Advertisement

Exploiting Loopholes: The Dark Side of Fast Fashion Giants Shein and Temu

Dzimitry-stock.Adobe.com

“Fast fashion is not free. Someone, somewhere is paying the price.” – Lucy Siegle

The fast fashion industry is hardly new, but the recent rise of international powerhouses has sparked new conversations and insights into the industry. In fact, fast fashion on the whole has been on the upswing: the fast fashion market was valued at $122 billion in 2021 and is projected to reach $283 billion by 2030, growing at a CAGR of 10.13% from 2023 to 2030, according to Gitnux.  

This significant growth has led to a series of conversations surrounding ethical workplaces, overconsumption as a result of capitalism and the speeding up of trend cycles. But more importantly, it led to the establishment of two fast fashion powerhouses: Shein and Temu.

Despite existing since 2008, Shein, and new kid on the block Temu broke out in the United States alongside a certain infectious disease following 2020. Stuck inside and yearning for something new, many Americans found a new passion for online shopping. In fact, at the height of the pandemic, ecommerce sales accelerated by 43% from 2019 to 2020, according to the U.S. Census Bureau; however, since then it has reverted to a more normalized long-term growth trend. And while a lot of this is due to necessary shifts caused by the pandemic, such as buying groceries from Fresh Direct versus in person, much of this online shopping is still recreational. 

Advertisement

Ethical and Legal Quandaries Behind Shein and Temu’s Explosive Growth

Shein and Temu captured the hearts of millions with their immense selection and competitively low prices. They’ve continued to grow year after year since the pandemic, making billions of dollars in revenue. Shein’s 2023 revenue is believed to be north of $30 billion, with Temu on its heels at $16 billion. Temu, in its quest to conquer the U.S. market, recently dropped a whopping $21 million to produce and air a series of Super Bowl ads. But how, and why, are these fast fashion superpowers making so much money? And how long can they keep up this growth?

The secret to these Chinese powerhouses’ success lies in one very important customs loophole: A key element to their supply chain model includes “exploiting” a de minimus ruling that states that any import up to $800 per person is duty free. Effectively, they bypass “red tape” and import duties, putting local companies at a disadvantage.

To the average consumer, Shein and Temu are notable for their wide selection of items and low prices. But these offerings come at a price. For starters, unethical labor practices and conditions allow for these companies to operate at inhuman speeds. Shein, for example, adds roughly 2,000 new items to its site every single day. The company doesn’t hesitate to exhaust its workforce, with one report finding that Shein employees were clocking upwards of 75 hours a week. This, coupled with unsafe working conditions and an alleged lack of employee contracts, has sparked a discussion surrounding what really goes on in Shein and Temu factories.

Plus, this doesn’t even begin to touch on the sustainability concerns caused by such companies. Rapid production leads to rapid consumption, both of which result in more and more piles of clothes in landfills. The trend cycle has reached a micro level, with things coming in and out of fashion in mere days. Buyers are trying to keep up, and the Earth is paying the price as a result.

Additionally, the majority of these products come in from China via air freight, which raises a number of questions around sustainability, the impact of fast fashion on the environment and counterfeit goods. These companies have been known to sell knockoffs of famous clothing items and brands and are mired in a number of ongoing legal cases as a result.

The Influence of Global Politics on Fast Fashion Giants

The fact of the matter is that companies like Shein and Temu will continue to make money so long as no one stops them. Specifically, the House Select Committee on the Chinese Communist Party (CCP) released a bipartisan report pointing fingers at Shein and Temu for their ties to Xinjiang and forced labor in the region. The committee estimated that the two were responsible for over 30% of packages that enter the U.S. under the de minimis provision, totaling about 600,000 parcels per day.

This region is already under scrutiny by the U.S. with products brought in from Xinjiang subject to being held — similar to what happened to Volkswagen when it was revealed that certain of its car parts were made by a supplier using forced labor in Xinjiang.

It’s important to mention that the de minimis threshold was raised from $200 to $800 by President Obama in 2015, a time often considered the peak of globalization. This was done in an attempt to foster international trade and boost economic activity in the U.S., particularly by engaging further with China.

Since then, the tides have turned both under Presidents Trump and Biden. An example of the latter is Biden, who passed the Inflation Reduction Act and the Chips Act for the U.S. to reduce the country’s reliance on China. The result has been a turning upside-down of supply chains, with manufacturing shifting back to U.S. and other “friendly trading partners.”

Additionally, the Uyghur Forced Labor Prevention Act (2021) is now being enforced as a political weapon to limit trade with China, increasing the importance of ensuring the traceability of products. This emphasis on having a greater understanding of suppliers also will allow companies to understand their carbon footprint.

Sustainability and IPO Prospects in Fast Fashion Amid Shifting Politics

But the question remains: How sustainable is this in terms of environmental sustainability, and how sustainable is this overall approach as an IPO prospect? The use of air freight for low-cost disposable items reflects a business model that relies on avoiding import taxes, thereby giving these companies an unfair advantage over domestic retailers. This approach has become particularly contentious as political sentiment around trading with China has shifted in the last five years and is in direct correlation to lobby spending, which has increased significantly over the past 12 months in an effort to support American political candidates who promise to preserve the systems earning them money.

It is uncertain how Shein and Temu’s underlying business model can withstand current geopolitical conditions paired with growing public disapproval. Because of their low costs, they are managing to slip through the fingers of a system that is preventing other major brands from conducting questionable business practices. Will they keep getting away with it? They seem confident in themselves, with Shein even filing an IPO in the U.S. market at the end of last year. And their confidence makes sense, as they continue to rake in billions of dollars.

Fast fashion always comes at a price. But with the right people in charge and an attention to the details that are being overlooked, perhaps that price can eventually be paid by the offenders themselves.


Jon Bradford is a Co-founder and Managing Partner at Dynamo Ventures, a seed-stage investor in digital startups targeting the supply chain and mobility sectors. He is one of the most experienced early-stage investors in Europe, having made over 150 investments and launched the first accelerator bootcamp outside of the U.S. in 2009 that subsequently merged with Techstars to become their first international program. He co-founded the Ignite100 Accelerator in the UK, the Startup Wise Guys Accelerator in Estonia and the Eleven Venture Accelerator in Bulgaria. Bradford was a seed investor in digital startups such as Tray.io ($600 million valuation), SendBird ($1.1 billion), Sennder ($2 billion), Stord ($1 billion) and Chainalysis ($8.8 billion).

Feature Your Byline

Submit an Executive ViewPoints.

Featured Event

Join the retail community as we come together for three days of strategic sessions, meaningful off-site networking events and interactive learning experiences.

Advertisement

Access The Media Kit

Interests:

Access Our Editorial Calendar




If you are downloading this on behalf of a client, please provide the company name and website information below: