The China Price and why China should buy Wal-Mart

Many know that the “China Price” has been, for so many years and decades, a reason why so many companies have come to China to source products from all over the world. It’s been written so many times that China is the factory to the world. Most people already know this. Most people also know the story of Wal-Mart and China. If you don’t, then do some searches on Google and you will find plenty of information that talks about how Wal-Mart sources a high percentage of their products from China and how, over the years. This along with their operational excellence in their supply chain has helped them to destroy their competition. Wal-Mart is possibly one of the largest driving forces of China being the factory to the world. Also, Wal-Mart is what any large scale supplier in China would wish to have – a connection to the final customer. The greatest amount of profit is secured through this demand chain and it is the final battle for Chinese companies that currently export to the world but have ambitions to go where Wal-Mart is today – being the end retailer to the world and not the low cost supplier. Look below on the reporting done by FRONTLINE in 2004 at PBS examining the close relationship Wal-Mart has with China and how Wal-Mart, as a retailer facing the customer and owning the demand chain, has changed the ownership of power from the supplier to the retailer.

FRONTLINE explores the relationship between U.S. job losses and the American consumer’s insatiable desire for bargains in “Is Wal-Mart Good for America?”. Through interviews with retail executives, product manufacturers, economists, and trade experts, correspondent Hedrick Smith examines the growing controversy over the Wal-Mart way of doing business and asks whether a single retail giant has changed the American economy.

“Wal-Mart’s power and influence are awesome,” Smith says. “By figuring out how to exploit two powerful forces that converged in the 1990s — the rise of information technology and the explosion of the global economy — Wal-Mart has dramatically changed the balance of power in the world of business. Retailers are now more powerful than manufacturers, and they are forcing the decision to move production offshore.”

“Wal-Mart has reversed a hundred-year history that had the retailer dependent on the manufacturer,” explains Nelson Lichtenstein, a professor at the University of California Santa Barbara. “Now the retailer is the center, the power, and the manufacturer becomes the serf, the vassal, the underling who has to do the bidding of the retailer. That’s a new thing.”

Let’s repeat the above one more time – “Now the retailer is the center”. Now to examine some trends and get back to our Wal-Mart perspective in a few minutes. Given the current conditions in the marketplace see our article on 4 reasons why the “China Price” is changing with increases from raw materials to labor and oil reaching all time highs, many are saying that the factory of the world will lose its customers to emerging markets like Vietnam, India, and even back to Mexico for many US companies. The pivotal point is that “customers” are moving and not Chinese companies (albeit many Chinese companies are even diversifying their operations to a variety of Asian and foreign countries).

Losing power to the retailer? Chinese suppliers being just another commodity? China, as a country, being another commodity and being replaced by countries like Vietnam, India, and Mexico? What is China to do? What can they do to not be just another low cost country provider?

This article by David Barboza published in the Global Policy Forum in 2005 relays the changes China has embraced to battle these changes. Take a look below.

“The future goal of the company is to make the name Great Wall known across the world,” said Liu Rengang, a spokesman for the state-controlled Great Wall Computer Group. A spokesman for Ningbo Bird, one of China’s biggest cellphone makers, sounded equally ambitious: “Our future goal is to become one of the top three cellphone manufacturers in the world.” China’s Ministry of Commerce reported this month that even though China’s exports are dominated by consumer products, few famous Chinese brands are involved in the export trade. Most goods are being shipped abroad with foreign brand labels.

To rectify the situation, the ministry called on Chinese companies to start exporting their own “famous brands.” Every region was ordered to produce its own famous brands. “We need to cultivate a group of independent famous brands that have international influence,” the report said. “Each industry needs to have its own famous brand for export.” The thinking behind the effort seems simple: imitate the foreigners.

So let’s add some background and analyze some other important elements in the world and about the business of retail and reach – reaching the customer is not easy to say the very least…

Massive Growth in Spending among Emerging Economies – Opportunity for China and Chinese Suppliers?
Massive growth in consumer spending due to emerging growth in the economies of Brazil, Russia, India, China (BRIC countries). This creates demand for products and services to say the least. There will be so many new companies in all these countries expanding into retail…but do they have the savvy to be leaders? Many of these national retail companies will have local expertise, but even that can be overcome for patient and visionary companies. The key aspects here is that many of these countries and the companies to entrepreneurs will come to China to source and buy products to import into their countries. This will be a rising trend even as the China Price is going up.

