Wal-Mart operations in China

Findings on Wal-Mart’s operations in China

In 1996, Wal-Mart began its retail operation in China through joint venture agreement with opening of a Supercenter and Sam’s Club in Shenzhen. Over pass 13 years of development, Wal-Mart now has 146 stores in China, across 89 cities, including 138 supercenters, 3 Sam’s Clubs and 2 Neighborhood Markets. Beside, Wal-Mart brought out 70,000 job opportunities for China. Wal-Mart is also striving hard on environmental protection and also encourages its suppliers to work jointly with it. About 95 percent of local products are sold in Wal-Mart China store. It is because Wal-Mart built up relationship with nearly 20,000 suppliers. Moreover, Wal-Mart China won quite a number of awards such as Leading Multi-National Enterprise in Asia by Asian Wall Street Journal Award.

Joint Venture as entry strategy into China

Wal-Mart is the world’s largest retailer with a powerful retail position to make it possible to expand its market. Because of Wal-Mart’s competitive gross margins and high inventory turnover, and enjoyed the economies of scale, efficient supply chain logistics, high purchasing power. So that it can enforce everyday low price strategy.

Due to rapid growth of Wal-Mart, it could not constrain its operation in U.S. as the limitation and the lowered trade barrier of the market itself. Wal-Mart had no choice to go for globalization to meet the competition.

The United States is 37% of the world’s economy, which leaves 63% for International. If Wal-Mart does their job, International operations should someday be twice as large as the United States. That is a great challenge, but that is the opportunity in front. Someday the U.S. will slow down, and the international will be the growth vehicle for the company (Business Week 2001).

By 1996, Wal-Mart felt that it is real-time to take on the Asian challenge. It targeted China with a population of exceeding 1.3 billion, continued economic of growth, and a large supple of labor forces. Middle-class purchasing power of the Chinese customers exhibited great potential for low-price retailer like Wal-Mart.

However, large cultural differences, too many players, local protectionism, backward infrastructure, government restriction on foreign ownership and import barriers, brought difficulties to Wal-Mart when considering to enter China.

The largest obstacle faced by Wal-Mart was the government regulation that permitted foreign retailing only in certain Chinese cities. Wal-Mart was only allowed to set up business in only eleven Chinese cities (for examples Shenzhen, Beijing, Shanghai), and it was limited to three stores per city.

In December 2001, China joined the World Trade Organization (WTO); it became obligated to waive many limitations on market access. That means removing barriers for foreign competitors to compete in China. This allowed Wal-Mart to open up stores in any Chinese cities. After all the challenge of integrating the Wal-Mart’s culture into its stores in China seem to be the great obstacle for Wal-Mart.

Late entry also was a non-barrier to Wal-Mart as its main rival – Carrefour had entered into China earlier than Wal-Mart in 1995. It became a major difference between Carrefour and Wal-Mart. As Carrefour was mainly trying to do things at the Chinese way by empowered the local stores decision making, building local supplier contracts, amplifying local rules and regulations, and using local promotion marketing schemes, while Wal-Mart was more focused on doing things the American way.

As of this consideration, Wal-Mart used joint venture as entry strategy to acquire local retailer chains to expand its business and be more local adaptation in shorter period of time.

Performance of Wal-Mart in China

When Wal-Mart began its operation enter China in 1996 with a store in Shenzhen. Wal-Mart had 31 stores with nearly sixteen thousand employees by 2003. As of the mid 2000s, it was mostly in major cities like Shenzhen, Beijing and Shanghai.

In 2006, Wal-Mart had about 60 stores in nearly 30 Chinese cities. Its sales increased 30 percent to $2 billion, which drive Wal-Mart to China’s 10th largest retailer. Wal-Mart planned to set up 18 stores in 2006. One Sam’s Club store reported $100 million in sales in 2005.

In 2006, Wal-Mart had employees of 30,000 and planned to obtain 150,000 more employees in the next five years; the turnover rate is lower than the United States where it usually remains in 50 percent.

However, Wal-Mart was unable to integrate the efficient logistical system it has in the United States in to China. Besides, The Sam’s Club warehouse stores both in Beijing and Shenzhen did not operate well as most Chinese homes do not have large storage facilities for bulk supplies.

According to OneSource, Wal-Mart brought over a 35 percent stake in Trust-Mart for US$ 264 million from BCL. Bu now, Trust-Mart, a major Chinese discount chain, has 101 chain stores in 34 cities in China.

In 2008, Wal-Mart has achieved annual sales growth in China of at least 25 percent and this strong growth will continue, a company executive said on Tuesday (Reuters 2008).

Now, Wal-Mart has total 243 units’ stores in China. It totally rose to 41 units from 2008 to 2009 also refer to Appendix X). Besides Wal-Mart China also won numerous award (also refer to Appendix X).

Current challenges faced by Wal-Mart

Last year, the cases of infant consumed the melamine-contaminated powdered infant formula, and caused over 6240 infants has kidney problems and three reported death (World Health Organization 2008). Also, according to the Greenpeace report, more than 50 kinds of pesticides have been discovered in fruits and vegetables delivered in big cities.

As a result, food safety becomes one of the biggest challenges for the company. Due to the food safety issues are recently often cited in the media, China’s government is forced to take action to stop the problems become more seriously. Now, China is more serious about the quality and safety of the products, including the products that are imported and exported from China.

As reported by Business Daily at 15 April 2009, Wal-Mart has launched a job optimization and regrouping program to reduce labor costs in China. Leally Huang, public relations manager, Wal-Mart China said with Asia Pulse in 15 April 2009 that “Those who are unsatisfied with the program and want to leave would be given adequate compensation, but we will try and see if we can retain them.”

In addition to the reported from Datamonitor (17 April 2009), Wal-Mart China cut down the labor cots affecting 1,400 employees. Along with the local trade unions are go again for this (South China Morning 2009).

As a consequence, employees are not happy with the low-paid wages by the Wal-Mart and may resent of the action of Wal-Mart. In short period of time, it may seem not be the big problem for Wal-Mart but in long-term it may become the “cancer” for the Wal-Mart China. In additionally, workers will not be loyalty to the company and this will result in the performance of the Wal-Mart or even destroy the reputation. Besides, from the reported news above, because Wal-Mart’s target is everyday low price, so what make Wal-Mart to reduce the labor cost, it is because the competitions in China between local and foreign companies are too intense and stiff. Furthermore, Wal-Mart everyday low price practice is easily replicated by its competitors.

According to Reuters (8 Sept 2009), a customer of Wal-Mart was suspecting of shoplifting, and she was death after injured by the employees of Wal-Mart China. The customer, 37-year old female, her husband complained that Wal-Mart did not apologize or offer any compensation after this incident has happened.

This shows that the employees are not being trained well enough. Because the employees who at the front line drive the company’s reputation. This case may have bad influence on the Wal-Mart reputation, if Wal-Mart cannot handle it well may destroy the image it built up along the years in China or global.

In the past two decades, Wal-Mart has developed an exceptionally and efficiency supply chains that connected the globe. These supply chains are designed on the low price of energy, it will reduce the costs of transportation and relatively negligible.

However, things are changing today. According to the Deloitte, energy prices are likely to be essentially high in the next few years and transport will be much more expensive than in the recent past. Wages in China’s large cities are also rising, as is China’s currency, which will likely rise further. General, the cost of sourcing in China is going to increase. The global supply chains were designed to take advantage of low transport costs and low wages, but the wages are rising, and as the transport costs increase in China.