Case Study:
China, India, and Wal-Mart: Issues of Price, Quality, and Sourcing
Sam Walton understood the immense clout of the company he created—long before it was the largest retailer in the United States or the largest corporation in the world. In 1985, he launched his “Buy American” crusade, offering to work with U.S. manufacturers to bring production back to our shores. In his autobiography, Walton acknowledged that “we had fallen into a pattern of knee-jerk import buying without really examining possible alternatives.” For a time, he took great pride in replacing everything from imported stacking chairs to apparel with U.S. products. However, since Walton’s death in 1992, Wal-Mart’s “Buy American” crusade has clearly evaporated. As Ken Alley writes in the trade magazine, Plastics News, “Have you taken a walk through any Wal-Mart throughout North America lately? I will venture a guess that better than 98 percent of all of the shelves throughout Wal-Mart are stocked with items that are not manufactured in the United States, but rather, China, Vietnam, South Korea, Taiwan, India, etc.” Wal-Mart sources everything from apparel to toys to lighting fixtures to electronics from China, representing about 90% of all the company’s imports. As the largest retailer in the United States, Wal-Mart soaks up a signifi cant chunk of all U.S. imports from China. For instance, in February 2004, China accounted for “80 percent of all bicycles imported into the U.S. and 67 percent of the toys, and 95 percent of all Christmas decorations.” In that same year, Wal-Mart ranked as China’s sixth largest export market just behind Germany. Critics of Wal-Mart maintain that “the U.S. manufacturing sector is being killed by too-cheap-to-beat Chinese imports.” A Wal-Mart spokesperson, however, asserts that the retailer still prefers to buy domestically whenever possible but that “some products are simply no longer manufactured in the United States in the volume we need.” Nonetheless, “one domestic supplier after another has been shut out of Wal-Mart’s system largely in favor of Chinese imports, whether inexpensive plastic products or high-tag consumer electronics.” According to Wal-Mart critic Ken Alley, United States’ manufacturers “cannot afford to make products anymore if they want to sell to WalMart and Wal-Mart’s competitors and still make a profi t. Wal-Mart’s directives have dictated that value and quality are second-tier issues when compared to price.” Another Wal-Mart critic, Rick Carter, editor-in-chief of the trade magazine Industrial Maintenance & Plant Operation, asserts that “the only goal of (Wal-Mart’s) buyers is to obtain the lowest possible price, but that buyers have been known to quibble with vendors over one cent of difference.” Carter further states, “If all America needed were low prices, Wal-Mart might be doing its citizens a service.” Lester Thurow, the noted economist and former dean of the Sloan School of Management at Massachusetts Institute of Technology, makes the point that Wal-Mart is often quick “to junk American suppliers and to replace them with cheaper foreign suppliers.” Wal-Mart is also much more likely “to pressure U.S. suppliers to do whatever it takes to remain in business with the retailer, even if it means sacrificing their own profit margins, closing down plants, and outsourcing jobs to China. If they don’t, they’re likely to be dumped by Wal-Mart in favor of suppliers who can provide the same goods made by people who make a mere fraction of what U.S. workers earn.” The negative impact of low cost offshore labor is echoed by Shoshana Cohen, a well-respected consultant at PRTM (named for its founding partners Theodore Pittiglio, Robert Rabin, Robert Todd, and Michael McGrath). Asked by Neil Shister, editorial director of World Trade Magazine, to identify the key for doing business in a “flat world,” Cohen immediately responded that “contrary to popular belief, the last factor to consider, after everything else, is labor cost.” Moreover, John Byrne, writing in Fast Company magazine, argues that “[m]any people are literally shopping themselves, their children, and their friends out of work. These are jobs that the United States would eventually lose to low-wage nations anyway. But WalMart, as a massively powerful force in our economy, is helping accelerate that loss by years and perhaps decades.” Wal-Mart’s sourcing of products to China because of low cost is taking an increasingly vigorous public thrashing because of product safety and quality concerns. Neil Shister predicts that the summer of 2007 “will be remembered as a pivotal moment when China sourcing was subjected to serious second thoughts. Products manufactured there triggered bans, health alerts, and recalls. Made-in-China fake Viagra, lead-painted toys, toxic toothpaste, and poisonous dog food entered the global supply chain. Indonesia began testing popular imported products from China and found mercury-laced makeup that turns skin black and dried fruit spiked with industrial chemicals. The Philippines warned of candy contaminated with formaldehyde. In Malaysia, it was fungus-infested nuts.” A Minneapolis-based marketing consulting fi rm, Strategic Name Development, reported some interesting and revealing results from a survey conducted in August 2007. According to that survey, just 40% of respondents said they could trust Wal-Mart to protect them from products made in China, and 39% of respondents indicated they were more fearful of buying products from Wal-Mart (as compared to 22% for Wal-Mart’s retail rival, Target). Moreover, 56% of the survey respondents said Wal-Mart was more interested in profits than people; in comparison 41% expressed the same sentiment about Target. In making specific comments, one survey respondent said that WalMart “sold out the American consumer just to make a buck,” and another said, “’It’s been my policy to avoid all things associated with China, including WalMart . . . I haven’t been [to Wal-Mart] in three months and I used to go weekly.” The Strategic Name Development survey also indicates that in the aftermath of numerous recalls of Chinese manufactured products, many consumers would now rather buy goods manufactured in India. Out of 25 different categories of products, consumers indicated a preference for products manufactured in India in all but four categories. Chinese-manufactured products were favored only in the categories of automobiles, cell phones, computers, and fl at screen televisions. Moreover, in June 2004, the trade magazine Furniture/Today observed that “India’s government is courting Wal-Mart in hopes the retail giant will begin sourcing more products, including furniture, from India instead of China.” Nonetheless, according to Deloitte Touche Tohmatsu, Wal-Mart is expected to expand its purchases of Chinese goods to as much as $30 billion annually by the end of the twenty-first century’s first decade. This will be difficult for “U.S. factory workers—if they still have a job, they’re in no position to demand big wage hikes. At the same time, cheap T-shirts and DVD players are crowding U.S. store shelves. It all adds up to low inflation.” Of course, companies like Wal-Mart will probably continue to flourish. As Wal-Mart critic Ken Alley asserts, “The cost of labor and materials are so cheap in China—and most of the Far East for that matter—that you can’t help but make record profits in dealing with Chinese manufacturers.” Allen further argues that “America must put its foot down and make it more difficult for manufacturers of product ines made outside of the USA to make these record profits. If not, Wal-Mart will continue to grow, more and more manufacturing corporations will close their doors here in the USA, and more bad-quality products will be brought into this country to be handled and potentially ingested by our children.”
Q1. What are the ethical issues associated with Wal-Mart’s extensive sourcing of low-cost products from China?
Q2. Based on your experience, does Wal-Mart sacrifice product quality in order to offer customers low prices—always?
Q3. How does the cost versus quality conundrum affect Wal-Mart’s key stakeholders, including customers, suppliers, and employees?
Q4. What advice would you give to Wal-Mart’s executives regarding how they could (or should) address the multiple effects of the cost and quality impacts of products sourced from China?
Q5. What advice would you give to businesses in India that are trying to cultivate supplier relationships with Wal-Mart?
Q6. What advice would you give to critics of Wal-Mart in order to enhance their impact on the company? To enhance their impact on governmental and regulatory agencies? To enhance their impact on society in general?
Your answer must be typed, double-spaced, Times New Roman font (size 12), one-inch margins on all sides, APA format and also include references.