Shein opens up about forced labor, data privacy as it looks to clear key hurdles before possible U.S. IPO (2024)

It's no secret that Shein has ambitions to go public, but the fast-fashion juggernaut will have to overcome a slew of hurdles before it can win over Wall Street.

The digitally native retailer skyrocketed to prominence during the Covid-19 pandemic after shoppers across the globe fell in love with its fashion-forward designs, endless assortment and dirt-cheap prices.

The company 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 transform itself from a $5 T-shirt company into a global powerhouse equipped to compete with legacy retail giants, a public offering has long been rumored to be its end goal.

But as it tries to cap off its meteoric rise with a U.S. market debut, those ambitions have been mired by its ties to China, along 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 address those issues and show U.S. regulators and Congress it can be trusted to go public in the U.S., where scrutiny of businesses founded in China has intensified in recent years. The company 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 in the geopolitical rivalry between the U.S. and Beijing.

"IPO investors right now want to see a straightforward story," Matt Kennedy, a senior IPO market strategist for Renaissance Capital, told CNBC. "I could certainly see some prospective investors just wanting to avoid the deal entirely, at least until some of those things are resolved."

If Shein can overcome these hurdles while maintaining the strategy that has fueled its success, it could become a winner on Wall Street, said one longtime retail advisor who spoke anonymously because they're not authorized to speak publicly about specific companies.

"For all the bad press and publicity and news, they've been incredibly innovative in how they're producing product … so that to me says they've got something really good there that other retailers can learn from," said the advisor. "They have to deploy their innovation in a way that's going to address these issues and then if they can do that in a way that they still have the same kind 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 company will need to overcome before it can turn that dream into a reality, and what it's doing to get there.

The House panel has been investigating Shein since May, after it heard expert testimony that the company was sourcing cotton and a range of other materials from China's Xinjiang region. Several months earlier, Bloomberg tested garments the company shipped to the U.S. and found some had been made with cotton from Xinjiang.

Evidence of genocide, torture and forced labor against the Uyghur ethnic group in 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 because of a tariff law loophole known as de minimis.

Under the provision, packages valued under $800 are not charged import duties and aren't subject to the same oversight from U.S. customs, which is tasked with screening packages to ensure 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 directly to American consumers through its network of Chinese suppliers.

The committee is investigating Shein over concerns that Uyghur forced labor is being used in its supply chain and has gone undetected because of the de minimis provision. Similar probes into Temu, Nike and Adidas are ongoing.

The panel in June determined "the vast majority of products" Shein ships to the U.S. "are less likely to face the same level of customs scrutiny that other retailers might face on a formal 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 spent time at its Washington, D.C., outpost to meet with lawmakers and try to assuage their concerns.

"As a company that abides by every single local law, we're going to cooperate with any investigation and provide any information that's requested from us,"Marcelo Claure, the company'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 "believe those allegations are correct."

"I can wholeheartedly say that there's no such thing as forced labor, or anything even close to that, as it relates to the [Shein] manufacturers that I visited" in China, Claure said, referencing visits he made in the past.

However, the company previously acknowledged that cotton from Xinjiang has been found in its raw materials through Oritain, a third-party supply chain firm that can test cotton fibers and trace them to specific farms. Oritain works with a range of major retailers, including Target, Costco and Ralph Lauren. On average, 13% of Oritain's cotton tests come up positive for problematic regions, Rupert Hodges, Oritain's chief commercial officer, told CNBC.

As of July, 2.1% of Shein's cotton tests came up positive for unapproved regions, Shein said. Oritain confirmed the results with CNBC. When a test came up positive, "production of affected products was stopped and any products containing cotton associated with the positive tests were removed for sale," a Shein spokesperson said.

The company declined to share test results from August on but said they've "remained consistent" with the inspections conducted through July.

A Shein spokesperson pointed out the positive test rate is lower than the fashion industry average, but said any positive test is "unacceptable." The retailer is pushing to get its positive test rate "as close to zero as possible" and has committed to no longer using Chinese cotton in its production, a spokesperson said. Experts say the vast majority of Chinese cotton comes from Xinjiang.

However, forced labor can still show up in other parts of the supply chain, said Chloe Cranston, the head of thematic advocacy programmes at Anti-Slavery International. Shein relies on thousands of contracted manufacturers, mostly in China, to design, produce and ship its products. Workers at those factories could be there against their will under state-sponsored labor transfer programs, said Cranston.

"It's not only about where the cotton is coming from, it's how it's ginned, it's how it's spun, it's how it's turned into final product and so on, and we see Uyghur forced labor risks across all these tiers," Cranston told CNBC. "Oritain or comparable companies are part of the solutions, but they aren't the sole solution themselves."

In response, the company said internal Shein auditors and third-party firms conduct regular and unannounced audits of its manufacturing facilities to ensure they're not 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 as a result, according to the company.

However, the audits only cover a fraction of Shein's sprawling supply chain.

Last year, 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 less than half its suppliers, which provides a limited view of the retailer's supply chain and how widespread labor violations are.

