I N F O C U S

Wal-Mart in ChinaCan the World's Largest Retailer Succeedin the World's Most Populous Market?

GARY GEREFFI AND RYAN ONG

Wal-Mart has already attained legendary status in theannals of American business. Its rise from a small five-and-tiime discount chain founded by Sam Walton in ruralArkansas in 1962 to the largest company in the UnitedStates, with S350 billion dollars in sales, nearly 7.000stores and 1.8 million employees worldwide, boggles themind. Every description of Wal-Mart is built on superla-tives: it is the world's largest private employer, it generatesthe most sales, and it occupies the top spot in many US.retail categories—from food and footwear to toys andtelevision sets. Wal-Mart uses the most sophisticatedsupply-chain management system with the largest com-puter network to source goods from the lowest-wagecountries, which it sells for the lowest prices to the mostcustomers in America, the world's biggest consumer mar-ket.

On the surface Wal-Mart's market power seems unas-sailable, but not everj-thing is going smoothly in the em-pire that Sam Walton built. Wal-Mart's unparalleleddominance has generated a growing backlash in theUnited States from a variety of sources; from the compe-tition—"mom and pop" stores and large retailers alike—who can't compete with Wal-Mart's everyday low prices;from US. suppliers who arc squeezed by Wal-Mart's unre-lenting demands to cut costs to the bone, which oftenrequires moving factories offshore; from communities,uncomfortable with the congestion and commercial con-trol that Wal-Mart superstores leave in their wake; andfrom workers, who disdain Wal-Mart's low wages, scantbenefits, and militantly anti-union stance.

Overseas, Wal-Mart's expansion has also beenbumpy. Mainly through the acquisition of its rivals, ithas become the dommant retailer in Canada, Mexico,and the United Kingdom, but it has done poorly andpulled out of other markets, such as Germany, Japan,and South Korea. Wal-Mart has become the whippingboy for international labor campaigns that cite its inter-national suppliers' abusive labor practices, and it is chas-tised for fueling a gktbal "race to the bottom" in searchof the cheapest suppliers, most of which are now lo-cated in China.

The story of Wal-Mart in China has moved to centerstage. China has garnered notoriety in recent decades as"the workshop of the world," sucking in huge interna-tional orders to feed its giant export machine. However,Wal-Mart's main preoccupation today is not with enlistingmore Chinese suppliers, but rather its concern over howto attract Chinese shoppers. Ironically, the icon of globalcapitalism is mortgaging its future to a considerable ex-tent on a joint venture with the world's biggest commu-nist country.

T H E LURE OF THE CHINA MARKET

As the world's most successful retailer, Wal-Mart isn'tused to being in second place. Despite its setbacks inother international markets, Wal-Mart sees China as a newfrontier, second only to America in its appeal and poten-tial. But Wal-Mart faces stiff competition in seeking toconquer the most populous market on the planet, and itwill neetl to rethink key elements of its US. strategy if ithopes to succeed in China.

The Chinese retail market is estimated at S860 billionfor 2006, making it the world's seventh largest, and it isprojected to grow to over SI trillion by 2009 and to awhopping $2.4 trillion by 2020 (The Economist, 2006).However, it remains highly fragmented, with the largestretail chain, Shanghai Brilliance (Bailian), posting 2005sales of 72.1 billion yuan (approximately US S9 billion).In 2005, Wal-Mart ranked #11 on the list of China's ma-jor stores with sales of 9.9 billion yuan, behind the othertop foreign companies, France's Carrefour (17.4 billionyuan, #5 ranking) and Taiwan's Trust-Mart (13.2 billionyuan in sales and a #7 ranking). China's top 10 retailershold less than two percent of the market, and the top 100account for about 6.4 percent of national sales (A.T.Kearney 2005). To put this in perspective, Wal-Mart has alarger share of the relatively concentrated U.S. retail mar-ket (nearly 8 percent of consumer sales) than do the top100 retailers combined in China.

Until recently, Wal-Mart (like Carrefour and its othermain foreign competitors) faced restrictions that limitedtheir stores to certain cities and areas, but those rules

46 Harvard Asia Pacific

Epety description of Wal-Mart is built onsuperlatives: it is the world's largest privateemployer, it generates the most sales, and it

occupies the top spot in many VS. retail cate-gories—from food andfootii'ear to toys and

television sets

have been relaxed. In October 2006, Wal-Mart Interna-tional head Mike Duke said Wal-Mart plans to add 25stores in China by the end of the year, beyond the 10already opened. By 2011, Wal-Mart expects to hire anadditional 150,000 employees (Associated Press 2006a,2006b).

NEW STRATEGIC IMPERATIVES

In its quest to be successful in China, Wal-Mart con-fronts three strategic imperatives: go global, go native,and go up-market.

Go Global. Wal-Mart currendy generates one-fifth ofits global sales from its in-ternational division, and itaims to have one-third offuture revenues come fromits overseas stores (Gilbert,2006). Wal-Mart's opera-tions in (!!hina are still fairlysmall, though, in compari-son with the rest of theworld. In the United States,

Wal-Mart had nearly 4,000 stores by the end of 2006, andglobal sales for the fiscal year ending January 31, 2007 areprojected to be nearly S350 billion. Wal-Mart Interna-tional boasted more than 2,700 stores, with the largestconcentrations being in Mexico (845), Japan (391), theUnited Kingdom (326), Brazil (296), and Canada (279).Wal-Mart also owns stores in Argentina, Puerto Rico, andCentral America (]. Lee 2006). In 2006, Wal-Mart di-vested themselves of stores in Germany and South Ko-rea, citing lack of market penetration in each case. Theseretreats have led some to question how well Wal-Mart canadapt to other countries, which will result in far greaterscrutiny 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 adapta-tion is a key reason for Carrefour's success, and Wal-Marthas also adapted its model to the Chinese market (D. Lee2006, Naughton 2006). Inthe grocery section of itsstores, Wal-Mart originally

seafoodin plastic-

wrapped, freshness-datedcontainers. To Chinese con-sumers, however, "fresh"means that you can pick it out yourself and watch it wrig-gle - so they took a pass. In response, U'al-Mart broughtChinese wet markets indoors, allowing ctmsumers to pickout their own dinner. Now when opening stores in a newcity, Wal-Mart teams arrive five months early in order toresearch local consumption habits and to fine-tune storemerchandise.

Wal-Mart also has been working with universities andthe government to help promote better training and edu-cadon for C hina's burgeoning retail economy. In No-

offered meat and/Vmerican-stj'le,

In November 2004, Wal-Mart donatedUS S1 billion to Tsinghua Universityto establish China's first-ever institute

for retailing research.

vember 2004, Wal-Mart donated US %\ billion toTsinghua University to establish China's first-ever institutefor retailing research. Its executives frequently give lec-tures and arrange seminars for officials and busmessmento learn about the "Wal-Mart way" (Schafer 2004).

Go IJp-Mtirkef. Perhaps Wal-Mart's biggest departurefrom its US. strategy is to shed its discount label, and totarget China's vast emerging middle class. In the UnitedStates, Wai Mart's mantra of "everyday low prices" —ad-vertising qualit)- goods at bargain-basement prices—is thecore of its business strategy. Wal-Mart's target market arelow-income consumers, and it does considerably better in

rural and suburban areas than in largecities.

In China, Wal-Mart executives havetheir eyes squarely on the growingmiddle class, not on China's largepoor population who can not affordWal-Mart gttods. As a result, Wal-Mart merchandise is more upscaleand aligned with middle class materi-alism than in the United States. Lux-

ury goods like baijiu, a fme liquor, and down-filled duvetsappear on the shelves next to far cheaper goods. China'sVC'al-Marts also feature a more varied grocery section,with displays from eel tanks to elaborate prepared-foodcounters.

China's retail market is booming, especially for itsmiddle class customers. According to a recent McKinseystudy, China currently boasts more than one millionwealthy urban households (with income exceeding100,000 yuan per year, or approximately US $12,500)—and more than 42 million middle class households, withannual incomes between 25,000 and 100,000 yuan(roughly $3,100 to 312,500) (The Economist 2006). Morethan 200 million middle-class households are expected by2015, which will give China a more sizeable middle classthan found in either America or F^urope.

W'al-Mart still has a fairly small number of stores inChina, given the country's massiveretail sector. In November 2006,Wal-Mart operated 67 stores acrossChina, with a high concentration inthe more developed areas of (^tiina'ssouthern and eastern provinces, andit employed 36,000 people. Shenz-hen, China's richest city, alone had 12

Wal-Mart stores. Wai-Marts in China, like the stores ofother targe retailers, are predominantly in urban areas,Chinese consumers drive less and visit the grocery moreoften than their US counterparts, which results in lowerbills per visit but more regular trips (Ctirrey 2006).

