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Wal-Mart in China: Can the World's Largest Retailer Succeed in the World's Most Populous Market?
Gereffi, Gary; Ong, Ryan. Harvard Asia Pacific Review9.1 (Winter 2007): 46-49.

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Wal-Mart has already attained legendary status in the annals of American business. Its rise from a small five-and-dime discount chain founded by Sam Walton in rural Arkansas in 1962 to the largest company in the United States, with $350 billion dollars in sales, nearly 7,000 stores and 1.8 million employees worldwide, boggles the mind. Every description of Wal-Mart is built on superlatives: it is the world's largest private employer, it generates the most sales, and it occupies the top spot in many U.S. retail categories-from food and footwear to toys and television sets. Wal-Mart uses the most sophisticated supply-chain management system with the largest computer network to source goods from the lowest-wage countries, which it sells for the lowest prices to the most customers in America, the world's biggest consumer market. On the surface Wal-Mart's market power seems unassailable, but not everything is going smoothly in the empire that Sam Walton built. Wal-Mart's unparalleled dominance has generated a growing backlash in the United States from a variety of sources: from the competition-"mom and pop" stores and large retailers alike-who can't compete with WalMart's everyday low prices; from U.S. suppliers who are squeezed by Wal-Mart's unrelenting demands to cut costs to the bone, which often requires moving factories offshore; from communities, uncomfortable with the congestion and commercial control that Wal-Mart superstores leave in their wake; and from workers, who disdain Wal-Mart's low wages, scant benefits, and militantly anti-union stance. Overseas, Wal-Mart's expansion has also been bumpy. Mainly through the acquisition of its rivals, it has become the dominant retailer in Canada, Mexico, and the United Kingdom, but it has done poorly and pulled out of other markets, such as Germany, Japan, and South Korea. Wal-Mart has become the whipping boy for international labor campaigns that cite its international suppliers' abusive labor practices, and it is chastised for fueling a global "race to the bottom" in search of the cheapest suppliers, most of which are now located in China. The story of Wal-Mart in China has moved to center stage. China has garnered notoriety in recent decades as "the workshop of the world," sucking in huge international orders to feed

its giant export machine. However, Wal-Mart's main preoccupation today is not with enlisting more Chinese suppliers, but rather its concern over how to attract Chinese shoppers. Ironically, the icon of global capitalism is mortgaging its future to a considerable extent on a joint venture with the world's biggest communist country. THE LURE OF THE CHINA MARKET As the world's most successful retailer, Wal-Mart isn't used to being in second place. Despite its setbacks in other international markets, Wal-Mart sees China as a new frontier, second only to America in its appeal and potential. But Wal-Mart faces stiff competition in seeking to conquer the most populous market on the planet, and it will need to rethink key elements of its U.S. strategy if it hopes to succeed in China. The Chinese retail market is estimated at $860 billion for 2006, making it the world's seventh largest, and it is projected to grow to over $1 trillion by 2009 and to a whopping $2.4 trillion by 2020 (The Economist, 2006). However, it remains highly fragmented, with the largest retail chain, Shanghai Brilliance (Bailian), posting 2005 sales of 72.1 billion yuan (approximately US $9 billion). In 2005, Wal-Mart ranked #11 on the list of China's major stores with sales of 9.9 billion yuan, behind the other top foreign companies, France's Carrefour (17.4 billion yuan, #5 ranking) and Taiwan's Trust-Mart (13.2 billion yuan in sales and a #7 ranking). China's top 10 retailers hold less than two percent of the market, and the top 100 account for about 6.4 percent of national sales (A.T. Kearney 2005). To put this in perspective, Wal-Mart has a larger share of the relatively concentrated U.S. retail market (nearly 8 percent of consumer sales) than do the top 100 retailers combined in China. Until recently, Wal-Mart (like Carrefour and its other main foreign competitors) faced restrictions that limited their stores to certain cities and areas, but those rules have been relaxed. In October 2006, Wal-Mart International head Mike Duke said Wal-Mart plans to add 25 stores in China by the end of the year, beyond the 10 already opened. By 2011, Wal-Mart expects to hire an additional 150,000 employees (Associated Press 2006a, 2006b). NEW STRATEGIC IMPERATIVES In its quest to be successful in China, Wal-Mart confronts three strategic imperatives: go global, go native, and go up-market. Go Global. Wal-Mart currendy generates one-fifth of its global sales from its international division, and it aims to have one-third of future revenues come from its overseas stores (Gilbert, 2006). Wal-Mart's operations in China are still fairly small, though, in comparison with the rest of the world. In the United States, Wal-Mart had nearly 4,000 stores by the end of 2006, and global sales for the fiscal year ending January 31, 2007 are projected to be nearly $350 billion. Wal-Mart International boasted more than 2,700 stores, with the largest concentrations being in Mexico (845), Japan (391), the United Kingdom (326), Brazil (296), and Canada (279). Wal-Mart also owns stores in Argentina, Puerto Rico, and Central America (J. Lee 2006). In 2006, Wal-Mart divested themselves of stores in Germany and South Korea, citing lack of market penetration in each case. These retreats have led some to question how well Wal-Mart can adapt to other countries, which will result in far greater scrutiny of Wal-Mart's fortunes in the China market.