Outside of its Shein brand, the company also produces items under sub brands, including Dazy, Cuccoo and Glowmode.

Shein has ramped up audits this year and plans to conduct inspections that cover 90% of Shein-brand products by procurement value, a company spokesperson said.

As Shein looks to sanitize its reputation amid rising geopolitical tensions between Washington and Beijing, it's quick to point out that it's based in Singapore and merely founded in China.

By some accounts, Shein was founded in Nanjing, China, in 2008. But the company'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, according to reports.

Shein's decision to move its headquarters to Singapore several years ago and plant seeds outside of China could help pave the way for its IPO, said Shang-Jin Wei, a professor who teaches Chinese business and economy, as well as finance and economics, at Columbia University's graduate schools. As long as Shein imports and exports mass amounts of product in and out of China, a top priority for the region, it could remain in the Chinese Communist Party's good graces as Beijing looks to curtail foreign investment, said Wei.

"If Shein can credibly claim it's not a Chinese company, it will reduce the sensitivity in the U.S. At the same time, vis-a-vis Chinese regulators, if Shein can claim it is not a Chinese company, then presumably many of the regulatory requirements from the Chinese security regulation side do not apply to Shein as well," Wei told CNBC.

Still, the bulk of Shein's sprawling supply chain remains in China, and its move to Singapore has done little to quell concerns from lawmakers. Some are worried the company is still closely aligned with the Chinese government, and fear data about Shein's American customers could wind up in its hands.

"As long as you're in China or in the Chinese territory, that means the CCP has got their hooks into you. I am not convinced that the CCP does not have control over all of these companies," Montana's Attorney General Austin Knudsen told CNBC in an interview. "If the CCP demands information and demands your company's cooperation, you're going to give it to them. So, no, being in Singapore does not make me feel better."

Wei agreed that Shein's exposure to China in its supply chain could be a risk for the company.

"If the Chinese government does want to limit the company, of course it has many ways, as long as Shein depends on China-based suppliers," said Wei.

In response to concerns about data security, a Shein spokesperson said it stores U.S. data within Microsoft and Amazon's cloud services "in data centers and regions located within the United States."

The company declined to comment on whether it would be subject to Chinese securities laws if it sought offshore investment.As of publication, the company was not able to clarify whether its mysterious CEO Sky Xu is still a citizen of China but did say he "resides in Singapore." Shein's CEO has also been referred to as Chris Xu.

When asked if China considers Shein to be a Chinese company, Claure said he has "no idea."

"I've been investing in global companies for many years and I would consider Shein to potentially be the most global company I have ever been involved with," said Claure.

When it comes to whether Shein's Chinese supply chain is a risk, Claure said Shein is no different from other major companies that do the bulk of their manufacturing in China. However, Shein is working to localize its supply chain and is in the process of building out manufacturing hubs in Brazil and Turkey. It's currently evaluating options in India and Mexico, as well, said Claure.

"I don't think it's fair to say that we're moving away from China, but we are getting as close as we can to our customers with a very simple intent and that is, the closer we are to our customers, the faster we can fulfill their needs," said Claure.

In August, Knudsen, along with 15 other attorneys general, sent a letter to U.S. Securities and Exchange Commission Chair Gary Gensler imploring the agency to ensure Shein and other foreign companies are following U.S. law before they can go public in the U.S.

He has also sparred with Chinese-based TikTok over concerns that it's spying on U.S. consumers. He proposed legislation that banned the use 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 company that would require it to disclose certain financial and labor documents.

"I'll make the same offer [to Shein] that I made with TikTok. Move wholly to the U.S. and cut all ties with the CCP and fine, we'll drop all of this," Knudsen said.

Shein faces another risk as 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 company, alleging Shein's copyright infringement is so extreme, it can be considered racketeering.

In response, Claure said Shein has a "zero tolerance policy" for copyright infringement but acknowledged "mistakes do happen." He said that if the company finds infringement, it "immediately" stops production of the item.

A company spokesperson added Shein takes disciplinary action against designers and manufacturers when copyright infringements occur and affected artists can submit takedown notices if they suspect their work had been copied.

Further, the company uses image-recognition technology to find cases of potential infringement and conducts manual reviews.

Beyond its legal troubles, Shein frequently faces criticism for its fast-fashion strategy because of the likelihood that its clothes will end up in a landfill after a few uses as consumers become increasingly conscious of sustainability.

"We have heard that younger generations are very much more concerned about the environment, they're much more concerned about these issues and topics," said Sonia Lapinsky, a partner and managing director with AlixPartners' retail practice. "And yet, we continue to see retailers who are really bad examples of this, even some of the worst, do incredibly well, even with the younger consumer."

Under looming SEC rule changes, Shein would be required to disclose its greenhouse gas emissions if it were to go public. But 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.

• This bank just hiked its 1-year CD rate to a fresh high
• How to invest $1 million for the next decade, according to private bankers and wealth advisors
• This highly profitable industry is booming as the population ages
• Bank of America sees risks for employers as insurance coverage of weight loss drugs grows