Shrink embroidery can produce by normal embroidery machine, but need to match with the water soluble under thread and heat shrinkage interlining (The interlining would wrinkle up after heating).  The fabric would be in shrinkage because of wrinkling of interlining.  Then, the fabric would be separated as the under thread dissolved in washing process.  Kindly noted that the shrink effect is obvious in synthetic fabric only