the geopolitical rivalry between the U.S. and Beijing.
“IPO investors without delay wish to see an easy story,” Matt Kennedy, a senior IPO market strategist for Renaissance Capital, told CNBC. “I could definitely see some prospective investors just wanting to avoid the deal entirely, at the least until a few of those things are resolved.”
If Shein can overcome these hurdles while maintaining the strategy that has fueled its success, it could change into a winner on Wall Street, said one longtime retail advisor who spoke anonymously because they don’t seem to be authorized to talk publicly about specific corporations.
“For all of the bad press and publicity and news, they have been incredibly revolutionary in how they’re producing product … in order that to me says they have something really good there that other retailers can learn from,” said the advisor. “They must deploy their innovation in a way that is going to deal with these issues after which in the event that they can do this in a way that they still have the identical sort of compelling business on top then wow, are they winning.”
Shein told CNBC it has not filed to go public and doesn’t have plans for a public offering. Still, reports have suggested an initial public offering could come as soon as 2024.
Here’s what the corporate might want to overcome before it may well turn that dream right into a reality, and what it’s doing to get there.
Forced labor and a battle with Congress
The House panel has been investigating Shein since May, after it heard expert testimony that the corporate was sourcing cotton and a variety of other materials from China’s Xinjiang region. Several months earlier, Bloomberg tested garments the corporate shipped to the U.S. and located some had been made with cotton from Xinjiang.
Evidence of genocide, torture and compelled labor against the Uyghur ethnic group within the region prompted lawmakers to ban the import of cotton and other products made in Xinjiang in 2021. But critics say the items can still get past U.S. borders due to a tariff law loophole referred to as de minimis.
Under the availability, packages valued under $800 should not charged import duties and are not subject to the identical oversight from U.S. customs, which is tasked with screening packages to make sure items from banned regions don’t come into the country.
Contrary to traditional retailers that typically import large batches of merchandise and send them to U.S.-based warehouses for distribution, Shein often ships its products on to American consumers through its network of Chinese suppliers.
The committee is investigating Shein over concerns that Uyghur forced labor is getting used in its supply chain and has gone undetected due to de minimis provision. Similar probes into Temu, Nike and Adidas are ongoing.
Rep. Mike Gallagher, center, chair of the House Select Committee on the Chinese Communist Party, speaks at a news conference following a GOP caucus meeting on the Republican National Committee offices in Washington, D.C., on Feb. 28, 2023. He’s joined by fellow Republicans Rep. Elise Stefanik, left, and Majority Whip Steve Scalise.
Chip Somodevilla | Getty Images
The panel in June determined “the overwhelming majority of products” Shein ships to the U.S. “are less prone to face the identical level of customs scrutiny that other retailers might face on a proper entry.” The committee has not yet drawn conclusions about forced labor in Shein’s supply chain. A committee aide told CNBC the probe is ongoing.
In response to the investigation, some Shein executives have frolicked at its Washington, D.C., outpost to satisfy with lawmakers and check out to assuage their concerns.
“As an organization that abides by each local law, we will cooperate with any investigation and supply any information that is requested from us,” Marcelo Claure, the corporate’s newly minted group vice chair and former SoftBank CEO, told CNBC in an interview.
When asked about claims of forced labor in Shein’s supply chain, Claure told CNBC he doesn’t “consider those allegations are correct.”
“I can wholeheartedly say that there is no such thing as forced labor, or anything even near that, because it pertains to the [Shein] manufacturers that I visited” in China, Claure said, referencing visits he made prior to now.
Nonetheless, the corporate previously acknowledged that cotton from Xinjiang has been present in its raw materials through Oritain, a third-party supply chain firm that may test cotton fibers and trace them to specific farms. Oritain works with a variety of major retailers, including Goal, Costco and Ralph Lauren. On average, 13% of Oritain’s cotton tests come up positive for problematic regions, Rupert Hodges, Oritain’s chief industrial officer, told CNBC.
As of July, 2.1% of Shein’s cotton tests got here up positive for unapproved regions, Shein said. Oritain confirmed the outcomes with CNBC. When a test got here up positive, “production of affected products was stopped and any products containing cotton related to the positive tests were removed on the market,” a Shein spokesperson said.
