Wal-Mart Nation

By Dorinda Elliott, Bill Powell/Shenzhen

Joe Hatfield is the quintessential Wal-Mart guy--a chain-smoking good ole boy from Baltimore who started as an assistant store manager and toy buyer in the American heartland nearly 30 years ago under the tutelage of Sam Walton. Today he is the missionary from Bentonville, Ark., bringing the Wal-Mart way to China. "I was blessed to work for Sam Walton," he says, "and I am doubly blessed to work in China." Walking through a brightly lighted store in Shenzhen, the boom town across the border from Hong Kong, Hatfield, who heads Wal-Mart's retail operations in China, can't disguise his delight over the--what else?--"everyday low prices!" He zips over to an electronic keyboard selling for $20. "It was three times more a few years ago!" he exclaims. He pauses at a bathroom scale that used to sell for $6 and now is just $2.50. "We found a new vendor," he says. "It's amazing. We're bringing people a great shopping experience!" Chinese customers, piling goods into their shopping carts, seem to agree. In a corner of the food department, Wal-Mart salespeople lead a group of giggling women shoppers in a rousing relay race, transporting small sausages down the aisle with chopsticks.

From Wal-Mart's modest offices across town--a sea of small cubicles plastered with Sam Walton's inspirational messages (DON'T ALLOW YOURSELF TO FALL INTO DIFFICULT SITUATIONS YOU CAN'T CHANGE!) in Chinese--Hatfield is staging his own little revolution. He runs 46 stores today but has much bigger plans. In two years, Wal-Mart will double that number and, in the next year alone, he will train some 25,000 new employees in the art of delivering those everyday low prices to China's growing middle class. It's a grueling, nonstop job. Hatfield has visited 70 Chinese cities in the past six months, convincing Communist Party secretaries and provincial governors alike that opening more Wal-Marts is a "win-win-win-win-type situation." The core of his message to Wal-Mart's associates (as all company employees are called) is simple: respect for the individual--customers in particular--"is what we're all about." Unlike in most Chinese companies, the system is transparent--guanxi, or personal connections, don't matter in the firm's Chinese stores. "The culture of Wal-Mart is stronger in China than anywhere else in the world," he says.

That shouldn't be surprising. The giant retailer is the biggest player in the huge and growing U.S.-China business relationship. Hatfield's stores are simply a sign that the alluring but elusive China market is opening up to all comers. But as grueling as Hatfield's job is--when asked what he does for fun in Shenzhen, he responds, "Nothing''--he has the less controversial half of his firm's business.

It's the buy side, not the sell side that gets the headlines back home. Wal-Mart sources everything from T shirts to toys to lighting fixtures in China--which puts the company right in the firing line of those who think the U.S. manufacturing sector is being killed by too-cheap-to-beat Chinese imports. By itself, Wal-Mart is China's sixth largest export market-- just behind Germany--buying some $18 billion worth of goods last year.

That makes someone you have never heard of, Chiqui (pronounced Chick-ee) Cui, one of the most powerful men in the global economy. The U.S. ran a $162 billion trade deficit with China last year and, as Wal-Mart's top buyer in the country, he is a big part of the transmission belt linking China and the U.S. A gentle-spoken Filipino, Cui, 54, is managing director for Greater China and North Asia in Wal-Mart's global-procurement department. So, for factory owners across China, he is, simply put, the man to see. Every day on the fourth floor at company headquarters in Shenzhen, scores of Chinese factory salesmen come to vendor rooms with dreams of landing a contract. They--and the products they make--are a big part of the reason Wal-Mart's prices in its 3,702 U.S. stores are so low. "If you stop stuff from [abroad] coming into the U.S.," Hatfield says, "it would mean $180 blue jeans. Is that what Americans want?''

If Hatfield sounds defensive, it's understandable. Wal-Mart's passion for buying in China makes it an easy target back in the U.S. "Wal-Mart is both a beneficiary and a driver of the race to the bottom in the global economy," says Alejandra Domenzain, an associate director of Sweatshop Watch, a U.S. advocacy group. "It has enormous leverage, and how it uses that leverage in the pursuit of ever cheaper labor has enormous consequences for communities in the United States." But that may be less true now than it was 20 years ago. The production of most of the goods Wal-Mart sells in the U.S. left American shores long ago, mainly for other countries in East Asia--Taiwan, Hong Kong and South Korea. Only about 10% of the firm's purchases from 2,500 suppliers in China today come from companies owned on the Chinese mainland. Andrew Tsuei, managing director in charge of Wal-Mart's global-procurement operations, says the rest come from longtime suppliers in other parts of the world that have moved their manufacturing to China in search of lower costs. That means Wal-Mart's China trade may indeed be eliminating factory jobs--but in South Korea, not South Carolina.

It is not easy being a supplier to the barons of Bentonville. "In fact, it's very tough," concedes Tsuei. Wal-Mart says it's trying to export its American-style standards and ethics to China's manufacturing sector too. In China, where sweatshops are alive and well, the company insists those measures make a difference. Suppliers, including those who sell to Wal-Mart indirectly through other companies, must limit the work week to 40 hours plus no more than three hours of overtime a day, meet safety requirements and provide decent accommodations for workers. Even those critical of Wal-Mart concede that the standards can make conditions at a Wal-Mart supplier's factory more bearable than they are at a lot of other low-wage factories in China. "When the standards are enforced," says Domenzain, "I think they are a step in the right direction. The question is, How rigorously are they enforced?"

These days, Wal-Mart is concerned that suppliers are getting extremely sophisticated at faking records to show compliance, even coaching workers before inspectors show up. "Most Chinese manufacturers don't understand why we focus on ethical standards," says Tsuei. "They ask questions like, Well, if I do this, then I'll have to increase costs. We say these are things we have to have."

To enforce the standards, Andy Tang, Wal-Mart's Far East manager for ethical standards, travels across China, making unexpected visits to all of the company's suppliers. In 2004, more than 6,500 representatives of suppliers and factories underwent the standards training. When Tang visits a factory, he sticks a cardboard placard on the table announcing the company's policy: no gifts, no kickbacks. He won't even sit for the traditional Chinese banquet. Some "officials are pretty moved when they see that because they're used to a different way," says Hatfield.

Forcing suppliers to stick to ethical standards isn't the only way Wal-Mart can be tough. The bottom line, after all, is what really counts. "We drive prices down," says Tsuei, but not, he insists, "to the point where factories are making losses. We're helping them become more efficient." Manufacturers have to meet rock-bottom costs plus quality and design standards in order to keep selling to Wal-Mart.

At Shenzhen's Catalina lighting-fixtures factory, whose biggest customer is Wal-Mart, the managers are constantly struggling to meet the company's pricing demands and still turn a profit. Girls in pink jackets assemble and inspect parts for a little more than $100 a month. "Wal-Mart's requirements are very tight--on quality, ethical standards, production lead times. They've pushed us to achieve better in all ways," says Sng Lai Kee, who heads the factory. Catalina, he says, tries to stay ahead of Chiqui Cui's relentless price demands by coming up with more sophisticated designs for which it could charge slightly more. Meanwhile, Wal-Mart allows only a month between its orders and delivery time, so Sng has to badger suppliers to deliver promptly. It's tough, but Catalina knows that in today's China, it's not too smart to push back hard against the retail giant's demands. "This is the real world," Sng says. "If we don't do this business, someone else will."

That real world is what brings low prices to Wal-Mart's U.S. customers and, increasingly, to its customers in China too. Joe Hatfield's new stores are thriving, in part because Wal-Mart is spreading a management style that many of its young Chinese employees find liberating. In most Chinese companies, managers typically share little information with employees, and promotions usually depend on whom you know. At the Sam's Club outside Beijing, it's different. Alan Li, 31, the store's deputy manager, encourages workers to contribute ideas about efficiency, and managers tell employees what's going on. "It doesn't matter who you know here," says Li, a high school graduate from a peasant family in rural China. "All that matters is your work." In a country of 1.3 billion people, the Wal-Mart way may not yet amount to a great leap forward. But it is progress.