The Hindu Business Line : Wal-Mart and China — Wholesale lessons for India's policy-makers

With its increasing exploitation of China's manufacturing capacities and cheap labour, Wal-Mart's dominance in the retailing market has redefined the power relations between the manufacturer and the retailer, with the benefits skewed largely in favour of the latter. China's extreme dependence on the US retail giant is a potential risk to its economy, says K. Subramanian, cautioning that the Asian tiger's experience must be borne in mind by those who advocate free flow of FDI into ret ailing in India.

CURRENTLY, two economic forces are impacting global trade. One is Wal-Mart and the other is China. The former is the conduit through which massive retailing of goods worth billions of dollars takes place. The latter is the manufacturing hub churning out goods to feed those the retail mills. A study of Wal-Mart's operations and China's manufacturing potential may have lessons for countries like India.

Wal-Mart has been described as the Beast of Bentonville or an 800-pound gorilla. China is an authoritarian state run with an iron hand by a communist party. What do they have in common?

For Wal-Mart to grow, it has to draw on the bottomless reserves of cheap or low-priced goods. For China to employ its millions, it has to exploit its capacity in manufacturing and infrastructure. If steady streams of goods do not feed Wal-Mart's super-centres, Wal-Mart cannot grow.

If steady exploitation of China's industrial and manufacturing capacities does not take place, the displaced labour from the hinterland cannot be absorbed and there will be social disruption.

In the early years, the Chinese authorities looked at the Wal-Mart alliance with caution. Once they understood its potential, they latched onto it. Wal-Mart is unique as a business model. Sam Walton had a different vision of retailing. Instead of charging a little less than his competitors, he would slash prices as much as he could and yet make a profit. Rather than operating on price breaks from wholesalers to boost his margins, he would pay less at the wholesale end and pass on the savings to customers. He hoped to make up the difference in high volumes.

The company pursued cost reduction and efficiency so ruthlessly that it reversed the role of the retailer. Wal-Mart grew phenomenally and, by the mid-1980s, Sam Walton was on the top of the Forbes list of richest Americans.

A 2002 McKinsey Global Institute report said: "Productivity growth accelerated after 1995 because Wal-Mart's success forced competitors to improve their operations." Wal-Mart's growth had social implications — it had grown too big and become self-destructive in its drive towards cost-reduction. It now has a workforce of around 1.6 million workers, including over a million in the US. It operates 3,200 stores in the US and around 1,100 outlets in nine other countries. Its dominance as a buyer is unparalleled.

As Prof Edna Bonacich of UCLA put it, "They are the largest toy seller and grocer. There are large products they control. And then the manufacturers are basically stuck having to sell them. If they don't sell to (Wal-Mart), then they are in deep trouble. So there is big volume effect."

With its dominance in the market, Wal-Mart could change the power relations between the manufacturer and the retailer. As Prof Nelson Lichtenstein of the University of California, described, "The power of Wal-Mart is such, it reversed a hundred-year history in which the manufacturer was powerful and the retailer was sort of the vassal... Now the retailer, the mass global retailer, is the centre, the power, and the manufacturer becomes the vassal, who has to do the bidding of the retailer."

Several studies established that even as Wal-Mart contributed to higher poverty rate, it did not bear the full cost of its corporate practices and shifted them to the state. Employees were unable to cover the cost of medical insurance and their wages got reduced by as much as 40 per cent.

Even as Wal-Mart opened superstores in new towns, it displaced workers employed in regional chains. Not all the displaced labour could be absorbed by the employment created in Wal-Mart super-centres, as they adopted sophisticated technology requiring lesser manpower. This resulted in unemployment. Thus, Wal-Mart created islands of low wages even as the argument was advanced that it neutralised the impact of low wages by offering cheaper products to the poor. It had anti-union policies and discouraged the formation of unions to settle wage and related benefits. Many of these practices led to the perception that the operations of Wal-Mart were a `race to the bottom' and the affluent blue-collar professionals who rose during the post-War years were being wiped out.

Soon this model created tension between the US manufacturers and the big box retailer. The manufacturers' profits were consistently reduced or eliminated by the fierce demands of Wal-Mart. This had implications on the US manufacturers and on Wal-Mart.

More and more of Wal-Mart suppliers began to outsource and locate manufacturing units in Asia, especially China. Analysts have provided examples of companies driven abroad to maintain their supply contract with Wal-Mart and to say afloat. Levi Strauss is one such. After it commenced its dealings with Wal-Mart in 2003 it had to close down two of its last factories and lay off 2500 workers in the US.

As one report said, "A company that 22 years ago had 66 clothing plants in the US — and that was also one of the most socially responsible corporations on the planet — will, by 2004, not make any clothes at all. It will just import them." Even bigger companies like GE had to outsource their production in cheaper locations with lower wages resulting in job losses in the US. In its early years, Wal-Mart promoted US goods through it much publicised "Buy American" campaign and supported domestic companies. But, under growing economic pressure, it began to source imports as far back as the 1970s. Thus began its move towards the East and its alliance with China.

Wal-Mart buys so many Chinese products that if it were a country, it would be China's sixth largest export market and eighth largest trading partner. The company was said to have established a network of 10,000 suppliers for its China operation.

Wal-Mart's eastward migration was signalled in 2002, when it decided to shift its procurement centre from Hong Kong to Shenzhen, the hub of South China's export industries. Shenzhen has the fifth largest port in the world and, as reports go, the port was constructed to suit the interests of Wal-Mart. The preparatory steps taken years before, began to yield results only after China was admitted to the WTO. Under its WTO commitments, China agreed to permit foreign retailers to enter as fully-owned subsidiaries after 2002. Wal-Mart came to have the whole of China under its coverage. The relationship between Wal-Mart and its suppliers in China is more zamindari (akin to landlord and tenants) in nature. Some reports read, "In southern China, Wal-Mart has found all the ingredients it needs to keep its `every day low prices' among the lowest in the world."

Other reports suggest how meetings between suppliers and Wal-Mart China buyers would take place at "the negotiations centre." Suppliers make their offers to Wal-Mart China buyers. Those whose offers are not accepted are summarily sent out. For them to survive, they will have to cut down costs, which can only be through reduction in wages.

Wal-Mart gives suppliers specifications for its products. Suppliers have to meet the specifications as also the price, quality, delivery schedule and the whole lot. Thus develops a clear and continuing dependence between Chinese suppliers and Wal-Mart.

Though Wal-Mart has reluctantly accepted the necessity to recognise labour unions in China, in the present conditions, wage levels take a downward spiral and working conditions deteriorate. Many observers feel that this phase of China's global integration is regressive and anti-poor. It is the fear of slowing down of the rate of growth that seems to have encouraged China to lean so heavily Wal-Mart.

The long-term prospects of China's relations with Wal-Mart are uncertain. For any reason such as currency revaluation, US sanctions or embargoes, Wal-Mart will not hesitate to close down its China shop. In the wake of that event, China will be rudderless. Some of our economists in the Ministry of Finance and Planning Commission have strongly recommended FDI in retail trade in India and quote the Chinese experience. Are they fully aware of all the facts and the implications of their prescriptions for a country like India?

(The author, a former Finance Ministry official, has extensive experience in international, financial and trade issues.)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Non-executive directors in their twilight years

Tracking market malfeasance

Japanese investments — Can China's loss be India's gain?

Gas strike: Possible versus proven

Iraq `worth it', but for whom?

Wal-Mart and China — Wholesale lessons for India's policy-makers

Being a hedgehog

Investor worries

Educational reform