The Journal. - Shein: Fast Fashion, Slow IPO

Episode Date: June 10, 2024

The fast-fashion giant hoped to have a splashy U.S. public offering this year. WSJ's Shen Lu explains how the divide between Beijing and Washington got in the way. Further Reading: - Shein Promised to Have a Big U.S. IPO. Its China Roots Got in the Way.  - Fast-Fashion Giant Shein Files to Go Public  Further Listening: - Shein Took Over Fast Fashion. Then Came the Backlash.  - The Mysterious CEO Leading Shein to an IPO  Learn more about your ad choices. Visit megaphone.fm/adchoices

Late last year, there was big news about Shein, the fashion company founded in China that's known for trendy looks and dirt-cheap prices. But it wasn't a flash sale or a new line of clothes. Fashion retailer Shein is considering an IPO after a meteoric rise. The brand's sales exploded during the pandemic, growing sixfold in two years.

The retailer was last valued at $66 billion and could be ready to start trading on the public markets as soon as 2024. For our colleague Shen Liu, this was an exciting moment. And we were like, oh, this is one of the biggest IPOs that we could have in years. The bankers and lawyers were thinking that an IPO could come as early as June, which is now. But Sheehan's big debut on a U.S. stock exchange looks like it's not going to happen.

What is it that got in the way? What is it that made it so hard? What is it that got in the way? What is it that made it so hard? Xi'an has run into U.S.-China geopolitical tensions as it's trying to go public. It has tried its best, but still, it's facing so much suspicion. It certainly didn't expect its IPO quest to be so turbulent and so difficult. Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudson. It's Monday, June 10th. June 10th. Coming up on the show, how one of the biggest U.S. IPOs in years got derailed.

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Ever since Sheehan exploded under the U.S. market, there have been questions about its business model and why so many of its items cost way less than other retailers. It was even the punchline of a recent Saturday Night Live skit. Unbeatable prices. Dress, $10. Shoes, $5. How so cheap? Don't worry about it. Men's t-shirt, $3.

Not made with forced labor. The skit, which technically was about a made-up company called Shimu, didn't pull any punches. What do you think, like, sort of the existence of that SNL skit says about the challenge that Sheehan has to overcome? Sheehan has to overcome? Sheehan has to overcome this huge challenge that's not just an image issue, but also it has to prove itself that it plays by Western rule books. It has tried its best, but still, it's facing so much suspicion about its labor practices and about

its supply chain practices. Shein says it has zero tolerance for forced labor. Shein is a company that sits between multiple worlds. It was founded in China, and most of its manufacturing takes place there. Its headquarters are now in Singapore, and its primary market is in the U.S. Its headquarters are now in Singapore, and its primary market is in the U.S. It's Shein's ties to China, though, that are giving the company problems with its IPO. Chinese companies don't always get more scrutiny than other firms that want to list on a U.S. stock exchange. But Shein has been dogged by concerns about its labor practices and where it sources its material. And that's because, a few years ago, reports came out about a region where

the majority of Chinese cotton comes from, called Xinjiang. The reports allege that cotton from this region was picked using forced labor. The U.S. accuses Beijing of forcing ethnic Uyghurs, a Muslim minority who live mostly in western China into factory and farm jobs against their will. The evidence suggests that China's cotton crop, which makes up a fifth of the world's total supply, could be far more dependent on forced labor than was previously thought. And they're working in factories that are in the supply chains of a number of, you know, very famous global brands that we wear every day, Nike, Adidas, Apple. China has denied that there's forced labor in the Xinjiang cotton industry.

After the allegations came out, the U.S. passed a law making it illegal to import goods linked to Xinjiang. Since then, companies, including Xi'an, have been trying to clean up their supply chains. Some U.S. lawmakers have pressed Xi'an to be more transparent about its supply chain because there were reports from a while back saying that Xi'an's clothing contained cotton from Xinjiang. And Xi'an has spent tens of millions of dollars in compliance, including trying to eliminate cotton from its supply chain.

How effective has the company been at getting cotton from Xinjiang out of its supply chain? I mean, if we look at the numbers, it's quite effective. I mean, if we look at the numbers, it's quite effective. So the R10 numbers are saying that now only 1.7% of Xi'an's cotton tested positive for unapproved regions, which means Xinjiang. The industry average is 14%. It sounds like Xi'an has actually become much better at keeping this cotton out of its supply chain than the rest of the industry. Yeah, and Xi'an's message has been, we want to be the best in class, and we're trying to do our best in reducing Xinjiang cotton that's in our clothing and look at others. We're doing better than others. Xi'an doesn't just have to worry about U.S. regulators, though. It also has to worry about Chinese ones. Remember, it still makes most of its clothes there.

The Chinese government has created problems for major IPOs in the past. Like for the U.S. listing of the Chinese ride-hailing giant Didi in 2021. So Xi'an has to be careful about what it says about cotton. 2021. So Xi'an has to be careful about what it says about cotton. For Xi'an, if they publicly address the matter on Xinjiang cotton or forced labor, it could get the company in trouble with Beijing, who has always wanted so much control over companies with substantial operations there. And companies, you know, seen by Beijing as bowing to Western criticism over Xinjiang, they risk retaliation there. For instance, in 2021, when H&M announced it would stop sourcing cotton from Xinjiang, the company was effectively deleted from the Chinese internet

by government censors. The incident sent a clear signal to other companies. The incident sent a clear signal to other companies. We know that Xiyin's public response to the Xinjiang cotton allegations has evolved. Last year, Xiyin said, we don't source cotton from Xinjiang, or even we don't source cotton from China. But later, they've changed their lines. They no longer mention Xinjiang in their public statements. They're only saying we have zero tolerance for forced labor. And an ESG report that included Xi Yan's cotton tracing, cotton testing methods and programs

has now been removed from its website. What does that say to you? That says to me that Beijing wants Xi'an to stay in line with its messaging. It seems like this puts Xi'an in between a rock and a hard place because they need to make U.S. regulators happy, but by doing so, they run the risk of upsetting the Chinese government. in between a rock and a hard place because they need to make U.S. regulators happy, but by doing so, they run the risk of upsetting the Chinese government.

