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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."
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. Worldsavvy 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.] nationalbrand 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 [WalMart'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.