T H E TRUST-MART TAKEOVER

The largest and most important expansion effort byWal-Mart in China to date has been its purchase of Tai-wanese retailer Trust-Mart for US $1 billion. Trust-Mart

Han'ardAsia Pacific Ketim 47

currently runs 108 stores and has over 30,000 employeesin more than 20 provinces across China. In 2005, itposted sales of $1.7 billion, concentrated in the low-end,discount segment of the retail market (Coleman-Lochneriind Cimilluca 2006). Wal-Mart outmaneuvered severalother big name foreign retailers in this purchase, includingarchrival Carrefour and other firms aspiring to leadershipin the China market, such as Britain's Tesco, China's Iian-hua, and Germany's Metro. Assutning that the merger isapproved by Cliinese regulators, Wal-Mart plans to incor-porate Trust-Mart's stores over the next three years. Thisshould propel Wal-Mart ahead of Carrefour to becomeChina's top foreign retailer.

WAL-MART'S CHALLENGES IN CHINA

While the Trust-Mart acquisition islikely to elevate Wal-Mart to the status of(China's largest foreignretailer, it will notguarantee Wal-Mart'ssuccess in China.Wal-Mart must con-front a set of biggerchallenges in order toprosper in the Chinesemarket and beyond.

I.j'adersbip. Wal-

Mart in China issearching for newleadership. Its formerhead, ]oe Hatfield,was a perfect exampleof W a l - M a r t ' s

Bentonville-bred culture—a thirty-year Wal-Mart veteranwith a thick Southern accent and a ten-plus year history inChina. However, Wal-Mart has decided it needs morelocal experience to take its Chinese expansion to anotherlevel. The new head of Wal-Mart in China is Ed Chan, aHong Kong businessman who was regional director forDairy Farm International, running supermarkets, conven-ience stores, and drug stores across Asia.

l^gis/ics and Supply Chains. China remains a cruciallocation for sourcing the goods that Wal-Mart sellsworldwide. Wal-Mart's Global Procurement Centermoved from Hong Kong to Shenzhen in 2002, and theretailer's supplier networks are heavily concentrated inChina. There are rumors that Wal-Mart would like toextend its procurement to incorporate parts of northernand eastern China, possibly by putting another procure-ment center in Shanghai. Its China operations alone areserved by 15,000 suppliers, and Wal-Mart China claimsthat over 95% of its goods sold in China are sourced lo-cally (The Economist 2006; J. Lee 2006; D. Lee 2006).

More than 70% of the goods sold in Wal-Mart storesaround the world are made in China, with Chinese ex-

ports to Wal-Mart estimated at about $25 billion for 2006.If Wal-Mart were a country, it would rank just above theUnited Kingdom ($24 billion) and just belcjw all of Africa(S26.6 billion) as an export market for Chinese-madegoods.

Wal-Mart's global sourcing strategies are forcingchanges in the way that Chinese suppliers operate. Wal-Mart is known for its tough bargaining stance and its will-ingness to pit suppliers against each other for lower bids.Wal-Mart dictates to its suppliers how they should maketheir goods, from product specifications to packaging,and how much profit they should take. It has sought tograft this strategy onto China's commercial culture, usingWal-Mart's Global Procurement Center to cull throughthe legions of factory managers that arrive every day to

pitch theirp r o d u c t s .Yet the sup-ply chainpower thatmakesMart ad i s e

s li () p p e r screates a cut-throat marketfor suppliers,and managersin ('hina arer e b e l l i n gagainst raznr-thin marginsand workerdiscontent isgrowing as

Wal-para-f o r

fHckr. com/phofos/klobetime/

weU,Logistics and distribution are serious problems for

Wal-Mart too. In the United States, one of Wal-Mart'skey cost advantages is its supply-chain efficiency, led bymajor investments in information technology and inven-tory management. In China, however, Wal-Mart facesseveral difficulties. The first is China's infrastruc-ture^while more efficient than most developing coun-tries, there are still plenty of bottlenecks. Some of theseare physical, relating to roads, ports, and so on. Othersarc attitudinal—many Chinese suppliers have a hard timeadjusting to the rigorous standards of modern supplychain management. A final bottleneck is one of scale:Wal-Mart's (jperations in China are not yet large enoughto reap efficiencies from its logistics system.