The corporate declined to share test results from August on but said they’ve “remained consistent” with the inspections conducted through July.
A view of cotton being harvested in a field in Xinjiang, China, on Nov. 10, 2021.
Vcg | Visual China Group | Getty Images
A Shein spokesperson identified the positive test rate is lower than the style industry average, but said any positive test is “unacceptable.” The retailer is pushing to get its positive test rate “as near zero as possible” and has committed to not using Chinese cotton in its production, a spokesperson said. Experts say the overwhelming majority of Chinese cotton comes from Xinjiang.
Nonetheless, forced labor can still show up in other parts of the provision chain, said Chloe Cranston, the top of thematic advocacy programmes at Anti-Slavery International. Shein relies on 1000’s of contracted manufacturers, mostly in China, to design, produce and ship its products. Staff at those factories might be there against their will under state-sponsored labor transfer programs, said Cranston.
“It is not only about where the cotton is coming from, it’s the way it’s ginned, it’s the way it’s spun, it’s the way it’s became final product and so forth, and we see Uyghur forced labor risks across all these tiers,” Cranston told CNBC. “Oritain or comparable corporations are a part of the solutions, but they don’t seem to be the only solution themselves.”
In response, the corporate said internal Shein auditors and third-party firms conduct regular and unannounced audits of its manufacturing facilities to make sure they don’t seem to be engaging in forced labor or other violations.
In 2022, 11% of audits turned up “zero tolerance violations,” including child labor, forced labor and wage violations, and 28 suppliers were terminated consequently, based on the corporate.
Nonetheless, the audits only cover a fraction of Shein’s sprawling supply chain.
Last yr, Shein audited just 1,941 manufacturers out of about 5,400 total suppliers. The audited contractors accounted for about 85% of Shein-brand products by procurement value, but represented lower than half its suppliers, which provides a limited view of the retailer’s supply chain and the way widespread labor violations are.
Outside of its Shein brand, the corporate also produces items under sub brands, including Dazy, Cuccoo and Glowmode.
Shein has ramped up audits this yr and plans to conduct inspections that cover 90% of Shein-brand products by procurement value, an organization spokesperson said.
Chinese ties and a latest home in Singapore
As Shein looks to sanitize its popularity amid rising geopolitical tensions between Washington and Beijing, it’s quick to indicate that it’s based in Singapore and merely founded in China.
By some accounts, Shein was founded in Nanjing, China, in 2008. But the corporate’s official origin story began in 2012.
Any references to Shein’s birthplace are absent from the “About” sections on its website. It registered its headquarters in Singapore in 2019, and has been based there since 2021, a Shein spokesperson said. The retailer appears to have de-registered its original company in Nanjing in 2021, based on reports.
Clothes displayed on the Shein headquarters in Singapore on June 19, 2023.
Ore Huiying | Bloomberg | Getty Images
Shein’s decision to maneuver its headquarters to Singapore several years ago and plant seeds outside of China could help pave the way in which for its IPO, said Shang-Jin Wei, a professor who teaches Chinese business and economy, in addition to finance and economics, at Columbia University’s graduate schools. So long as Shein imports and exports mass amounts of product out and in of China, a top priority for the region, it could remain within the Chinese Communist Party’s good graces as Beijing looks to curtail foreign investment, said Wei.
“If Shein can credibly claim it isn’t a Chinese company, it is going to reduce the sensitivity within the U.S. At the identical time, vis-a-vis Chinese regulators, if Shein can claim it will not be a Chinese company, then presumably lots of the regulatory requirements from the Chinese security regulation side don’t apply to Shein as well,” Wei told CNBC.
Still, the majority of Shein’s sprawling supply chain stays in China, and its move to Singapore has done little to quell concerns from lawmakers. Some are frightened the corporate remains to be closely aligned with the Chinese government, and fear data about Shein’s American customers could wind up in its hands.
“So long as you are in China or within the Chinese territory, which means the CCP has got their hooks into you. I’m not convinced that the CCP doesn’t have control over all of those corporations,” Montana’s Attorney General Austin Knudsen told CNBC in an interview. “If the CCP demands information and demands your organization’s cooperation, you are going to provide it to them. So, no, being in Singapore doesn’t make me feel higher.”
