China, India confront the Wal-Marts
By Jayanthi Iyengar
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WTO requires China to admit foreign retailers
Under China's WTO commitments, during the first year of the five-year transition period ending December 2004, Beijing agreed to open up its retail sector to foreign retailers in two phases. For the first two years, foreign retailers had to come in as joint ventures, while in the last two years they could also enter as fully owned subsidiaries. In the first phase, China agreed that to permit joint ventures to be set up in the five special economic zones and six cities. These are the zones in Shenzhen, Zhuhai, Shantou, Xiamen and Hainan and the cities of Beijing, Shanghai, Tianjin, Guangzhou, Dalian and Qingdao.
In the special economic zones, foreign suppliers were permitted to provide comprehensive services for their product distribution, including after-sales services. In the case of Beijing and Shanghai, foreign retailers were allowed to set up only four joint ventures in each, while in the other four cities, the number of joint ventures was capped at two per retailer.
The provincial capitals, including Chongqing in Chongqing province and Ningbo in Zhejiang, were to be opened to foreign investors in the second year. By January 2003, all the regional, quantity and foreign equity shared restrictions were to be lifted. This meant that from 2003 onwards, a foreign company could own 100 percent retail subsidiaries in China, subject to some exceptions. For department stores of over 20,000 square meters, and chain stores with more than 30 outlets, the foreign equity in the joint venture was to be capped at 50 percent.
Further, the WTO agreement also allowed China to impose sector-specific restrictions on foreign retail activity in some sectors. Only those that had already been in business for more than a year were to be allowed to sell books, newspapers and magazines. The timetable permitted the foreign-funded retailers to deal in pharmaceuticals, pesticides and petroleum products in the fourth year and chemical fertilizer only in the fifth year.
The Chinese central leadership had agreed to this timetable with the WTO. Problems, however, began when the French retail giant, Carrefour, approached the provincial governments for clearances to set up retail units in their respective provinces. Lack of coordination as well as competition among the provinces allowed Carrefour to obtain far more clearances and set up far more joint ventures than was permitted under the license agreement and the WTO agreement. Before the central leadership realized what was happening, Carrefour had dotted the Chinese landscape with its outlets.
The Chinese government reprimanded but did not seriously punish the French retail giant, and seeing Carrefour get away with the violation without major losses, other foreign retailers followed suit. The net result is that today several foreign retailers have circumvented the license conditions. Apart from lack of political will, the Chinese government has also been unable to act against such violators, as it lacks specific legal mechanisms to do so.
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Meanwhile, public criticism of foreign retailers has been growing in China. The Chinese media is replete with stories of domestic retailers being edged out of the market by mega foreign chains such as Wal-Mart, the world's largest retailer. The China Daily, for instance, quotes a Wall Street Journal report that mentions a Chinese supplier being forced to lay off staff because Wal-Mart, which sources about 95 percent of its supplies from China, has been ruthlessly pressing down on the supplier's margin. This report is also quoted in India as proof of the evil intent of the foreign retailers.
A common thread in the Chinese media is the fear that the cost advantage enjoyed by the Chinese exports would be eroded if the foreign retailers were allowed to source supplies from within the country.
The expression of public distress and opposition has not ended there. Zhang Hongwei, vice chairman of the All-China Federation of Trade Unions (ACFTU), has been quoted by Chinese newspapers as saying: "Domestic retail businesses are facing complete annihilation. Major foreign retail giants have completed the layouts of their sales outlets through virtually illegal means, and other investors are coming via the same routes."
Understandably, the ACFTU, with a membership of 131 million, has taken aim at Wal-Mart as the symbolic of foreign repression. The national union has been urging "active" instead of "passive" unionization by the Wal-Mart management in its stores in China since 2000. At the Chinese Trade Unions 14th National Congress held in late September 2003, the federation further intensified its attack by officially announcing: "For companies depriving the rights of employees to establish trade unions, we reserve the right of resorting to lawsuits."
