By Krystal Hu and Arriana McLymore

Online fashion giant Shein is exploring plans to build a factory in Mexico, as one of its manufacturing hubs outside China, sources familiar with the matter told Reuters.

The factory, which will produce Shein items and is part of the retailer's push to localize production, could shorten shipping time and cut distribution costs for Shein customers in Latin America. It follows its announcement that it will build a manufacturing network in Brazil to serve as a global customer base.

Shein was founded in China and manufactures most of its products there, but is now seeking to diversify. The company sells $10 dresses and $5 tops and has taken market share from other affordable fashion retailers.

Now headquartered in Singapore, Shein competes with PDD Holdings' Temu, which sells low-priced items ranging from clothing to electronics from China in the U.S.

A final location for the Mexico site has not been decided yet, said the sources, who requested anonymity as the discussions are private.

Shein will use funds from its recent capital raise of $2 billion from investors including Mubadala and Sequoia China to fund the expansion, as it eyes an initial public offering in the U.S. Despite a valuation cut to $66 billion in its latest funding round, the retailer still posts annual revenue growth of 40%, one of the sources added.

Shein, in an emailed statement, declined to comment on the plan, but said it is committed to localization as it expands to new markets.

"SHEIN’s localization strategy allows us to shorten delivery times to customers while expanding product variety and supporting local economies," said Marcelo Claure, chairman of SHEIN Latin America, in the statement.

Shein is "continuing to explore nearshoring options," he added, referring to manufacturing closer to the point of sale.

Shein recently offered an online marketplace platform in Brazil, allowing third-party merchants to sell their own goods on the Shein app and website. A similar marketplace would be launched next in the U.S. before rolling out globally.

The upcoming Mexico factory will not house items from third-party vendors, sources said. Claure confirmed that Shein is considering bringing its "marketplace model to other markets across Latin America."

Shein has come under fire in markets including India, Brazil and the U.S. for its supply-chain links to China. A bipartisan group of two dozen U.S. representatives in May called on the Securities and Exchange Commission to halt Shein’s initial public offering until the company verifies it does not use forced labor, Reuters reported.

Shein has previously said it has "zero tolerance" for forced labor and requires suppliers to follow the International Labour Organization’s core conventions. A spokesperson referred to the same comments on Tuesday, when asked for a response on the matter.

Rights groups and governments have accused China of forced labor and internment of the mainly Muslim ethnic minority in the Xinjiang region. Beijing denies any rights abuses. Shein has denied that it ships from the Xinjiang region.

(Reporting by Krystal Hu and Arriana McLymore in New York; Additional reporting by Kate Masters in New York City and by Daina Beth Solomon in Mexico City; Editing by Matthew Lewis and Muralikumar Anantharaman)