Shein has used a nimble supply chain and duty-free shipping to send dresses and T-shirts for as little as $2 in squishy bags directly from China to hundreds of millions of shoppers.
Now, a business model that has let it capture fleeting fashion trends is confronting a ripple of challenges, not just in the U.S., where Shein’s plans for a multibillion-dollar stock listing has collapsed, but also around the world.
The Biden administration said this month it intends to take executive action to stop textiles from China entering the U.S. under a trade exemption covering packages valued at or below $800—which has benefited China-founded Shein and its e-commerce rival Temu enormously.
Countries including South Africa and Turkey have recently closed similar loopholes, while the European Union is looking to do the same.
Because Shein relies on what in the U.S. is called the de minimis exemption, the impact of new regulations “could be much higher for Shein than other brands and retailers,” said Sheng Lu, professor of fashion and apparel studies at the University of Delaware.
Shein, now based in Singapore, works with thousands of factories, mostly in China, which produce thousands of new styles daily. It places small orders to suppliers, relies on real-time data to gauge demand and replenishes orders as needed. By air shipping its wares to its consumers in more than 150 countries directly, it avoids high inventory costs, a key to its ultralow prices.
Shein critics also say it promotes excessive consumption, hurts the environment and uses high levels of toxic chemicals in its products.
Shein says it makes import compliance a priority and its success is anchored in its on-demand business model. It says that model reduces inventory waste and that it works with third-party agencies to conduct regular safety tests.
It has responded to its multiplying challenges with a charm offensive, spending on lobbying and allocating more than $50 million to ensure it and its thousands of suppliers are complying with regulations where Shein operates.
Shein’s reclusive Chinese founder and chief executive, Sky Xu, hasn’t addressed the company’s challenges publicly, leaving lobbying work to Executive Chairman Donald Tang. A former Bear Stearns executive based in Los Angeles, Tang travels frequently to Washington and to European capitals to meet regulators and politicians.
Senior company leaders say Xu and Tang have agreed to have their compensation cut by 30% if the company fails to reach certain compliance metrics, for example on how much it increases its use of recycled polyester or improves its standing in indexes of fashion companies’ transparency.
During the first two quarters of 2024, Shein spent more than $2 million on U.S. federal lobbying efforts, according to OpenSecrets, a Washington-based nonprofit tracking campaign finance and lobbying, almost as much as it spent on lobbying for all of 2023.
Shein at the beginning of the year expected revenue would grow around 30% in 2024, one person close to the company said, rather than the 40% growth it has seen in the past few years. The person said compliance efforts could further lower this year’s sales growth.
The company, which doesn’t publicly disclose its financials, had about $32 billion in sales and $1.6 billion in profit in 2023, the person said.
With the meteoric rise of bargain sites such as Shein and Temu, U.S. lawmakers have introduced several proposals to restrict the de minimis tax provision. The Biden administration said it intends to propose new rules that would subject about 70% of textile and apparel shipments from China to tariffs they have avoided under the de minimis exemption and require them to go through a more formal entry process.
Frances Townsend, a senior Shein adviser, said the company would accept reforms and work with regulators and lawmakers to make sure they are feasible.
Industry analysts say Shein would likely still have a price advantage over U.S. retailers such as Amazon and Walmart because of its supply-chain efficiencies, but a slowed-down entry process could hurt its response to new fashion trends.
U.S. politicians also have long pushed for Shein’s assurance that it doesn’t use cotton from Xinjiang, where Washington accuses Chinese authorities of deploying forced labor in its repression of Uyghurs, allegations Beijing denies.
In June, the same month Shein filed to list shares in London, a U.K. human-rights organization launched a legal campaign to stop the listing over concerns of its labor practices.
Shein says it has “zero tolerance” for forced labor and is committed to respecting human rights. Since 2022, it has worked with Oritain, a company that verifies the origin of raw materials, to weed out Xinjiang cotton from its supply chain. An Oritain spokesperson said Shein has recently expanded its testing volumes.
Over the past year, Shein has speeded up diversifying its supply chain. The company now manufactures in Turkey and Brazil and has built warehouses in several countries. Shein has also started recruiting local sellers in the markets where it operates for its Amazon-like marketplace. Experts and industry players say such efforts could help Shein mitigate Xinjiang concerns and potentially circumvent tariff regulations.
Ultimately, challenges for Shein have to do with its ties to China.
Townsend, one of the Western executives Shein has brought on to help address the challenges the company faces in the U.S., said the company has made concerted efforts to engage with lawmakers and politicians concerned about China’s influence.
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She said Western standards for compliance are novel for Chinese entrepreneurs such as Xu. “I think over time, he has come to accept that it is part of the cost of doing business,” she said. “It’s part of being a global brand.”
Shein’s rival Temu has a different approach. This year, the bargain site backed by Chinese e-commerce company PDD Holdings has focused on acquiring users outside the U.S. Earnest Analytics data show that 25% fewer U.S. shoppers made purchases on Temu between January and August, while Shein saw an uptick in consumer growth in the same period.
Regulations targeting companies’ environmental footprint is also a thorny issue for Shein, which relies on air shipping and synthetic materials.
In July, two EU sustainability and human-rights regulations became law. The same month, Shein pledged an investment of about $270 million in the U.K. and Europe over the next five years to address textile waste.
Write to Shen Lu at shen.lu@wsj.com
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Appeared in the September 24, 2024, print edition as 'Shein’s Business Model Comes Under Threat'.
