is wal-mart good for america? [home]
wal-mart and china - a joint venture by sam hornblowerhome
watch online
secrets
transforming
discussion

From the beginning, Sam Walton and Wal-Mart focused on buying goods as cheaply as possible, which often meant buying imports. Here is an examination of the history of Wal-Mart's procurement practices in Asia and China -- even through its own "Buy American" promotional campaign in the 1980s and 1990s -- and the prognosis for the future.

Give me a W!
Give me an A!
Give me an L!
Give me a Squiggly!
Give me an M!
Give me an A!
Give me an R!
Give me a T!
What's that spell?
Wal-Mart!

One of Sam Walton's earliest imports from Asia was team spirit. Enthused by a factory cheer he witnessed in 1975 at a Korean tennis ball plant, Walton instituted his own "Wal-Mart Cheer," still a staple of the company's corporate culture. He liked the dramatic device for its "whistle while you work philosophy."

Early in his company's spectacular expansion, "Mr. Sam," as everyone called him, decided to reach across the Pacific and make imports a pillar of Wal-Mart's business model. Forcing his American suppliers to cut costs, stressing sales volume over high margins, and wowing customers by showcasing one super low-priced item in each category -- all hinged on importing to find the cheapest prices.

"Sam was an advocate of importing. It was his vision," said a retired senior executive, who was a buyer in Wal-Mart's Hong Kong office in the 1980s, and who asked to keep his identity private. "Our first office was in Hong Kong, then Taiwan. Korea soon after. We'd visit factories, see how they store goods. You would look at every step of the process very carefully."

"From the beginning, Walton had bought goods wherever he could get them cheapest, with any other considerations secondary," writes Bob Ortega, author of the Wal-Mart history, In Sam We Trust. By the early 1980s, Ortega reports, Walton "increasingly looked to imports, which were usually cheaper because factory workers were paid so much less in China and the other Asian countries."

According to Ortega, Walton himself estimated that imports accounted for nearly 6 percent of Wal-Mart's total sales in 1984. But another observer of that period, Frank Yuan, a former Taiwan-based apparel middleman, who dealt with Wal-Mart in the 1980s, puts the number, including indirect imports, at around 40 percent from "day one." Either way, Walton's vision was a harbinger of far vaster global sourcing today.

And it is a far cry from the picture that many Americans have of the legendary founder of Wal-Mart: "Mr. Sam," the folk hero, who drove around the Ozarks in a pickup truck buying cheap goods for his early discount stores and who became the architect of Wal-Mart's highly publicized "Buy American" campaign in the late 1980s and early '90s.

In truth, Walton's "Buy American" campaign did rescue some U.S. manufacturers, but only those who followed his playbook. In a letter he wrote to suppliers in 1985, he made clear he was committed to buying U.S. goods only if they upgraded their operations and improved productivity to "fill our requirements."

"We're not interested in charity here; we don't believe in subsidizing substandard work or inefficiency," Walton wrote in his 1992 autobiography Made in America. "So our primary goal became to work with American manufacturers, and see if our formidable buying power could help them deliver the goods, and in the process, save some American manufacturing jobs."

As one retired senior Wal-Mart executive explained: "Sam wanted everything possible [made] in the U. S., but he was not going to pay [extra] for it to stay. The main thing he asked was: 'Is it good for our customers?' If not, we went and made it overseas."

And so it is equally true -- and far less well known -- that Sam Walton was the architect of Wal-Mart's unpublicized "Buy Asia" program.

In this strategy, Sam Walton was playing catch-up. Sears, Kmart, Target, and JCPenney all had established procurement networks in Asia long before Wal-Mart arrived. Wal-Mart's decision to arrive unfashionably late was deliberate, according to the retired executive. "In going to Asia and then into China," he said, "department stores always beat us. A lot of people were there long before we were. But it was part of the strategy to let them go through the initial tortures. [Wal-Mart would] step in when all the groundwork had been laid."

