IN FOCUS
Wal-Mart in China
Can the World’s Largest Retailer Succeed
in the World’s Most Populous Market?
GARY GEREFFI AND RYAN ONG
Wal-Mart has already attained legendary status in the
annals of American business. Its rise from a small fiveand-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 Wal-Mart’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.
46 Harvard Asia Pacific Review!
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).
vember 2004, Wal-Mart 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
NEW STRATEGIC IMPERATIVES
target China’s vast emerging middle class. In the United
In its quest to be successful in China, Wal-Mart conStates, Wal-Mart’s mantra of “everyday low prices” —adfronts three strategic imperatives: go global, go native,
vertising quality goods at bargain-basement prices—is the
and go up-market.
core of its business strategy. Wal-Mart’s target market are
Go Global. Wal-Mart currently generates one-fifth of
low-income consumers, and it does considerably better in
its global sales from its inrural and suburban areas than in large
ternational division, and it
Every description of Wal-Mart is built on cities.
aims to have one-third of
In China, Wal-Mart executives have
superlatives: it is the world’s largest private their eyes squarely on the growing
future revenues come from
employer, it generates the most sales, and it
its overseas stores (Gilbert,
middle class, not on China’s large
2006).
Wal-Mart’s opera- occupies the top spot in many U.S. retail cate- poor population who can not afford
tions in China are still fairly
gories—from food and footwear to toys and Wal-Mart goods. As a result, Walsmall, though, in compariMart merchandise is more upscale
television sets
son with the rest of the
and aligned with middle class materiworld. In the United States,
alism than in the United States. LuxWal-Mart had nearly 4,000 stores by the end of 2006, and
ury goods like baijiu, a fine liquor, and down-filled duvets
global sales for the fiscal year ending January 31, 2007 are
appear on the shelves next to far cheaper goods. China’s
projected to be nearly $350 billion. Wal-Mart InternaWal-Marts also feature a more varied grocery section,
tional boasted more than 2,700 stores, with the largest
with displays from eel tanks to elaborate prepared-food
concentrations being in Mexico (845), Japan (391), the
counters.
United Kingdom (326), Brazil (296), and Canada (279).
China’s retail market is booming, especially for its
Wal-Mart also owns stores in Argentina, Puerto Rico, and
middle class customers. According to a recent McKinsey
Central America (J. Lee 2006). In 2006, Wal-Mart distudy, China currently boasts more than one million
vested themselves of stores in Germany and South Kowealthy urban households (with income exceeding
rea, citing lack of market penetration in each case. These
100,000 yuan per year, or approximately US $12,500)—
retreats have led some to question how well Wal-Mart can
and more than 42 million middle class households, with
adapt to other countries, which will result in far greater
annual incomes between 25,000 and 100,000 yuan
scrutiny of Wal-Mart’s fortunes in the China market.
(roughly $3,100 to $12,500) (The Economist 2006). More
Go Native. Stung by its setbacks elsewhere, Walthan 200 million middle-class households are expected by
Mart’s strategy in China is to “go native.” Local adapta2015, which will give China a more sizeable middle class
tion is a key reason for Carrefour’s success, and Wal-Mart
than found in either America or Europe.
has also adapted its model to the Chinese market (D. Lee
Wal-Mart still has a fairly small number of stores in
2006, Naughton 2006). In
China, given the country’s massive
the grocery section of its In November 2004, Wal-Mart donated retail sector. In November 2006,
stores, Wal-Mart originally
operated 67 stores across
US $1 billion to Tsinghua University Wal-Mart
offered meat and seafood
China, with a high concentration in
American-style, in plastic- to establish China’s first-ever institute the more developed areas of China’s
for retailing research.
wrapped, freshness-dated
southern and eastern provinces, and
containers. To Chinese conit employed 36,000 people. Shenzsumers, however, “fresh”
hen, China’s richest city, alone had 12
means that you can pick it out yourself and watch it wrigWal-Mart stores. Wal-Marts in China, like the stores of
gle – so they took a pass. In response, Wal-Mart brought
other large retailers, are predominantly in urban areas.