Labor Issues. Labor is one of the most significantconcerns for Wal-Mart, both in the United States and inChina. Wal-Mart, like other foreign retailers, has longbeen under pressure from the Chinese government toallow branches of the state-run trade union, the All ChinaFederation of Trade Unions, into its stores. In the UnitedStates, Wal-Mart has fought fiercely against unions, claim-

4S Harvard Asia Paiific Rem

ing they will drive up labor costs and damage the com-pany's competitive position. In China, however, laborunions are vastly different from their Western counter-parts, both in structure and in practice. Unions are offi-cially run by the government and tend to be more pro-management than in other countries, while also financiallysupporting the communist party structure and helping tosecure social order (Naughton2006).

In 2004, Wal-Mart Chinaagreed to allow unit)ns into itsstores, but with the stipulationthat workers ask for representa-tion—a condition that, in a soci-ety like China, prevented unionentry. Yet the Chinese govern-ment persisted in its efforts andsent organizers to Wal-Martworkers. In July 2006, Wal-Mart

finally accepted the first union into its Chinese stores,with the formation of the Wal-Mart Labor Union at itsstores in Quanzhou in Fujian province. By the end of2006, workers had set up unions at all of Wal-Mart's loca-tions in China and boasted totalmembership of around 6,000(Lague 2006).

Wal-Mart is also confrontinglabor issues within its supplierfactories. While Wai Mart doesnot directly own any of thesefirms, critics argue that the powerimbalance between Wal-Mart andits suppliers helps to spawn laborproblems that exist in these facto-ries. Many labor rights activistshave documented these problems,such as the case of reported laborcode violations at Guangzhou'sWinho Industrial Corporation (In-ternational Labor Rights Fund2006).

Legitimacy. In response tomounting criticism, Wal-Mart es-tablished a detailed factory certifi-cation program in the early 1990s.

Under this system, Wal-Mart carries out annual audits oneach factory from which it purchases goods. The com-pany, however, still faces major criticism that this systemis mainly for show. Factory audits are only once per yearand are announced in advance, allowing time for factoriesto "clean up their act" for the visit. Workers are oftencoached on what to say—and even if they are not, manyChinese are reluctant to speak up about problems in fearof potential retribution.

More importantly, Wal-Mart's tough relationship withits suppliers can be a disincentive for bettering conditions.Wal-Mart is extremely demanding with its suppliers, and

Wal-Mart has come a long ipayfrom its 'America " slogans in the mid-1980s. Today

it is the epitome of a company that winsthrough glohali^tion: it maximii^es its global

reach on the supply side in order to captureAmerican demand with a profit-maximit^ing

combination of low prices and low wages.

uses cost as its bottom line. If a supplier cannot performwell by this metric, then Wal-Mart will threaten to take itsbusiness elsewhere. Thus, for firms struggling to com-pete for Wal-Mart's massive orders, labor concerns seemsecondary. If forced to choose between higher laborstandards or lower production costs, many firms are likelyto choose the latter.

WHITHER WAL-MART?

Wal-Mart has come a long wayfrom its "Buy America" slogansin the mid-1980s. Today it is theepitome of a company that winsthrough globalization: it maxi-mizes its global reach rm thesupply side in order to captureAmerican demand with a profit-maximizing combination of lowprices and low wages. Nothing

symbolizes the global logic of Wal-Mart better than theevolution of its relationship with China. Whereas Wal-Mart once viewed China purely as a low-cost exportplatform to send cheap goods to the US. market, today

it views the Middle Kingdom as astrategic market in its own rightin Wai-Mart's drive to satisfy theworld's consumers.But China is not an easy place tonavigate. Its retail market is highlyfragmented, and its suppliers arestill learning the intricacies nf in-ternational supply chains. Dealingwith these challenges has forcedWal-Mart to reassess its own cul-ture and strategies. The questiontoday is whether the lure of theChina market will further interna-tionalize Wal-Mart's corporateculture and change many of thepractices that have defined its USstrategy for decades, or whetherWal-Mart will try to mold China toits American image. Wal-Mart hasalready made some adjustmentsfor the China market, from thefiickr. com/photos/fortes/

layout of its stores to its factory management practices.But the relationship between the world's largest firm andthe world's most populous nation is still in its early stages,and how it plays out will help shape the future of globalcapitalism for decades to come.

Gary Gereffi is Professor of Sociology and Director ofthe Center on Globalizadon, Governance & Competitive-ness at Duke University in Durham, North Carolina.Ryan Ong is a Research Associate at CGGC.

Harvard Asia Pacific Review 49