- [Narrator] Over the past few years, one Chinese company has thrived in the online fast fashion industry reaching a valuation of 66 billion dollars in 2023, and controlling 40% of the U.S. market. It's- - Shein. - Shein. - I say Shein. - It's Shein. - Shein is known for $2 T-shirts and $7 pants with prices even lower than its competitors. Shein made its U.S debut in 2015, and the brand's sales exploded during the pandemic growing sixfold in two years. The company generated an estimated 23 billion dollars in revenue in 2022. And its filed to go public in the U.S. - Shein takes fast fashion to a different level, and they're on top of every micro trend. - [Narrator] But there's a larger story behind Shein's low prices. A congressional report found that Shein uses a tax exemption to cut costs, and the company released a report that cited cases of involuntary labor in its supply chain. This is the economics of Shein. Scrolling through Shein's website can feel endless. - We offer thousands of new items per day. - [Narrator] But Shein only initially produces 100 to 200 units of each new product. - Shein's designs originate with Shein designers and with our Shein X third-party designers. - [Narrator] As customers browse those designs, Shein has technology that monitors user engagement activity. When a customer shows interest in an item by hovering over it, clicking on it, or adding it to their cart, Shein takes note, then it creates new designs based on data from popular items. This way, the retailer can test how popular an item is with its customers. If it does well, Shein starts producing more. - This differs from traditional retail where orders can often be placed in the 10,000 to 100,000 copies of a garment and can be placed between three and six months in advance. - [Narrator] And while it's fast at creating new designs, it's also quick to go through them. A Boston Consulting group report found that Shein has an inventory turnover rate of 40 days. That same report found that Shein is twice as fast as other competitor retailers like H&M and Zara. - The small batch model is a matter of controlling the cost and controlling the inventory wastage so that they won't have a large number of clothes that are sitting unsold in their warehouses in China or in the U.S. or anywhere else in the world. - [Narrator] The company calls this an on-demand model, and to support this on-demand model and lower prices, Shein hires thousands of smaller manufacturers. It took the journal to film in one of its third-party supplier factories in Dongguan. - Our designers will identify an item, design it, prepare a spec for it, and then they'll put it into our supplier management system, which will identify a contract manufacturer. That contract manufacturer will procure the supplies necessary to produce that garment from a network of suppliers that Sheen has approved. - [Narrator] If a design is popular, Shein's ordering platform can automatically place another order with its platform working in real time. - They're able to see as demand for a particular product is either waxing or waning in the marketplace so they can adjust their operations accordingly. And this concentration of information allows our suppliers to efficiently structure their own business to be able to meet demand at near real time. - [Narrator] By ordering in smaller batches. Shein says it can reduce the risk of excess unsold inventory. - It means that we don't carry excess inventory waste when we produce garments. That saves around 30 to 40% in cost of goods sold on the garments alone. - [Narrator] But while less inventory waste in the factory may lower prices for consumers, environmental activists say it might not lead to lower waste levels overall. - [Shen Lu] Critics are saying that because Shein's clothing is so cheap, people are buying a lot of it. And because fashion conscious young people may retire some of their Shein quicker than other more expensive clothing that actually may cost inventory wastage after the consumption happened. - Oh my goodness, there's so much. - [Narrator] A 2023 UBS report found that the average U.S. Shein shopper reported spending $100 per month on women's clothing. That's about 60% more than the average U.S. female consumer and critics argue that there's even more behind how the brand is able to keep prices low. - Retailer Shein is in hot water once again. - Shein has faced accusations of worker abuse. - The brand has recently come under fire. - Shein's on demand business model is not the only reason why its products are so cheap. It's also benefiting from cheap labor in China. - Shein has not been fully transparent about its supply chains. In 2022, Shein released the results of its supplier audits, but unlike some other retailers, Shein didn't disclose who its suppliers were or where they were located. The audits reported some incidents that involve what the company calls involuntary labor, but didn't mention exactly how many or where these incidents occurred. The Wall Street Journal's calculations found that these audits accounted for about 36% of Shein's contracted manufacturers. The company said in a statement to the Wall Street Journal, "Shein is committed to providing a safe and fair work environment for all our suppliers employees. We pay manufacturing suppliers competitive rates so they can pay fair wages to their workers." Shein says it's committed about $70 million towards improving supplier factory conditions and training workers. Congress is investigating Shein's labor practices and whether the company sources cotton from China's Xinjiang region. The U.S. government has accused Chinese authorities of using forced Muslim Uyghur labor, which Beijing denies. - Some U.S. lawmakers have pushed Shein to be more transparent about their supply chain. - [Narrator] In a statement to WSJ, the company says it has zero tolerance for forced labor, does not have contract manufacturers in Xinjiang and doesn't source cotton from China. Fashion Analysts say Shein hasn't provided evidence to back up these statements including a list of its suppliers, which goes against industry standard. And in addition to its on-demand model and low labor costs, Shein also keeps prices low by taking advantage of a U.S. tax exemption, which allows low-valued packages to enter the U.S. tariff-free. Under the de minimis tax rule, shipments sent to individual buyers in the U.S. aren't subject to tariffs if they're worth less than $800. According to a report from the U.S. House of Representatives, 30% of all packages shipped to the United States each day under the de minimis rule are from Shein and its rival Temu. Between the two companies, that adds up to millions of packages. Shein says that it supports reforming the de minimis exemption. Meanwhile, the valuation has fallen. The company's $100 billion valuation in 2022 dropped by a third in a fundraising round earlier this year, and Temu, which launched last September, overtook a larger share of the U.S. market last June. Recently, Shein has tried to improve its image through social media amidst environmental and labor criticisms, but with limited success. Shein brought a group of influencers to tour factories in China. - [Shen Lu] The tour didn't really help address a lot of the criticisms that people have about Shein. - [Narrator] The company has also moved its headquarters from Nanjing China to Singapore. Shein is also trying to diversify its supply chain outside of China. With this move, Shein is also adding new manufacturers in other countries. Although the majority of Shein's supply chain is still in China, the company promised to invest $150 million to train 2000 Brazilian manufacturers over the next three years. And Shein has recently partnered with Forever 21 and acquired roughly one third of the fashion brand's operator, Spark Group. - Shein has in recent months, been trying to pivot to a marketplace model, which allows third-party sellers to sell products directly to consumers as Shein expands globally and is trying to capture more of market share in the U.S. and in other countries around the world. (upbeat music)

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