Chinese wet markets indoors, allowing consumers to pick
Chinese consumers drive less and visit the grocery more
out their own dinner. Now when opening stores in a new
often than their US counterparts, which results in lower
city, Wal-Mart teams arrive five months early in order to
bills per visit but more regular trips (Correy 2006).
research local consumption habits and to fine-tune store
merchandise.
THE TRUST-MART TAKEOVER
Wal-Mart also has been working with universities and
The largest and most important expansion effort by
the government to help promote better training and eduWal-Mart in China to date has been its purchase of Taication for China’s burgeoning retail economy. In Nowanese retailer Trust-Mart for US $1 billion. Trust-Mart
Harvard Asia Pacific Review 47
currently runs 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 TrustMart acquisition is
likely to elevate WalMart 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. WalMart in China is
searching for new
leadership. Its former
head, Joe Hatfield,
was a perfect example
of
Wa l - M a r t ’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 ex48 Harvard Asia Pacific Review!
ports 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
flickr.com/photos/klobetime/
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, claim-
ing they will drive up labor costs and damage the comuses cost as its bottom line. If a supplier cannot perform
pany’s competitive position. In China, however, labor
well by this metric, then Wal-Mart will threaten to take its
unions are vastly different from their Western counterbusiness elsewhere. Thus, for firms struggling to comparts, both in structure and in practice. Unions are offipete for Wal-Mart’s massive orders, labor concerns seem
cially run by the government and tend to be more prosecondary. If forced to choose between higher labor
management than in other countries, while also financially
standards or lower production costs, many firms are likely
supporting the communist party structure and helping to
to choose the latter.
secure social order (Naughton
2006).
WHITHER WAL-MART?
In 2004, Wal-Mart China Wal-Mart has come a long way from its “Buy Wal-Mart has come a long way
agreed to allow unions into its America” slogans in the mid-1980s.! Today from its “Buy America” slogans
stores, but with the stipulation
in the mid-1980s. Today it is the
it is the epitome of a company that wins
that workers ask for representaepitome of a company that wins
tion—a condition that, in a soci- through globalization: it maximizes its global through globalization: it maxireach on the supply side in order to capture mizes its global reach on the
ety like China, prevented union
entry. Yet the Chinese govern- American demand with a profit-maximizing supply side in order to capture
ment persisted in its efforts and
American demand with a profitcombination of low prices and low wages.
sent organizers to Wal-Mart
maximizing combination of low
workers. In July 2006, Wal-Mart
prices and low wages. Nothing
finally accepted the first union into its Chinese stores,
symbolizes the global logic of Wal-Mart better than the
with the formation of the Wal-Mart Labor Union at its
evolution of its relationship with China. Whereas Walstores in Quanzhou in Fujian province. By the end of
Mart once viewed China purely as a low-cost export
2006, workers had set up unions at all of Wal-Mart’s locaplatform to send cheap goods to the U.S. market, today
tions in China and boasted total
it views the Middle Kingdom as a
membership of around 6,000
strategic market in its own right
(Lague 2006).
in Wal-Mart’s drive to satisfy the
Wal-Mart is also confronting
world’s consumers.
labor issues within its supplier
But China is not an easy place to
factories. While Wal-Mart does
navigate. Its retail market is highly
not directly own any of these
fragmented, and its suppliers are
firms, critics argue that the power
still learning the intricacies of inimbalance between Wal-Mart and
ternational supply chains. Dealing
its suppliers helps to spawn labor
with these challenges has forced
problems that exist in these factoWal-Mart to reassess its own culries. Many labor rights activists
ture and strategies. The question
have documented these problems,
today is whether the lure of the
such as the case of reported labor
China market will further internacode violations at Guangzhou’s
tionalize Wal-Mart’s corporate
Winbo Industrial Corporation (Inculture and change many of the
ternational Labor Rights Fund
practices that have defined its US
2006).
strategy for decades, or whether
Legitimacy.
In response to
Wal-Mart will try to mold China to
mounting criticism, Wal-Mart esits American image. Wal-Mart has
tablished a detailed factory certifialready made some adjustments
flickr.com/photos/fortes/ for the China market, from the
cation 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
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.
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.
Harvard Asia Pacific Review 49