Yeah, it's an awkward position to be. It's almost an impossible position for Xi'an to be in. It's very difficult for a company like Xi'an to appease both U.S. regulators and lawmakers and Chinese authorities, which have totally different and opposite interests and stents on the issue of cotton and forced labor. Threading this needle hasn't been easy. In February, Senator Marco Rubio wrote a letter to the SEC commissioner urging the agency to require Sheen to provide additional disclosures,

given the company's ties to China, saying, quote, investors deserve to know the truth about Xi'an. How Xi'an is trying to overcome its challenges in the U.S.? That's after the break. Summer is like a cocktail. It has to be mixed just right. We'll see you next time. The perfect summer mix. Bacardi. Do what moves you. Live passionately. Drink responsibly. Copyright 2024.

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before the DQ freezer closes. DQ. Happy tastes good. To smooth a path for its USIPO, Xi'an has been relying on its executive chairman, a man named Donald Tang. Donald Tang is the executive chairman of Xi'an. Donald Tang is the executive chairman of Xi'an. He is 61-year-old, originally from Shanghai, but has become a U.S. citizen for decades. He moved to the U.S. in 1982. After his then-girlfriend, now-wife, moved to the U.S.,

he sort of just picked up the phone and called the emergency line of the U.S. consulate in Shanghai and asked him for help getting a U.S. visa. He ended up getting the visa and came to the U.S. in 1982 and started his American dream there with $20. That's the maximum amount of U.S. dollars he could bring out of the country back then. Talk about a hopeless romantic. Also, his can-do spirit, you know? Yeah. And then, you know, he got his education here.

He went on to become a Bear Stearns executive for many years. Tong joined Shein in 2022. Tong joined Shein in 2022. Why did Shein want Donald Tong to do this job? Like, why did they want him? Donald has decades of experience making deals and doing business in the U.S. and in Asia. And he has had many successful experiences of taking many companies public as a Bear Stearns executive. And he has connections in different industries in both China and in the U.S. So he was like the sort of the perfect person to become Xi'an's voice and face in the West.

And what was his mandate? His mandate was to engage with all the external stakeholders, politicians, lawmakers, the press, investors in the West, to kind of sell mainly to the lawmakers and politicians that Xi'an as like a model of compliance and accountability. And Xi'an takes allegations and criticisms seriously. They want to be the best in class. They want to be seen as a global company. In public appearances, Tang frequently distances Xi'an from its Chinese roots. At an event last month at the Milken

Institute, Tang said Xi Shein's identity was different depending on how you looked at it. Its roots in manufacturing make it Chinese. Its headquarters make it Singaporean. But he said its ethos is American. If you really think about where we do business, for the most part, the biggest market that we've got

is United States of America. If you look at it that way, we are an American company. But even with these public statements and the work Sheehan's done on its supply chains, the company ran into a problem when it tried to start the IPO process in the U.S. Sheehan filed confidentially for an IPO in November with the SEC.

But the SEC told Sheehan that we won't accept your application unless you file it publicly. That means all Sheehan's financial data and all of its sensitive business information will be under the sun. Is that unusual for the SEC to ask a company to do that? I talked to a couple of securities lawyers who help companies go public, and they told me it's unusual for the SEC to do that. Typically, companies don't want to open up their books to the public if they don't have to. So when a company files its registration documents with the SEC for an IPO,

it usually does so privately at first. The information doesn't become public until later, after the SEC's had a chance to review the filing and ensure it complies with all the right disclosure requirements. If the registration needs to be resubmitted, or if a company changes its mind about going public, their information stays private. But what the SEC is asking

Xi'an to do is reveal its finances up front. Politicians, lawmakers, and Chinese government officials can all chime in, and that's not what the company wants. And even if they file publicly, it's not a guarantee the SEC will approve its application.

Sheehan still hasn't submitted a public filing. Instead, Shenlu says it's decided to look across the pond to London. Why London? What's appealing about London? London is relatively politically safe for Xi'an. And we know that the UK doesn't have a law that's preventing the import of any products from China that may involve forced labor in Xinjiang. The listing could be filed in London as soon as this week, according to people familiar with the matter. So if Xi'an is having a hard time doing an IPO in the U.S. because of these China-U.S. tensions, what does that mean for other companies that have affiliations with China?

China-U.S. tensions. What does that mean for other companies that have affiliations with China? For many years, companies like Xi'an and companies like TikTok even, who believe that they could straddle different countries and different systems and taking advantage of supply chains in one company and taking the consumer and capital market in another country. But now, the consumer and capital market in another country. But now it's looking like it's increasingly difficult to straddle two countries in an increasingly fraught U.S.-China relationship. And so if Xi'an ends up going to London, then it sends chilling effect to many other Chinese companies or companies with Chinese roots, because people would be thinking if Xi'an can't pull this off, then who else can? It's sort of like you have to pick a side. You can no longer, you know, shuttle between

the two countries and benefit from different perspectives and different experiences. It's sort of like now you have to pick one country, or maybe in the experience, you pick neither, you go somewhere else in this geopolitical environment. That's all for today. Monday, June 10th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Corey Dreebush. Thanks for listening. See you tomorrow.