Go Native. Stung by its setbacks elsewhere, Wal-Mart's strategy in China is to "go native." Local adaptation is a key reason for Carrefour's success, and Wal-Mart has also adapted its model to the Chinese market (D. Lee 2006, Naughton 2006). In the grocery section of its stores, Wal-Mart originally offered meat and seafood American-style, in plasticwrapped, freshness-dated containers. To Chinese consumers, however, "fresh" means that you can pick it out yourself and watch it wriggle - so they took a pass. Ia response, Wal-Mart brought Chinese wet markets indoors, allowing consumers to pick out their own dinner. Now when opening stores in a new city, Wal-Mart teams arrive five months early in order to research local consumption habits and to fine-tune store merchandise. Wal-Mart also has been working with universities and the government to help promote better training and education for China's burgeoning retail economy. In November 2004, Wal-Matt donated US $1 billion to Tsinghua University to establish China's first-ever institute for retailing research. Its executives frequently give lectures and arrange seminars for officials and businessmen to learn about the "Wal-Mart way" (Schafer 2004). Go Up-Market. Perhaps Wal-Mart's biggest departure from its U.S. strategy is to shed its discount label, and to target China's vast emerging middle class. In the United States, WalMart's mantra of "everyday low prices" -advertising quality goods at bargain-basement prices-is the core of its business strategy. Wal-Mart's target market are low-income consumers, and it does considerably better in rural and suburban areas than in large cities. In China, Wal-Mart executives have their eyes squarely on the growing middle class, not on China's large poor population who can not afford Wal-Mart goods. As a result, Wal-Mart merchandise is more upscale and aligned with middle class materialism than in the United States. Luxury goods like baijiu, a fine liquor, and down-filled duvets appear on the shelves next to far cheaper goods. China's Wal-Marts also feature a more varied grocery section, with displays from eel tanks to elaborate prepared-food counters. China's retail market is booming, especially for its middle class customers. According to a recent McKinsey study, China currently boasts more than one million wealthy urban households (with income exceeding 100,000 yuan per year, or approximately US $12,500)and more than 42 million middle class households, with annual incomes between 25,000 and 100,000 yuan (roughly $3,100 to $12,500) (The Economist 2006). More than 200 million middle-class households are expected by 2015, which will give China a more sizeable middle class than found in either America or Europe. Wal-Mart still has a fairly small number of stores in China, given the country's massive retail sector. In November 2006, Wal-Mart operated 67 stores across China, with a high concentration in the more developed areas of China's southern and eastern provinces, and it employed 36,000 people. Shenzhen, China's richest city, alone had 12 Wal-Mart stores. WalMarts in China, like the stores of other large retailers, are predominantly in urban areas. Chinese consumers drive less and visit the grocery more often than their US counterparts, which results in lower bills per visit but more regular trips (Correy 2006). THE TRUST-MART TAKEOVER

