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."