Shein exemplifies a new style of Chinese multinational

Shein exemplifies a new style of Chinese multinational

AMANCIO ORTEGA, the founder of Zara, started selling bathrobes in northern Spain. Erling Persson of H&M peddled women’s clothing in a small-town shop in Sweden for decades before going global. Xu Yangtian, who founded Shein (pronounced shein) in 2008, had no tailoring experience. Instead, the creator of the fashion world’s latest sensation was a specialist in search-engine optimisation.

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This expertise helped Mr Xu gain an understanding of how to draw shoppers’ attention in the digital world. This is something he has clearly understood and has presented to a rapt audience of Western fashionistas a Chinese style. “social commerce”combines online shopping and social media. The results are remarkable when you add in a new approach to manufacturing. In 2019 Shein’s gross merchandise volume (GMV), e-commerce groups’ preferred measure of total sales on their platforms, was $2.3bn, estimates to Zheshang Securities, a Chinese broker. It is projected to rise to $20 billion this year. By 2022 analysts expect Shein’s GMV to overtake Zara’s revenues. Shein was America’s most downloaded shopping app, surpassing Amazon in May.

Mr Xu also knows how to navigate the increasing geopolitical and commercial tensions between China, the West, and China. It is difficult to say what his private company has done, but Shein probably has had more success selling directly Western consumers than any other Chinese company. America is the largest market for Shein, accounting for between 35-40% and 40% of GMV. Another 30-35% is from the west and southern Europe. It has received the backing of both American venture capitalists like Sequoia Capital and Chinese ones such as IDG Capital, a Beijing-based company. This is how you can create a new model of a Chinese multinational company.

Threading the needle
Shein’s global success rests on three pillars. The first is a turbocharged version the fast-fashion formula that offers a constantly changing range of garments at bargain-basement pricing. Zara releases approximately 10,000 new products per year, while Shein releases 6,000. “stock-keeping units”(which includes old designs in different colours) every day. While some of these items have been discontinued, the permanent virtual closet already contains 600,000. And with a typical price tag of between $8 and $30, Shein’s garments cost roughly as much as those of Primark, a resolutely offline British retailer, and 30-50% less than similar ones from Zara or H&M, according to Douglas Kim of Smartkarma, a research firm.

Shein was able to accomplish this feat because he combined a strong grasp of fashion supply chains with the kind of on demand manufacturing originally allowed by Chinese ecommerce giants like Alibaba. It all starts with design. The Shein team scans the internet to find the latest trends, using algorithms to determine what is most popular on any given day. One member of this team revealed to Chinese media that he visits thousands on websites to find ideas. These ideas are sent to another group who creates designs. They are then manufactured in smaller batches, as low as 100 items, as opposed to the usual order of thousands.

Next, Shein uses the learnings from Alibaba to test these new products simultaneously through its app. Managers have a live view of every item’s performance, since all sales are digital. If a new design is well-received, the company will order more. No more orders will be placed if consumers shrug off the new design. Shein has reduced inventory turnover to 30 days by centralizing inventory in a few large warehouses and shipping directly to customers. This is compared to an industry average of 150 days according to a consultant who works for the company.

Shein moved from Nanjing, an eastern Chinese city, to Guangzhou in order to streamline the process. Guangzhou is a major southern manufacturing hub. It has also offered factory bosses better terms and conditions than many fast-fashion counterparts. In exchange for guaranteed supply, the company guarantees that it will buy the entire batch and pay within 14 working days. This is in contrast to the industry’s 90-day delays. Around 400 of Shein’s 3,000 or so suppliers in China have signed up to this deal, says Chen Tengxi of Zheshang Securities. A custom software interface allows them to see when production is needed.

Shein has deployed digital savvy not just in its procurement but also in sales and marketing—the second pillar of its success. It has recruited hundreds of local designers from America and other countries, in addition to giving out products at no cost to thousands of influencers. They also create new clothes and market their products via social media. In 2022, the company plans to hire 3,000 more third-party designers.

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Shein has amassed 250m followers on Instagram, TikTok and many other social-media platforms through this strategy. About 70% of them shop on Shein’s mobile phone app, which boasts 24m daily active users. On any day, one in two of the world’s shoppers who buy apparel online do so using its app. This method has proven so successful that many companies want to emulate it. Gabby Lewis, a Los Angeles designer who works alongside Shein, says that as soon as Shein began showing videos of her promoting her products via social media, other fashion companies contacted her to see if they would do the same.

The third ingredient in Mr Xu’s winning formula is deft avoidance of geopolitical controversy. Shein does not take pride in its Chineseness. It sells almost nothing domestically, contrary to other Chinese brands like Huawei and Xiaomi, both telecoms-equipment giants. This weakens China’s already loose association with it in Western eyes. Western consumers have assumed, rightly, that Shein clothes are made in Asia, just as most Western brands. Many people don’t know or care that the label is Chinese. It is helpful that most American customers are small enough to avoid tariffs on Chinese exports as part of a trade war between the two countries.

Shein has also been evaded scrutiny by the Chinese Communist Party. In part that is because selling frocks is not as contentious an industry as making semiconductors or writing artificial-intelligence software. Its small presence at home has saved it from the headaches that have plagued Alibaba and other consumer-internet companies with large domestic operations. President Xi Jinping is intensifying his campaign to correct the perceived wrongs of Chinese capitalism.

For all its stupendous success, Mr Xu’s formula is not without risks. Some of these risks are related to its industry. Shein has come under fire like others in the fast-fashion industry for its waste and negative impact on the environment. Many fast-fashion brands are being questioned about whether they source cotton from the Xinjiang area in far-west China. There, the government is accused using forced labour. And its products’ low price sometimes goes hand in glove with shabby quality. One consultant notes that internet memes comparing Shein garments have been created by customers using the catalogue images. This has hurt its reputation in Europe.

Other dangers may be more specific to Shein’s heavily digital business model. Venture-capital funding rounds have valued Shein at $15bn, and it has reportedly approached banks to discuss an initial public offering. However, no one outside of the firm seems to know if it makes any money. Shein executives have not given interviews to Western journalists in recent years. Chinese media have consistently dubbed it China’s “most mysterious unicorn”. Analysts are left scratching there heads about its profitability margins.

In the short-term, this may not be an issue. Investors’ appetite for tech-adjacent startups, even loss-making ones, appears undiminished. Another Shein-specific danger may be more difficult to manage in the long-term. The company depends on American customers to collect lots of data. It may find itself in the same situation as TikTok (another popular Chinese export to America). Last year the short-video app’s Chinese owner, ByteDance, barely averted a forced sale of its prize asset to American investors over fears that Americans’ data could fall into the hands of China’s Communist rulers (an accusation that TikTok has always vociferously denied).

As with TikTok’s social-media rivals in America, Shein’s Western competitors may invoke national security as a reason to curb its relentless rise. That would be a compliment—after a fashion.

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