The largest and most important expansion effort by Wal-Mart in China to date has been its purchase of Taiwanese retailer Trust-Mart for US $1 billion. Trust-Mart currently aruns 108 stores and has over 30,000 employees in more than 20 provinces across China. In 2005, it posted sales of $1.7 billion, concentrated in the low-end, discount segment of the retail market (Coleman-Lochner and Cimilluca 2006). Wal-Mart outmaneuvered several other big name foreign retailers in this purchase, including archrival Carrefour and other firms aspiring to leadership in the China market, such as Britain's Tesco, China's Lianhua, and Germany's Metro. Assuming that the merger is approved by Chinese regulators, Wal-Mart plans to incorporate Trust-Mart's stores over the next three years. This should propel Wal-Mart ahead of Carrefour to become China's top foreign retailer. WAL-MART'S CHALLENGES IN CHINA While the Trust-Mart acquisition is likely to elevate Wal-Mart to the status of China's largest foreign retailer, it will not guarantee Wal-Mart's success in China. Wal-Mart must confront a set of bigger challenges in order to prosper in the Chinese market and beyond.

Leadership. Wal-Mart in China is searching for new leadership. Its former head, Joe Hatfield, was a perfect example of Wal-Mart's Bentonville-bred culture-a thirty-year Wal-Mart veteran with a thick Southern accent and a ten-plus year history in China. However, Wal-Mart has decided it needs more local experience to take its Chinese expansion to another level. The new head of Wal-Mart in China is Ed Chan, a Hong Kong businessman who was regional director for Dairy Farm International, running supermarkets, convenience stores, and drug stores across Asia. Logistics and Supply Chains. China remains a crucial location for sourcing the goods that Wal-Mart sells worldwide. Wal-Mart's Global Procurement Center moved from Hong Kong to Shenzhen in 2002, and the retailer's supplier networks are heavily concentrated in China.

There are rumors that Wal-Mart would like to extend its procurement to incorporate parts of northern and eastern China, possibly by putting another procurement center in Shanghai. Its China operations alone are served by 15,000 suppliers, and Wal-Mart China claims that over 95% of its goods sold in China are sourced locally (The Economist 2006; J. Lee 2006; D. Lee 2006). More than 70% of the goods sold in Wal-Mart stores around the world are made in China, with Chinese exports to Wal-Mart estimated at about $25 billion for 2006. If Wal-Mart were a country, it would rank just above the United Kingdom ($24 billion) and just below all of Africa ($26.6 billion) as an export market for Chinese-made goods. Wal-Mart's global sourcing strategies are forcing changes in the way that Chinese suppliers operate. WalMart is known for its tough bargaining stance and its willingness to pit suppliers against each other for lower bids. Wal-Mart dictates to its suppliers how they should make their goods, from product specifications to packaging, and how much profit they should take. It has sought to graft this strategy onto China's commercial culture, using Wal-Mart's Global Procurement Center to cull through the legions of factory managers that arrive every day to pitch their products. Yet the supply chain power that makes WalMart a paradise for shoppers creates a cutthroat market for suppliers, and managers in China are rebelling against razorthin margins and worker discontent is growing as well. Logistics and distribution are serious problems for Wal-Mart too. In the United States, one of Wal-Mart's key cost advantages is its supply-chain efficiency, led by major investments in information technology and inventory management. In China, however, Wal-Mart faces several difficulties. The first is China's infrastructure-while more efficient than most developing countries, there are still plenty of bottlenecks. Some of these are physical, relating to roads, ports, and so on. Others are attitudinal-many Chinese suppliers have a hard time adjusting to the rigorous standards of modern supply chain management. A final bottleneck is one of scale: Wal-Mart's operations in China are not yet large enough to reap efficiencies from its logistics system. Labor Issues. Labor is one of the most significant concerns for Wal-Mart, both in the United States and in China. Wal-Mart, like other foreign retailers, has long been under pressure from the Chinese government to allow branches of the state-run trade union, the All China Federation of Trade Unions, into its stores. In the United States, Wal-Mart has fought fiercely against unions, claiming they will drive up labor costs and damage the company's competitive position. In China, however, labor unions are vastly different from their Western counterparts, both in structure and in practice. Unions are officially run by the government and tend to be more promanagement than in other countries, while also financially supporting the communist party structure and helping to secure social order (Naughton 2006). In 2004, Wal-Mart China agreed to allow unions into its stores, but with the stipulation that workers ask for representation-a condition that, in a society like China, prevented union entry. Yet the Chinese government persisted in its efforts and sent organizers to Wal-Mart workers. In July 2006, Wal-Mart finally accepted the first union into its Chinese stores, with the formation of the Wal-Mart Labor Union at its stores in Quanzhou in Fujian province. By

the end of 2006, workers had set up unions at all of Wal-Mart's locations in China and boasted total membership of around 6,000 (Lague 2006).