So by the time Wal-Mart opened its first buying office in Hong Kong in 1981, "manufacturers were already very competent in Taiwan," said Gary Hamilton, a professor of sociology at the University of Washington. "There was already a high level of confidence and responsiveness that allowed Wal-Mart to rapidly expand."

Other retailers' investments in basic infrastructure and manufacturing clusters primed the Pacific Rim for the eventual stream of Wal-Mart's logistics wizards, hard-nosed buyers and product developers to cash in on low-wage Asian labor. "All of the retailers in the world participated in it," said the retired Wal-Mart buyer, recalling the mood in the old days. "We keep moving around to chase lower wages. Or if there's a tariff, we'll move to a country that does not have the tariff."

Lowering Wal-Mart's Profile in Asia

Even as Wal-Mart was pushing its U.S. suppliers to be more efficient and promoting its "Buy American" program through the '80s, the company bought more and more from Asia, according to Jay Moates, a former accountant with Wal-Mart's overseas buying operation.

But to please American consumers concerned about the Asian threat, the retailer played down its buying operations in Hong Kong, Taiwan, Korea, and the rest of Asia. Following the brutal suppression of Chinese students in Tiananmen Square in 1989 by the Chinese Communist leadership, Walton feared a consumer backlash if Wal-Mart were seen as operating in China. He was also disturbed by charges of human rights abuses in his Asian suppliers' factories.

To continue growing in Asia, Wal-Mart needed a buffer -- a middleman or a buying agency that would purchase Asian products without showing Wal-Mart's hand. According to the retired Hong Kong senior executive, Walton told Bill Fields, Wal-Mart's head buyer, that he wanted to "get out" of direct involvement in Asia. "The decision was to go to an exclusive buying agency," the buyer said. "The main reason for going into [the deal] was not to be exposed as going into Communist China."

Walton needed a trusted friend to act as his Asian middleman. He turned to a close friend and tennis partner, George Billingsley, to serve as the titular head of the operation. No matter that Billingsley, a former real estate salesman, knew next to nothing about retail or procurement. To actually run the operation, Walton found Charles Wong, a seasoned Wal-Mart vendor who knew the U.S. retail business well and was at ease operating in Asia. Billingsley would be a figurehead. Wong would run the day-to-day business of procurement out of Hong Kong.

Within two years, Billingsley and Wong had set up Pacific Resources Export Limited (PREL) as an exclusive buying agent for Wal-Mart. Wal-Mart sold its own Asian buying offices to PREL. The links were so close between PREL and Wal-Mart that "most of the people at Wal-Mart, referred to them as us," said Jay Moates, the PREL accountant. "We hired all the old people from [Wal-Mart's Asian buying] operation."

As PREL provided Wal-Mart cover for its Asian buying, Walton could both continue promoting his "Buy American" campaign at home and expand his overseas procurement out of PREL in Hong Kong.

But several months after Walton's death in April 1992, the "Buy American" campaign backfired when Wal-Mart became the target of a Dateline NBC expose that revealed "Buy American" signs adorning piles of imported goods from Asia. Overnight, an embarrassed Wal-Mart de-emphasized the "Buy American" campaign.

Catching the China Bug

China loomed large for Sam Walton's successors in the years following his death. Deng Xiaoping had opened the country to investment, easing restrictions on foreign businesses, and encouraging Chinese entrepreneurs to enter joint ventures with Westerners. Deng declared the fishing village of Shenzhen, just across the border from Hong Kong, a "special economic zone," with no taxes on foreign businesses for the first few years of operation. Across South China, the government began building roads, ports, and other infrastructure. In 1994, it devalued China's currency, from roughly 5 to 8 yuan to the dollar, further fueling the country's explosive development.

China, suddenly the cheapest workshop in Asia, attracted vast capital investment. Millions of migrant workers flooded industrial centers. World-savvy entrepreneurs migrated from Hong Kong and Taiwan, eager for a piece of the action. Many shut down their plants at home in the rush to set up new factories and hire mainland Chinese workers.

