Mine doesn't have a "smell" but I could see how some people think the fabric could have a chemical odor.
Compared to the Graco (for example) the fabric is really not "cloth"- it's more like a plastic-y fabric (almost like parachute fabric) so it's more easily cleaned (one of the reasons we selected it). The Graco seats just have a velveteen type plush cloth that's softer but harder to clean.
I will say that many of the negative reviews about the Chicco related to the material causing baby to sweat and sometimes get a rash. Overall though, it appears that Chicco has been willing to provide a new cover made with a different material when/if that happens to your baby.
They have a new model called "Keyfit 30 Magic" that uses a different fabric to try and avoid the issue. You might want to check that out. I could only find it through BRU and amazon though.