[BITList] The Great Walmart of China!

[John Feltham]

http://www.hardnewsmedia.com/2011/12/4261



The Great Walmart of China!

Foreign investment is invariably beneficial as it creates jobs, adds
value, and contributes to the GDP. Companies like Hyundai, Ford and
Honda have built a giant automobile industry in India now producing
over 2 million cars and tens of thousands of new jobs. By 2017 India
will emerge as the third largest car making country in the world
producing over 7 million automobiles. This would not be possible
without foreign investment, technology and leadership. In sector after
sector foreign investment has created huge new capacities catering to
domestic and foreign markets. The level of foreign ownership makes no
difference to the contribution foreign companies make to the economy.
The desirability of foreign investment must never be questioned as
long as it creates jobs, adds value and contributes to development.
And these are just the factors that go against foreign direct
investment in retail.

Study after study in developed and developing countries alike have
shown that big box retail rather than creating jobs, destroy jobs.  In
fact their utility in developed economies is due to the labor savings
they achieve. This combined with bulk buying and the recourse to
monopsonic (the opposite of monopoly) practices result in pushing down
producer prices, undoubtedly with resultant benefits to the consumer.
On the other hand, the more of a commodity large retailers purchase in
bulk, the lower the prices growers of agricultural commodities obtain!
Studies by FAO and Oxfam attest to this. For instance, a decade ago
coffee growers earned $10 billion from a global market of over $30
billion but now they receive less than $6 billion out of a global
market $60 billion. The cocoa farmers of Ghana now receive only 3.9%
of the price of a typical milk chocolate bar but the retail margin
hovers around 34.1%. A banana farmer in South America gets 5% of the
retail price of the banana while 34% accrues to distribution and
retail.

The average size of a Walmart is about 100,000 sq.ft and the average
turnover of a store is about $ 53.2mn, each employing about 300
workers. The turnover per employee averages $ 175,000. Wal-Mart has a
9% return on assets, a 21% return on equity, and its CEO Michael
Duke's $35 million salary, when converted to an hourly wage, worked
out to $16,826.92. In comparison to this new employees are paid $8.75
an hour that would gross $13,650 a year. By contrast the average
Indian retailer had an annual turnover of Rs. 330,000. Only 4% of the
12 million retail outlets were larger than 500 sq.ft in size. India
has 53 towns each with a population over 1 million. If Wal-Mart were
to open an average Walmart store in each of these cities and they
reached the average Walmart performance per store – we are looking at
a total turnover of over Rs. 141,000 million with the employment
merely of about 16,000 persons.  Extrapolating this with the average
trend in India, it would mean displacing about 758,000 persons. Quite
clearly Walmart is not going to create more jobs in India. On the
contrary it will cause a massive loss of jobs in direct retail. This
is the experience in the USA also. A 2004 study by the Pennsylvania
State University concludes that counties with Walmart stores suffered
increased poverty than those, and suggested that it was the
displacement of higher paid workers in small family owned retailers.
Another 2007 study has shown that towns in Nebraska with and without
Walmart fared similarly different in terms of joblessness and poverty.

The major argument in favor of the benefits a Walmart or Carrefour
will bring centers around the perceived benefits to agriculture and
better prices to the farmer. Empirical evidence from many countries
where big retail chains dominated show that on the contrary farm
realizations actually decline. A recent joint study in Finland by
Agrifood Research Finland and Pellervo Economic Research Institute
reveals that for each kilo of rye bread purchased in 2010, for which
the consumer paid 3.52 Euros, 1.24 went to the seller, while the
grower received only 14 cents. A further 1.74 Euros were shared by the
milling company and logistics, while the rest went to the state as
taxes. The study also revealed that while the trade got 19% of the
takings on food, it went up to 29% in 2009. Finally, the study showed
that food prices rose faster than other consumer goods between 2000
and 2010. Big business and MNC’s like PepsiCo, Cargill, ConAgra and
even ITC have been procuring food grains and farm produce for several
years now and there is no evidence that general prices have increased.
Even where better prices were paid to contract farmers, data available
suggests that input costs have been higher. Simple economic logic
tells us that nobody pays more for a commodity that can be obtained
for less. Business is about extracting profits and not about charity.
Protagonists of FDI in retail talk a lot about modernizing the supply
chain. Consider this. The National Sample Survey relating to household
expenditures reveals that fruits and vegetables only account for 9.88%
of urban household expenditure9. It is widely agreed that the supply
chain that links the Indian producer to the domestic consumer is
primitive, outmoded and wasteful. Many studies exist that detail the
extent of wastage. One will readily concede that large format
retailing with its capacity for bulk procurement and capital
investment, even if it accounts for a fraction of the retail trade in
the sector, might be able to make some headway in modernizing the
supply chain.