Shenzhen boomed. Growing at 20 percent a year, it became known as China's "Miracle City." In two decades, a fishing village mushroomed into a city of 7 million people, with high rises, miles of factories, and modern electronics headquarters. Here too, Wal-Mart sited its global sourcing headquarters.

Wal-Mart had caught the China bug. In a speech to business schools in the early '90s, David Glass, who succeeded Sam Walton as CEO, advised students to learn Mandarin Chinese. In regional meetings, Glass told Wal-Mart execs that if they didn't think internationally, they were working for the wrong company. "The only reason [manufacturing] moved from Taiwan was China's low level of wages," said one early Wal-Mart Hong Kong buyer. "We didn't have any trouble in China, because the Taiwanese went into China and built up the factories. We were dealing with the same people."

Working through PREL's Asian suppliers, Wal-Mart buyers became actively involved in developing products, and educating the mainland Chinese on how to make goods that would sell in America. "You'd go into a factory in Taiwan that's making men's shirts. You see what works," the Wal-Mart buyer recalled. "And then you go into China and tell a factory in China, 'This is why we're not buying from you.' Chinese people are not dumb. They're tenacious. They know they need to learn very quickly."

In 1992, with Wal-Mart clocking in at a 40 percent annual growth rate, Goldman Sachs analyst George Strachan released a study concluding that Wal-Mart was in the midst of "a major strategic merchandising revolution … breaking from a history of almost exclusive commitment to [U.S.] national-brand products, expanding and improving its private-label offerings … and marketing them more aggressively than ever before."

By lining its shelves with its own in-house brands, Wal-Mart began competing directly, on its own shelves, with its national, household brand-name suppliers. "It makes them more efficient," argues Ray Bracy, Wal-Mart's vice president of international corporate affairs. "I suppose you could suggest that they would like to not have that competition. But it makes them better."

The development of Wal-Mart's house brands proved to be a watershed. Consumer surveys had established that Americans cared less and less about buying national brands: Low price trumped brand loyalty. In the period following Sam Walton's death, when Wal-Mart's sales slowed and its stock price began to stagnate, this consumer trend freed the company to ramp up the production of its house brands through unbranded suppliers in China, who now had privileged access to Wal-Mart's 3,500 stores across America. The result was that Wal-Mart became its own de facto manufacturer, developing and designing products according to the taste of its customers, as analyzed by Wal-Mart's supercomputer. Profits soared.

Privately, long-time U.S. suppliers expressed dismay. "They invaded our core business model," said one apparel maker, requesting that his name be withheld. "Wal-Mart seems intent on managing the total product life cycle." If the competitive pressures of Wal-Mart's store brands continue, he said he would close his American factories, abandon his own brand, and try to solicit Wal-Mart's private label business in China. "We call it 'the race to the bottom,'" he asserted. "It's sad because I see that productivity increases [in America] are still possible through automation. There's room for improved efficiency. But it's impossible [to stay here] with retailers going for cheap Chinese labor."

By now, many American manufacturers, such as the apparel supplier, have little choice but to redefine themselves as "branded distributors" for overseas goods. In other words, instead of making their own products, they use their own brand names to market Chinese-made goods to retailers. They eke out profits by outsourcing production and marketing that production. The process is virtually the final step in the surrender to what Duke University Professor Gary Gereffi calls the Wal-Mart-China "joint venture."

For several years, Wal-Mart has been the single largest U.S. importer of Chinese consumer goods, surpassing the trade volume of entire countries, such as Germany and Russia. Global sourcing is now fully integrated into the company's operations -- giving Wal-Mart enormous leverage worldwide. Foreign products account for nearly all of Wal-Mart's trumpeted low opening price point goods.

During regularly scheduled conference calls with Wall Street analysts, Lee Scott, Wal-Mart CEO since 2000, touts global sourcing as the key to increasing company profits and continuing its expansion.