Unionization is legal in China, but only officially approved trade unions. Foreign companies could face legal action for not permitting the workers to organize for better wages, working conditions safety and other concerns.
The All-China Federation of Trade Unions has a different, land-use focus in Shanghai. The Shanghai Chain Enterprise Association (SCEA) recently pushed the panic button when Wal-Mart was given permission to enter Eastern China for the first time through a joint venture with CITIC Trust & Invest Co Ltd. After it became clear that Wal-Mart proposed to open three mega outlets, including a 100,000 square-meter super-center at Wujiaochang, a busy commercial area in west Shanghai, the Shanghai association argued that little space was available for such stores. Erecting this super shopping mall would mean razing existing structures, which in turn has set off fears of unplanned and indiscriminate land use with adverse consequences for local residents, retailers and others.
The Chinese central leadership has been quick to appease Wal-Mart, which has opened 26 units since it entered China in 1996 and procured an estimated $15 billion worth of Chinese products in 2003. Through the joint venture with CITIC Trust & Invest Co Ltd, for instance, the huge retailer proposes to bring in total investments amounting to $18 million, on an equity base of $7.2 million.
Wal-Mart CEO receives warm Chinese welcome
Understandably, when Wal-Mart Stores Inc's president and CEO Lee Scott visited China in October 2003, Vice Premier Wu Yi assured him of continued commitment to the WTO terms for opening up retailing. At the same time, such assurances have not stopped the Chinese central leadership from circulating the draft guidelines to regulate foreign retailers.
Under these proposed regulations, China would compile a list of foreign retail violators and non-violators. The law-abiding foreign retailers would be permitted to expand, while a one-year curb on expansion would be imposed on those who had violated the norms. Chronic violators would be banned indefinitely from expanding their operations.
Technically, these provisions if implemented, should have addressed and halted the Carrefour-type of expansion violations. However, the Chinese government has gone a step further by stating in the proposed guidelines that foreign retailers seeking to set up outlets in areas of less than 3,000 square meters would have to bring in 30 percent of the investments necessary up front. In the case of larger units, the proposed minimum capital requirement has been set at 5 million yuan (US$6.04 million) for 3,000-8,000 square-meter outlets and at 30 million yuan for outlets over 8,000 square meters.
Under the proposed guidelines, the large units also would have to submit applications for building approval at the time of FDI clearances. This appears to be the introduction of WTO-compatible qualitative restrictions in order to protect the domestic retail sector on the eve of global integration.
Undoubtedly, like India, China's concern also is dictated by the human dimension, the human price, of opening up to massive foreign retailing that could overwhelm domestic retailers.
Euromonitor's data for 1996-2001 show that China had 20.3 million retail units in 2001, growing at 32.6 percent over 1996-2001. Total retail sales had reached 3.2 trillion yuan, growing at the rate of 38.5 percent between 1996 and 2001. The sector employed 39.2 million people, up from 32 million in 1996, representing a 22.5 percent growth.
Part-time employment opportunities scarcely exist in the Indian retail sector, but in China, this is the fastest growing segment with 86 percent growth being notched on this front between 1996-2001. Full-time retail employment, however, grew at a more sedate 12.4 percent during this period.
So what are the solutions?
Sivakumar, executive director of PwC in India, is convinced that China is following relatively orderly growth, but says India needs to further open up its retail sector to foreign direct investment. "As demonstrated by China, this will not only lead to significant foreign investment but will also help create a base for foreign retailers to step up their sourcing from India," he says.
Political compulsions and the need to build popular consensus, however, are unlikely to permit swift evolution of policy changes to permit this opening up. This is more so in India, where democracy tempers the commercial liberalization process, than in China, but Beijing, too, is hearing calls for greater caution in its headlong drive to modernize.
Jayanthi Iyengar is a senior business journalist from India who writes on a range of subjects for several publications in Asia, Britain and the United States. She may be contacted at jayanthiiyengar1@hotmail.com
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