Walmart’s China Troubles

November 16, 2011 • Blogs, The Globalist Notebook • Views: 1027

by Edmund Downie:

October was a bad month for Walmart in China. Officials in the central city of Chongqing forced the closure of all 13 of the city’s Walmarts for two weeks after investigators determined that more than 80% of the organic pork it had sold since January 2010 year was not actually organic. A week after the scandal broke, Walmart China’s CEO resigned for what he claimed were “personal reasons.” Local officials arrested the manager and deputy manager of one store and, as of late October, were investigating criminal charges against another 25.

A Walmart in Yunnan province. (LeeAnne Adams/Flickr Creative Commons)

Walmart’s struggles in China are hardly an isolated incident. Since 2006, Chongqing authorities have punished Walmart in 21 separate instances for “exaggerated advertising and selling expired and substandard food,” in the words of Chinese state media outlet Xinhua. The company has already made Chinese news twice this year for such violations: in January for deceptive pricing nationwide, and in March for selling expired ducks in Chongqing.

Chinese and Western media coverage of the scandal have put forth strikingly different interpretations of the events. Some Western outlets have used the scandal to note the difficulties that foreign companies encounter in the Chinese market (see, for instance, the Wall Street Journal and the New York Times). In contrast, articles from state wire service Xinhua highlighted Walmart’s repeated violations as evidence that, in fact, foreign companies don’t receive enough supervision in China (see, for instance, here and here). An October 20 editorial from Xinhua slammed Western coverage of the scandal for glossing over Walmart’s misdeeds while drawing unfair conclusions about the political import of the closures. In particular, it harps on Western outlets’ preference for the word “mislabeled” over “fraudulent” to describe Walmart’s behavior.

For my two cents: there’s certainly no doubt that Chongqing authorities are grandstanding. As a foreign company, Walmart is an easy target. Moreover, a slew of scandals over the last few years — from tainted milk to “gutter oil” — has turned food safety into a major topic of public discussion. On top of this, the past year has seen substantial food price inflation. Thus, cracking down on a national chain for selling ordinary pork as higher-priced and healthier organic pork casts the Chinese government in a very positive light. One could argue, as Xinhua does, that the punishments levied here are part of a larger food safety campaign throughout Chongqing that has shut down 91 companies and revoked 602 production licenses this year alone. By the standards of Chinese food scandals, however, labeling organic pork incorrectly is a minor affair, hardly one that merits public humiliation of the sort that Walmart is facing.

On the other hand, Xinhua does have a point about the choice of the word “mislabeled.” I’m no management specialist, but it’s hard for me to see how a store accidentally allows for 80 percent of its organic pork to be mislabeled for a year and a half. And the closest thing I found in Western accounts to a defense of using the word “mislabeled,” from Reuters’ October 28 review of the scandal, doesn’t exactly inspire confidence:

“They sold more than 600,000 yuan ($95,240) worth of false organic pork,” Zhao said.”That’s consumer fraud.”

Asked if he thought Wal-Mart tripped up in the pursuit of profit in China’s cut-throat retail industry, where a competitor’s hypermarket may be only a stone’s throw away, Zhao said he didn’t think the stores intentionally sought to deceive customers.

“One employee told us they were instructed to keep the special display shelf for organic pork stocked with meat,” Zhao said. “They didn’t want to show empty shelves.”

This collection of quotations is confusing journalism that actually reinforces the sense that management at Walmart knew what it was trying to do. “Fraud” is a strong word, but “mislabeled” sounds a bit too accidental. Moreover, it’s important to note that “mislabeled” features in the first paragraph of a number of Western media reports, setting the tone for the rest of the article.

Beyond this, it’s necessary to distinguish Walmart’s situation from the situations that other foreign countries have confronted as they struggle to gain a foothold to China. For instance, as John Bussey discusses in the Journal editorial cited above, Chinese government policy eschews compliance with W.T.O. free-trade regulations in a number of industries in order to favor domestic producers; for instance, foreign wind turbine manufacturers have been forced to give up technology to Chinese firms in exchange for access to low-cost Chinese suppliers.

In the case of industries like wind power, however, foreign companies either already have direct Chinese competitors, or the government has ambitions to develop direct competitors. But Walmart has no Chinese rivals. Government investment in this sector of the economy has never fit with the export-based growth model that the state pushes, and, as a result, Walmart’s primary competitors are foreign-owned firms like Carrefour (France) and Ito Yokado (Japan).

Of course, Western companies like Walmart don’t need direct Chinese competitors to attract inordinate amounts of attention from the Chinese authorities. So it doesn’t help when management is making boneheaded mistakes that just ask for national news attention. According to China Daily, on November 1, the Beijing Times reported that a Walmart in Dalian has stonewalled its landlord on rent payments for 10 years in defiance of court orders. They may not be the first company to blow off rent, but, when you’re Walmart in China, you should know you’re playing by a different set of rules.

Edmund Downie ’14 is in Ezra Stiles College. He is a Globalist Notebook Beat Blogger on topics relating to China. Contact him at edmund.downie@yale.edu.

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