But before we get into the 'for and against' argument vis-à-vis FDI,
we must also ponder over the fact that a modern and nationwide supply
chain has been created, indigenously, for milk and milk products which
account for 8.11% of household expenditure. Similarly we have an
effective supply chain for food items such as cereals, pulses, and
sugar and edible oils, which together account for 24.16% of household
expenditure. All other non-food goods purchased by our households such
as tobacco products and alcohol, processed foods and snacks,
toiletries, detergents, garments etc which together account for 52.57%
of all urban household expenditure are made available for consumption
by modern and efficient supply chains. Thus, what the average
household does not get from a modern supply chain is a very small part
of its purchase. So the argument that the pro-FDI lobby extends
vis-à-vis of FDI in Retail of modernizing the entire supply chain is a
bit exaggerated. The supply chain as it is now is mostly modernized
and efficient, and what is yet to be modernized covers only a very
small part of urban household consumption. The argument then that we
need the merchants of the western world like Walmart to modernize just
9.88% of the supply chain is a bit bogus and self-serving.

More than anything else it is Walmart's Chinese connection that should
cause us to worry. While Walmart has 352 stores in 130 Chinese cities
with a total turnover of $7.5 billion, Walmart directly buys via its
procurement centers at Shenzhen and Dalian over $ 290 billion worth of
goods from more than 20,000 Chinese suppliers, 70% of its 2010
turnover of $420 billion. (The Atlantic, December 2011 pp82). Of this
over $60 billion of goods are exported to the USA alone, making
Walmart the fifth largest exporter to the USA, and also suggesting
that Walmart’s procurement from China is the major source of its
profits.

With its huge monopsonic power, Walmart actually depresses wages, by
forcing suppliers to cut costs. A good example to demonstrate the low
wages in the Chinese labour market is contained in a report by Thomas
Fuller in The International Herald Tribune of August 3, 2006, which
investigated the percentage split in profit in the shoe industry
between the Chinese factories and those who market and sell the
finished products in the US and Europe. The factory owners after the
laborious process of manufacturing makes a profit margin of 65 cents
per pair of shoes, which are sold ex-factory for $15.30. “A major U.S.
retailer, after factoring in shipping, store rent and salaries, sells
the boots for $49.99. Assuming a pretax profit margin of about 7
percent, an average among large U.S. retailers, it earns $3.46 on the
same pair of boots.” However the story doesn’t end with the unfair
profit margins. The Chinese laborers, who make the shoes, box them and
even affix the price tag, are the ones who get the worst deal. The
International Herald Tribune says “Yet for all the sweat that goes
into making shoes in Tianjin, the factory payroll is equivalent to
$1.30 a pair, 2.6 percent of the U.S. retail price.” Should the salary
of every worker in the Chinese shoe factory be doubled, the retail
price in the US would merely go up from $49.99 to $51 or so.

By keeping wages low without the protection of trade unions, China is
in effect subsidizing exports. What the flow of cheap Chinese goods
through the Walmart direct pipeline from China into India will do to
Indian companies, particularly the SME’s can well be imagined. Even
without Walmart, Indian SME’s are being driven out in sector after
sector by cheap Chinese imports. For instance there is no light
fittings industry left in India. Same for toys. One can well imagine
what a Walmart pipeline will do to the hosiery and woolen goods
manufacturers in Ludhiana and Tiruppur. The once prosperous clock
making industry around Rajkot has almost entirely fled to China.
Millions of jobs in the semi-organized sector now stand threatened.

Having said all this, one must concede that change is remorseless. The
constant displacement of workers by machines and methods is the story
of the future. Textile mills made most weavers redundant, just as
robots in automobile manufacturing have rendered many workers as
surplus. This is the story in all sectors of manufacturing. While the
future cannot be avoided there is no need to hasten the pain. Big box
retail will bring benefits to many stakeholders; not the least being
the state, which will see improved realization of taxes and the
construction industry, which will be called to build the new retail
centers. Better quality control and good management methods will
spread into other sectors and down the supply chain manufacturers will
demand from their suppliers what is demanded of them by their buyers.

Many talk of the revolution in retail, but governments must be more
concerned with revolutions forming on the streets. There are ways of
achieving the former while avoiding the latter. Two simple suggestions
to tweak the policy on the anvil are: 1. Insist that big box
retailer’s be foreign exchange neutral. That is, they export as much
as they import. 2. Restrict big box retailers to outside municipal
limits and to satellite towns instead of restricting them to within
the 53 cities with more than a million people each. This will ease the
urban chaos and encourage people to move into less expensive housing
outside the big cities. 3. And finally, why put limits on foreign
equity holdings? Allow companies like Walmart to own 100% of their
business in India. At the same time the government must insist that
they bring in foreign loans to finance their entire capital
investments in India. This will enable Indian financial institutions
and banks to remain within sectoral limits and to extend financial
assistance to Indian retailers. Above all the policy maker must
realize that while it is an American corporation earning profits for
its US shareholders, Walmart is mainly a retailer of Chinese goods.
Its business model is quite unique. As Nick Robbins wrote in the
context of the East India Company, “By controlling both ends of the
chain, the company could buy cheap and sell dear” In this case it
means profits for the Americans, jobs for the Chinese.

Mohan Guruswamy
Email: mohanguru at gmail.com
26 December 2011




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