Wal-Mart is also confronting labor issues within its supplier factories. While Wal-Mart does not directly own any of these firms, critics argue that the power imbalance between Wal-Mart and its suppliers helps to spawn labor problems that exist in these factories. Many labor rights activists have documented these problems, such as the case of reported labor code violations at Guangzhou's Winbo Industrial Corporation (International Labor Rights Fund 2006). Legitimacy. In response to mounting criticism, Wal-Mart established a detailed factory certification program in the early 1990s. Under this system, Wal-Mart carries out annual

audits on each factory from which it purchases goods. The company, however, still faces major criticism that this system is mainly for show. Factory audits are only once per year and are announced in advance, allowing time for factories to "clean up their act" for the visit. Workers are often coached on what to say-and even if they are not, many Chinese are reluctant to speak up about problems in fear of potential retribution. More importantly, Wal-Mart's tough relationship with its suppliers can be a disincentive for bettering conditions. Wal-Mart is extremely demanding with its suppliers, and uses cost as its bottom line. If a supplier cannot perform well by this metric, then Wal-Mart will threaten to take its business elsewhere. Thus, for firms struggling to compete for Wal-Mart's massive orders, labor concerns seem secondary. If forced to choose between higher labor standards or lower production costs, many firms are likely to choose the latter. WHITHER WAL-MART? Wal-Mart has come a long way from its "Buy America" slogans in the mid-1980s. Today it is the epitome of a company that wins through globalization: it maximizes its global reach on the supply side in order to capture American demand with a profit-maximizing combination of low prices and low wages. Nothing symbolizes the global logic of Wal-Mart better than the evolution of its relationship with China. Whereas Wal-Mart once viewed China purely as a low-cost export platform to send cheap goods to the U.S. market, today it views the Middle Kingdom as a strategic market in its own right in Wal-Mart's drive to satisfy the world's consumers. But China is not an easy place to navigate. Its retail market is highly fragmented, and its suppliers are still learning the intricacies of international supply chains. Dealing with these challenges has forced Wal-Mart to reassess its own culture and strategies. The question today is whether the lure of the China market will further internationalize Wal-Mart's corporate culture and change many of the practices that have defined its US strategy for decades, or whether Wal-Mart will try to mold China to its American image. Wal-Mart has already made some adjustments for the China market, from the layout of its stores to its factory management practices. But the relationship between the world's largest firm and the world's most populous nation is still in its early stages, and how it plays out will help shape the future of global capitalism for decades to come. Sidebar Every description of Wal-Mart is built on superlatives: it is the world's largest private employer, it generates the most sales, and it occupies the top spot in many U.S. retail categories-from food and footwear to toys and television sets Sidebar In November 2004, Wal-Mart donated US $1 billion to Tsinghua University to establish China's first-ever institute for retailing research. Sidebar Wal-Mart has come a long way from its "Buy America " slogans in the mid-1980s. Today it is the epitome of a company that wins through globalization: it maximizes its global reach on the supply side in order to capture American demand with a profit-maximizing combination of

low prices and low wages. AuthorAffiliation Gary Gereffi is Professor of Sociology and Director of the Center on Globalization, Governance &Competitiveness at Duke University in Durham, North Carolina. Ryan Ong is a Research Associate at CGGC.

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Title Wal-Mart in China: Can the World's Largest Retailer Succeed in the World's Most Populous Market? Gereffi, Gary; Ong, Ryan Harvard Asia Pacific Review 9 1 46-49 4 2007 Winter 2007 2007 IN FOCUS Harvard Asia Pacific Review Cambridge United States Business And Economics--Economic Situation And Conditions, Political Science--International Relations 15221113 Magazines English General Information 206109882 http://search.proquest.com/docview/206109882?accountid=13552

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