SHEIN is the fast fashion brand that took the world by storm. At one point in 2022 it was valued at $100 billion. But by 2024, that number had crashed to “just” $27 billion, and it’s now operating at a loss.
And while you might not be in fast fashion, the drop in SHEIN’s value has a more than a few lessons for anyone doing business in China. Here are a couple of quickies:
First, SHEIN’s innovation was indeed revolutionary. That it spawned so many copies and government actions against it in the West shows just how significant its business model was.
So if you don’t yet believe, it’s time to admit that China is innovative. Whether from 0 to 1 or 1 to 100, when that innovation is combined with China's world-leading supply chains, they are formidable and even dominant in just about any industry they enter. The age of “China just copies things” is mostly over.
Yes, most of the world’s copies still come from China, but China is also leading frontier technologies and business models from biotech and AI to EV's and batteries. Underestimate China at your own peril.
But as SHEIN’s drop in value shows, even global dominance can be stopped, or at least slowed 75%, with focused tariffs and the closure of loopholes. This should be a lesson for governments moving forward: that tariffs applied specifically and loopholes closed can have the desired effect on Chinese industry.
Second, The Chinese government is involved in every business decision of any significance in China—yes, even in “private” companies. Not only is SHEIN either hiding their supply-chain diversification (likely) or not doing it (unlikely) because of fear of the Chinese government, but they are limited in what they can openly/legally do at all due to restrictions on what China allows its companies to do outside of China. Just because you need to diversify your supply chain to meet the demands of foreign customers (the result of successfully following the Chinese government’s instruction to Go Out), does not mean that you will be allowed to move jobs, production, capital, IP, or equipment out of China. Just ask Apple. Or Manus.
This is significant for anyone doing business in China. You personally, and your company's assets can all be "stuck" in China for indefinite and undisclosed amounts of time and for unclear reasons. I have an associate who has been exit-banned from leaving China due to a retaliatory counter suit in Chinese court. Rule of law in China doesn't work in China the same was as it does in the West. Ditto transparency, justice, "private" companies.
Third, SHEIN has lost billions (with a B) of USDollars in the last two years, in part because the Chinese government didn’t do anything—meaning, it didn’t say “no” but also wouldn’t overtly give SHEIN the blessing it needed to go through with the London-approved IPO listing. When you’re beholden to the government, business decisions can’t be made independently. And everyone in China is beholden to the government.
This is where companies are caught between a rock hard place. They need government approval, or at least apathy, to be successful in China. But being successful means that companies are on the State’s radar and likely seen as a financial tool for multiple levels of government—all holding different priorities than corporate profit.
This is a great example of wuwei (无为, 無為) or inaction. Usually it means that things happen though nothing is explicitly done. In this case it’s something that the government ostensibly wants (companies Going Out) and is approved abroad and would be good financially for the company, but isn’t going to happen because no one with authority is going to actually say yes or no due to conflicting, unclear, or new priorities. China want global companies, but it doesn't want it's IP/capital to leave China (they know what happened to every Western firm that came to China!!). You can’t have common prosperity in China if your Chinese companies are leaving the country.
Further to this point, if you can achieve government priorities and subsequently also make a profit, bonus. But don’t expect that “common prosperity,” “capitalism with Chinese characteristics,” and whatever other policy is currently in vogue is designed to help you make money unless you’re specifically part of the current 5 Year Plan. And even then, once that plan has ended you can be taxed retroactively for subsidies you received!! Like Frank says, You’re riding hight in April, and shot down in May.
The willingness of the Chinese govt to now retroactively cancel subsidies and then use those changes to go after decades of “back taxes” in midst of the worst non-covid economy in the last 20 years should clearly show whose priorities come first. Not private businesses’.
SHEIN is just one example of a company that was a model in China, only to be caught in mixed signals, global tariffs, conflicting government priorities.
Yes, China is a big market. But that doesn’t mean it’s blue ocean. You need to know more than your product and industry to be successful. You need the combined map of local culture, government, judicial, market, supply chain, and industry to navigate successfully.
SRI has been working in China and Southeast Asia since 1989 and can help you make the most of your China experience. Call or email today for a free consultation and introduction.
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