Wal-Mart Discusses Product Safety and Business in China

UNCLAS SECTION 01 OF 02 GUANGZHOU 000848 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ETRD ECON EINV PGOV CH SUBJECT: Wal-Mart Discusses Product Safety and Business in China BUSINESS-SENSITIVE ¶1. (SBU) SUMMARY: Wal-Mart China employs a robust quality assurance program to maintain high standards for the goods it sells. Within China, Wal-Mart is in the vanguard of product safety, utilizing a multi-layer system including producer inspection and education, cooperation with local government, strict in-store quality monitoring, and active problem resolution. The company recognizes the challenges it confronts, but executives are optimistic about business opportunities in the China market. This is the second of two pieces on Wal-Mart's operations, this one focusing on the company's China market operations; it is also part of our continuing series on consumer product safety. END SUMMARY Links in a Chain -------------- ¶2. (SBU) At a meeting with congenoffs in Shenzhen July 25, Wal-Mart (China) Investment Company spoke confidently and with some passion about the measures the firm takes to protect the safety of the consumer products it sells. While known for its long and complex supply chain in the United States, the supply system for Wal-Mart's Chinese stores has been localized in order to take best advantage of the Chinese market. Supplier Inspection and Education -------------- ¶3. (SBU) Local government officials recommend local suppliers to Wal-Mart as part of the local government's economic development plan. Currently, Wal-Mart has over 20,000 local suppliers for its Chinese stores. Many of these suppliers are small in scale and have limited ability to supply products on a continuous basis. Suppliers may also face other obstacles such as flooding and crop failure or just be unable to meet deadlines. The large number of suppliers, however, allows Wal-Mart the flexibility to replace one product with another quickly and efficiently. ¶4. (SBU) When Wal-Mart's operations were smaller, Wal-Mart QA experts visited each supplier to raise product safety awareness and quality standards. However, as Wal-Mart has grown, it has taken advantage of technological advances to train and educate its suppliers. Wal-Mart's hands-on approach to quality assurance and product safety includes use of video conferencing with live demonstrations, the creation of DVDs instructing best practices, and periodic seminars. Government Interaction -------------- ¶5. (SBU) Wal-Mart China Vice President of Operations Shawn Gray characterized the company's relationship with the Chinese government as generally very positive. On any particular day, 10-12 inspections occur at Wal-Mart's 83 stores in China. Gray told us that these inspections range from checking fire safety standards and alcohol regulations to ensuring product safety. While a leader in implementing standards, Wal-Mart sometimes faces a competitive disadvantage as less-inspected Chinese firms continue to use cheaper and inferior goods. ¶6. (SBU) Gray recounted that local governments frequently call on Wal-Mart to "take the lead" in implementing new regulations and standards. Local government officials call with such regularity that Gray believes they use Wal-Mart as the example for its Chinese competitors to follow. (Note: this is reminiscent of the 1990s, when asked why it was so important for China to join the WTO, former Premier Zhu Rongji answered that it would help Chinese companies be more competitive and raise standards. End Note.) Given Wal-Mart's success at passing these inspections, Gray surmises that local government inspections of Wal-Mart stores are used as "good press" by the local government. ¶7. (SBU) Gray noted that the government's insistence that Wal-Mart allow its employees to join government-controlled labor unions has not had a dramatic effect on the company's relations with labor. For example, programs to contribute to charitable organizations or social events for employees are all similar to activities normally sponsored by the company in other countries, but are run under the banner of the employee union here in China. In-store Monitoring -------------- ¶8. (SBU) Every Wal-Mart store has more than 30 associates who serve as spot checkers. Spot checkers conduct price checks, date checks, and product quality checks. Each associate receives quarterly training on how to ensure retail products meet Wal-Mart standards. Since Wal-Mart has a low turnover rate among its employees, institutional knowledge among its workers remains very high. GUANGZHOU 00000848 002 OF 002 ¶9. (SBU) In China, Wal-Mart does not directly sell certain products, such as tobacco and liquor, which are found in its stores. In such situations, third-party vendors use designated areas of the sales floor for promotion and sale of their goods. All goods sold inside of Wal-Mart by third parties are required to meet Wal-Mart's standards for safety and quality. A "Whole Person" Approach to Problems -------------- ¶10. (SBU) According to Gray, when Wal-Mart experiences problems with its suppliers, it makes every effort to help the supplier meet its obligations, and to continue to do business with the company. Because Wal-Mart invests a considerable amount of money and time into training its suppliers, it is in the company's favor to ensure a low rate of turnover. When it does become necessary to stop accepting goods from a particular business, that company must wait for six months before reapplying to supply Wal-Mart, and return to the company's good graces is contingent upon passing a quality inspection. According to QA Manager Benny Liu, Wal-Mart's supplier turnover is around sixteen percent. ¶11. (SBU) Wal-Mart usually learns of product quality problems directly from its consumers. When a customer falls ill due to consumption of one of its products, Wal-Mart's reaction takes several forms. -- First, the company immediately removes the tainted item from its shelves. -- Second, Wal-Mart uses its close connections with local government to conduct on-site investigations and testing. According to Gray, local governments have proven very helpful in assisting Wal-Mart respond to product quality issues. -- Third, Wal-Mart does what it can for the individual to remedy the situation, including the payment of hospital or doctors' bills, when appropriate. Quality, not Price, is Selling Point in China -------------- ¶12. (SBU) Public Relations Director Jonathan Dong said that Wal-Mart has had to adjust its marketing strategy in order to succeed in the Chinese market. While Wal-Mart is often viewed in the United States as a place to purchase inexpensive products, an initial focus on the "Every day low price" in China actually damaged the brand. This is because Chinese consumers still consider Wal-Mart to be a foreign, and thus desirable, brand name. The emphasis on price cheapened the appeal of the company's goods, and subsequent marketing strategies have promoted "quality products at a fair price." The Trustmart Expansion -------------- ¶13. (SBU) Wal-Mart has gained a foothold in Guangzhou through the purchase of Trustmart, a chain of Taiwan grocery stores. There are presently sixteen Trustmart stores in Guangzhou, and Wal-Mart is currently in the process of establishing its product quality standards throughout the stores. Of Course, Challenges Remain -------------- ¶14. (SBU) Wal-Mart, which for now does not have a presence in Guangzhou City for a variety of reasons, is hopeful that in the future the Sam's Club in Guangzhou's neighboring city of Panyu will be joined by stores in the capital proper. GOLDBERG