Not In My Backyard!

Everyday, newspapers across the U.S. feature stories about communities fighting proposed Wal-Mart stores in their neighborhoods.  But in a new twist, the following article reveals that local governments in China are also snubbing the retail giant. 

After Twelve Years of Frustration, Wal-Mart’s Guangzhou Plans Move Forward [People’s Net]

Wal-Mart’s challenges in Guangzhou are not isolated incidences.  Because Wal-Mart’s general headquarters jointly pays taxes for all Wal-Mart stores, Wal-Mart has endlessly lost favor in many regions.  At the same time, local governments’ attempts to draw in foreign investment have weakened as domestic retail has expanded.

Wal-Mart’s tactic is to find allies within the real estate industry.  “When Wal-Mart’s bargaining power is insufficient, it lets Dalian Wanda investment group confer with governments therefore gaining taxation, land, and rent preferences,” one business insider revealed.

A Twelve Year Entrance

“Wal-Mart’s Guangzhou project has already been signed,” Wal-Mart China’s public relations director Dong Yuguo verified.  This has been a 12 year entrance into Guangzhou.

According to Wal-Mart China’s website, in Guangdong Province Wal-Mart already has 13 locations in Shenzhen with stores in Dongguan, Shantou, Foshan, Maoming, etc.  However, Wal-Mart has consistently been absent from Guangdong’s capital city, Guangzhou.

“That Wal-Mart has not been able to enter Guangzhou is definitely not a business insider’s secret.  When Wal-Mart initially planned for a store in Guangzhou, it had also promised to locate its headquarters in the city.  Currently, just Carrefour’s purchasing center is located in Guangzhou – Wal-Mart ultimately set up headquarters in Shenzhen,” one former Carrefour manager stated.

“In 2001, Wal-Mart was preparing to enter Guangzhou.  At that time, the general managers had even been selected.  But because Wal-Mart set up headquarters in Shenzhen, Wal-Mart’s relations with Guangzhou government quickly soured,” one former Wal-Mart employee leaked.

Wal-Mart’s troubles in Guangzhou are certainly not isolated incidences.  “In fact, Wal-Mart has been unable to enter many cities.  The issue is that local governments are not supplying licenses,” the former employee reported.

Because of Wal-Mart’s decision to set up headquarters in Shenzhen, plans to open stores in Shanghai also dragged along.  In 2003, Wal-Mart had selected Shanghai locations such as Yangpu, Baoshan, and Pudong, but the government refused to approve the stores.  It was not until 2005, that the first Shanghai Wal-Mart was opened.

Wal-Mart Not Favored in Regional Markets

Wal-Mart’s struggles with local governments are due to taxation.  This taxation problem causes tremendous difficulties for Wal-Mart’s regional expansion.

Wal-Mart China’s branches all pay taxes through the national headquarters in Shenzhen.  According to China’s present taxation system if a retail company’s subsidiaries are without legal representation, income tax is paid through the company headquarters while sales and value added tax are paid locally.  “Many local governments create preconditions that all taxes be paid locally,” one business analyst noted.

Wal-Mart’s way of paying taxes through its headquarters hasn’t changed and is difficult to change.  “In fact, Metro, which pays taxes in a similar fashion to Wal-Mart, has had entrance blocked to several areas in China.  Besides that a portion of sales and value added tax are being paid locally, not much has changed in the tax structure these companies use,” a former Metro employee said.

The former employee thinks the key issue is China’s taxation system which is contradictory for retail chains.  Because Wal-Mart operates all over the country, it is hard to figure statistics for individual stores.  When taxes are paid aggregately through the headquarters, it is considerably easier.  This is one reason some companies have changed their businesses.

A Shanghai business consultant believes for the past few years the urge to pull in foreign investments has weakened and has effected business expansion.  When foreign enterprise first entered China, local governments considered the track record and exceptional wages, but now local retail has developed.  When local companies open stores, all the taxes remain in the region.

Real Estate Expansion

Currently, through Wal-Mart’s real estate allies, the company is accelerating expansion.

“When Wal-Mart negotiates with local governments, the results are definitely not good.  But when Wal-Mart negotiates through Dalian Wanda investment group the negotiating power is strong,” one foreign investment tradesmen analyzed.  At the present time, Wal-Mart’s cooperative partners include a Kunming based investment firm, Dalian’s Wanda Group, as well as Hong Kong based CITIC Pacific.

This type of ally takes what it needs.  When using these real estate allies, Wal-Mart can gain rent and land preferential treatment.  (A few years rent can even be reduced by half if the real estate firm is invested.)

Entering Guangzhou has greatly been a joint project (comprised of Zhanjiang, Huiyang, Maoming, Foshan, Zhaoqing, etc.) for Wal-Mart.  CITIC Pacific is primarily responsible for Wal-Mart’s east China expansion and Wanda Group is concentrated to the southwest region.

To view this article in the original Chinese, click here.

Posted by Michael Mignano on Wednesday, December 12, 2007

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