Massive Changes in Information Technology – is China keeping up? Can Chinese companies compete?
Massive changes in information technology – people have at their fingertips the power to reach beyond their resources. Using the Internet what can you not do? The Internet has made the consumer immensely powerful and the new generations of consumers are possibly the most incredibly informed group of people ever. This means you just can’t sell at any price in a large scale nor can you just setup a store anywhere and think you can get customers to come to your store because you are new or have great service. People have information and in the near future, this will be instantly available on their phone – they will know that your store is not competitive on prices and that your services were not well regarded by 10 customers just yesterday.

Operations, Logistics, Process Excellence – Do Chinese companies have what it takes compete globally?
Operational Excellence – You can’t hide a company’s lack of operational execution savvy with money or people for too long. Sooner or later you get beat by companies that excel in this capacity. Wal-Mart is known for operational excellence. They are known to execute at a degree of effectiveness and efficiency with a cost basis that makes competitors just wonder how they will ever compete.

Understanding Retail – Does China know how to service the final customer?
Retail Excellence – you need to understand your customer, you need to be able to forecast your demand chain, you need to be able to almost predict the future and shape consumer behavior if not cater to it with utmost efficiency and effectiveness. There is possibly, when compared in sheer scale of operations (Google is probably ahead of Wal-Mart in this capacity if not well ahead), no other company in the world that can even compete with Wal-Mart in terms of its depth and breadth of consumer measurement and intelligence. Wal-Mart is like a government of a highly successful country with some key differences being: Wal-Mart collects profit not tax (what is the difference anyway?), Wal-Mart probably measures their customers more than governments track and monitor their people, and Wal-Mart is seeking to extend services in their country (their store) that allows the consumer to spend every bit of all the money in their wallet or purse at the store if not more.

For those of you not in the business of retailing then we can’t even begin to describe how complicated and how complex and how rapidly changing the game of retail is and how the demand chain is not won by money or sheer strength – absolutely not. Now back to China and the challenge of their globally minded suppliers and corporations involved in selling products to the world. So…who has the size, the sheer scale, the infrastructure (global logistics, regional and national distribution centers, fleets of trucks, global telecommunication and network infrastructure, global work force operating under process driven management, global business intelligence network, global relationships, global financial management infrastructure, etc. etc. etc) to be the highway for China’s aspiring companies (Lenovo is already there, Haier is growing, others still struggling) to reach the final customer and reap the promised profits of opportunity? For now, that’s probably only Wal-Mart.

Let’s examine what FRONTLINE reported in 2004 at PBS:

“Wal-Mart has a very close relationship with China,” says Duke University Professor Gary Gereffi. “China is the largest exporter to the U.S. economy in virtually all consumer goods categories. Wal-Mart and China are a joint venture.”

So imagine…if China bought Wal-Mart then what could it do? What would that mean to sourcing direct from China? What would that mean to every company’s product in the world that isn’t in a Wal-Mart anymore because Wal-Mart is selling only Chinese (ok, ok, maybe some local country products as well)? Imagine the power of owning that demand chain…the power of owning the front door to the customer…

Once again and finally to what David Barboza published in the Global Policy Forum in 2005:

Japanese and South Korean companies like Toyota, Sony and Samsung made the moves from national to global brands quite successfully, but it took years. Analysts say Chinese companies do not have that luxury, because the rapid pace of globalization means that markets are now quickly won and lost.

“Chinese companies don’t have that much choice but to acquire overseas companies,” said Joe Chang, a China specialist at McKinsey. “Very few companies can build organically any more. If they wait 10 to 15 years, they could be dead.”

Being the world’s low-cost factory floor is no longer the country’s singular ambition, analysts say. That is perhaps why China Entrepreneur magazine recently devoted a cover story to the question, “Should China Buy Wal-Mart?”

China Buying Wal-Mart? Why not?

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Comments

3 Responses to “The China Price and why China should buy Wal-Mart”

John Rand on May 27th, 2008 11:43 pm

Interesting. Good show.
Kerry Fontaine on June 11th, 2008 4:52 am

This is what every manufacturer wants. Power at the customer level.
chinese granite on July 24th, 2008 1:32 am

Massive Changes in Information Technology – is China keeping up? Can Chinese companies compete?
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