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

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 has committed to no longer using Chinese cotton in its production because the vast majority of it comes from Xinjiang, and is pushing to get its positive test rate “as close to zero as possible,” a spokesperson said. 

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.