"No one can compete with China. Such efficiency, such manpower," said Frank Yuan, the former middleman who did business with Wal-Mart, and who now heads an international apparel trade show. "If you look at [Wal-Mart's] shoes or housewares, 80 or 90 percent is coming out of China. And apparel is not as big as it should be." After U.S. quotas on textile imports expire on Jan. 1, 2005, Yuan expects imports from China to rise to 80 percent of the apparel market.

Perfecting the Joint Venture

CEO Lee Scott would continue to improve the Wal-Mart-China joint venture through better predictions of future sales, improved forecasting models of coming fashion trends and the development of a new global sourcing group to succeed PREL that became operational in 2002. Given the improved trade relations with China under President Clinton, and a politically entrenched free trade movement, Scott no longer saw any need to hide Wal-Mart's ties to China.

Scott's vision was to expand global purchasing across the company and aggregate its vast buying power. As one retired senior executive from Wal-Mart's Global Sourcing group explained, the idea is to have "one huge buy" from apparel to food to general merchandise manufacturers. By joining the orders of every Wal-Mart division in every country, the company achieves massive economies of scale in its purchases.

In the coming years, Wal-Mart's challenge is to further consolidate its list of manufacturers in China. "Wal-Mart gets more control by keeping vendor list short, because the small number of vendors becomes more and more dependent on Wal-Mart as a customer," said Yuan. "They only use the top 1 percent of factories. Maybe top 50 factories in a given country. Wal-Mart has 60 percent of the largest factories in the world [working for them]."

But a more agile, transnational, "virtual" manufacturer is emerging to service the American mass retailer. Larry Harmer, CEO of Petters International, has never created a brand, run a research and development group, overseen the assembly of a product, or sold it on a store shelf.

He is a "brand distributor," a general contractor of sorts for consumer electronics, who develops a concept for a product -- a new kind of DVD player, for instance -- by licensing other people's design and technological innovations. When the prototype is ready, he licenses a familiar brand name, such as Polaroid, under which he sells his product. He and his team of fluent Mandarin speakers then head to China and turn to one of Wal-Mart's chosen Chinese manufacturers for production. Harmer said that Wal-Mart deals with only three or four DVD player factories worldwide -- all in China. Harmer's situation is typical: To sell to Wal-Mart, most brand distributors will be forced have their products made by Wal-Mart's anointed partners in China.

"The question is going to be whether the retailers and [Chinese] manufacturers will come together to squeeze money from the traditional brands," said Harmer. As long as he continues to bring Wal-Mart new concepts that sell, Harmer expects to survive, one year at a time.

Some retail analysts said that Wal-Mart's dwindling number of vendors will continue to abandon their factories in the American Midwest, as well as transfer production from their factories in Mexico and Taiwan to China. As this happens, massive Chinese conglomerates, such as the television manufacturer TCL, will dominate more and more of the market. And Wal-Mart will increasingly be forced to contend with muscle-flexing by its Chinese partners.

And so, there's a new wrinkle in the global game: China may not settle for second fiddle. Chinese manufacturers want to become equal partners with Wal-Mart, playing a role in product development, not just filling assembly orders. They, too, are becoming creative with the use of point-of-sale analysis to respond instantly to the demands of consumers and develop products they want.

"We are seeing an emerging shift in product development," said Tom Travis, a trade lawyer at Miami's Sandler, Travis & Rosenberg, who counts Wal-Mart among his clients. Chinese manufacturers "are assuming much more of the functions, creating and designing … the product."

This could lead to what up until now, many would have considered an unthinkable scenario in which the manufacturing dominance of China subverts Wal-Mart's control of the supply chain.

 

Sam Hornblower is the production assistant for "Is Wal-Mart Good for America?"

SUPPORT PROVIDED BY

NEXT ON FRONTLINE

Prison StateApril 29th

FRONTLINE on

ShopPBS