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Want the IPO prospectus reveals excessive dangers related to e-retailer's reliance on China

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Wish e-commerce marketplace filed its IPO prospectus on Friday, giving plenty of reasons to be skeptical to investors who may be concerned about over-reliance on China.

Founded in 2010, Wish is an online marketplace with a variety of discounted goods, from cheap homeware and clothing to electronics and toys. The app offers a range of products for just a few dollars to appeal to low to middle income consumers with cheaper options than those found on other sites, including Amazon.

Valued at $ 11.2 billion by private investors, the company has been able to keep prices down in part by sourcing most of its products from sellers in China. Wish doesn't split which portion of its 500,000+ sellers are local, but Marketplace Pulse previously estimated 94% are based in China while the remaining 6% are from the US, UK, Canada, and India.

"We first expanded our platform and focused on distributors in China, the world's largest exporter of goods for the past decade, as these distributors are able to sell quality products at competitive prices," the prospectus reads.

Amazon and Walmart also have a growing percentage of sellers in China, but they're not as dependent on Chinese merchants as Wish is. Wish's prospectus contains a number of risks associated with its concentration in China.

Sales in the market were down 8% year over year in the first quarter due to the initial outbreak of Covid-19, which caused "severe disruptions to production and supplies." Business rebounded, growing 67% in the second quarter before declining to 33% in the third quarter, partly due to ongoing "global logistics network disruption".

Changes in postal grants could harm the company in other ways in the future. Wish has long benefited from an agreement between the U.S. Postal Service and China Post, China's official postal service, that allowed packages weighing 4.4 pounds or less to be shipped to the United States cheaper than it would cost them to ship between US states

In July, the Universal Postal Union, a United Nations agency, ended the subsidy and set higher rates for incoming mail from China. To offset the surge, Wish's Chinese merchants could be forced to raise the price of their products, the file said, undermining one of the company's key assets.

Wish's reliance on Chinese merchants is also particularly exposed to U.S.-China trade relations, which became openly hostile during President Donald Trump's tenure. If the US imposes new tariffs on Chinese imports, wish sellers may have to raise prices on their products.

The company cited recent US threats to impose tariffs on imports from China worth $ 500 billion as a specific risk.

"Further escalation of trade tensions between the United States and its trading partners, particularly China, could lead to long-term changes in world trade, including trade retaliatory measures that restrict the flow of international products," the prospectus read. "Changes to our business strategy or operations that are made to adapt to or comply with such changes would be time consuming and expensive, and some of our competitors may be better able to withstand or respond to these changes."

Wish said steps had been taken to geographically diversify the trading base. In the past year the company has added more distributors from North America, Europe and Latin America. U.S. retailers have grown 268% since 2019.

The company has also invested in its own logistics offerings and has worked with third-party providers on cross-border shipments. The company is also expanding its line of private label products, which are items that are wholesaled or purchased by Wish and sold on its platform.

CLOCK: Airbnb, DoorDash, Wish, and more announced IPOs this week

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Katherine Clark