Wei agreed that Shein’s exposure to China in its supply chain might be a risk for the corporate.
“If the Chinese government does wish to limit the corporate, after all it has some ways, so long as Shein is dependent upon China-based suppliers,” said Wei.
In response to concerns about data security, a Shein spokesperson said it stores U.S. data inside Microsoft and Amazon’s cloud services “in data centers and regions situated inside america.”
The corporate declined to comment on whether it could be subject to Chinese securities laws if it sought offshore investment. As of publication, the corporate was not in a position to make clear whether its mysterious CEO Sky Xu remains to be a citizen of China but did say he “resides in Singapore.” Shein’s CEO has also been known as Chris Xu.
When asked if China considers Shein to be a Chinese company, Claure said he has “no idea.”
“I have been investing in global corporations for a few years and I might consider Shein to potentially be essentially the most global company I even have ever been involved with,” said Claure.
A employee makes clothes at a garment factory that supplies Shein in Guangzhou, China.
Jade Gao | AFP | Getty Images
With regards to whether Shein’s Chinese supply chain is a risk, Claure said Shein is not any different from other major corporations that do the majority of their manufacturing in China. Nonetheless, Shein is working to localize its supply chain and is within the technique of constructing out manufacturing hubs in Brazil and Turkey. It’s currently evaluating options in India and Mexico, as well, said Claure.
“I do not think it’s fair to say that we’re moving away from China, but we’re getting as close as we are able to to our customers with a quite simple intent and that’s, the closer we’re to our customers, the faster we are able to fulfill their needs,” said Claure.
In August, Knudsen, together with 15 other attorneys general, sent a letter to U.S. Securities and Exchange Commission Chair Gary Gensler imploring the agency to make sure Shein and other foreign corporations are following U.S. law before they’ll go public within the U.S.
He has also sparred with Chinese-based TikTok over concerns that it’s spying on U.S. consumers. He proposed laws that banned the usage of the app in Montana, which is slated to take effect in January, absent legal challenges.
Knudsen is considering escalating his fight with Shein by issuing civil investigative demands against the corporate that may require it to reveal certain financial and labor documents.
“I’ll make the identical offer [to Shein] that I made with TikTok. Move wholly to the U.S. and cut all ties with the CCP and superb, we’ll drop all of this,” Knudsen said.
Copyright infringement, fickle feelings on sustainability
Shein faces one other risk because it is routinely sued for copyright infringement over allegations it stole designs and used them in products without permission. In July, three designers sued the corporate, alleging Shein’s copyright infringement is so extreme, it may well be considered racketeering.
In response, Claure said Shein has a “zero tolerance policy” for copyright infringement but acknowledged “mistakes do occur.” He said that if the corporate finds infringement, it “immediately” stops production of the item.
An organization spokesperson added Shein takes disciplinary motion against designers and manufacturers when copyright infringements occur and affected artists can submit takedown notices if they think their work had been copied.
Further, the corporate uses image-recognition technology to search out cases of potential infringement and conducts manual reviews.
Customers hold shopping bags outside the Shein Tokyo showroom in Tokyo on Nov. 13, 2022.
Noriko Hayashi | Bloomberg | Getty Images
Beyond its legal troubles, Shein often faces criticism for its fast-fashion strategy due to likelihood that its clothes will find yourself in a landfill after a number of uses as consumers change into increasingly conscious of sustainability.
“We’ve heard that younger generations are very rather more concerned concerning the environment, they’re rather more concerned about these issues and topics,” said Sonia Lapinsky, a partner and managing director with AlixPartners’ retail practice. “And yet, we proceed to see retailers who’re really bad examples of this, even a number of the worst, do incredibly well, even with the younger consumer.”
Under looming SEC rule changes, Shein could be required to reveal its greenhouse gas emissions if it were to go public. However the retailer has already released that information in its 2022 ESG report, and it’s unclear just how much concerns about its environmental record are hitting sales.
“Pressure even comes from the buyer saying, ‘We’re demanding this, and we don’t need to buy at retailers who cannot show a superb rating.’ I do not think we have seen that yet and it sort of stays to be seen whether that is to return,” said Lapinksy. “Is the pressure just going to return from regulators and investors and boards? Or is the buyer actually going to react with their dollars and their wallet?”
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