The Egg on Wal-Mart’s Face

The following article from Chinese media details Wal-Mart’s “embarrassment” at being unable to negotiate direct purchasing from factories.  Wal-Mart’s prices are simply too low and their demands are too great.  The risks involved for the factories working directly with Wal-Mart aren’t worth the measly profits.

Already, China’s largest hosiery company, Langsha Group, said it will no longer work with Wal-Mart.  How much further will Wal-Mart push as reputable factories are shunning Wal-Mart’s low priced orders - or worse, sub-contracting the orders to smaller, less accountable firms?  How many recalls and health problems must consumers face before Wal-Mart makes sustainable change?

Wal-Mart’s Purchasing Embarrassment:  Chinese Factories Saying “No” to Direct Purchasing [Xinhua]

Faced with Wal-Mart’s demands for direct purchasing, many Chinese factories are saying “no”.  This illustrates Wal-Mart’s attempts to transform their business practices are still long term problems.

Recently, negotiations between trading group Yuwu and Wal-Mart were left unsettled.  “The risk is too great.  The key struggles are Wal-Mart’s demands for an unconditional return policy, as well as the shipment of goods to [Wal-Mart’s] U.S. stores.  Furthermore, the price they’re offering is comparatively low,” Yuwu told reporters.

In the past few years, Wal-Mart has striven to expand direct purchasing from Chinese factories.  However, the effort seems to have had little effect.  Reports from many Wal-Mart suppliers say Wal-Mart orders are currently being filled through trade groups in China, Hong Kong, Taiwan, and South Korea.

Wal-Mart has again used its operations to make known its direct purchasing determination.  This year, Wal-Mart quit its use of American trading companies.

Yuwu revealed that before now, the company’s goods passed through U.S. trading companies to Wal-Mart.  But this year, it’s already been very difficult to operate because Wal-Mart no longer purchases goods this way.  Meanwhile, Wal-Mart is pushing for its idea of direct purchasing.

A Shenzhen leather factory representative also noted that their goods pass through trade groups in China, Taiwan, and the U.S. to arrive at Wal-Mart’s American and European stores.  However, Wal-Mart has repeatedly approached them wanting to discuss direct purchasing.

In fact, purchasing directly from factories has always been an important strategy for Wal-mart.  Business analysts note that 10 years ago, Wal-Mart’s procurement center was located in Hong Kong but then moved to Shenzhen.  The purpose of the move was to bypass trade groups and work cooperatively with mainland factories.

“In order to maximize profits, Wal-Mart has started to break away from the use of trade companies,” one trade official reported.  Now the profit margin for some trading companies is only 3%-5%.  The good orders receive a profit margin of over 10%.  Yet, previously, some orders received as much as a 60% profit margin.  “If an order passes through two hands, the factory’s price and the dealer’s price will be tremendously different.  Why should dealers eat so much profit?”

Recently, direct purchasing has already become a trend at Chinese factories.  A procurement manager for the Scandinavian trade group, Birgma, located in Shenzhen, told reporters that in the past two to three years, headquarters for foreign companies encouraged the use of trade groups.  But as the understanding of Chinese factories by the foreign companies deepens, and factories have more import and export authority, foreign companies have implemented factory direct purchasing.

Wal-Mart China’s public relations director Dong Yuguo told reporters that presently Wal-Mart has not issued any statistics on direct purchasing.

Confronted with Wal-Mart’s push for direct purchasing, factories are judiciously saying “no”.

“The risk is too great,” Yuwu states and there is therefore no collaboration.  Even though prices may rise 10%-15% with Wal-Mart’s direct purchasing, Wal-Mart demands an unconditional return policy and shipment of goods to [Wal-Mart’s] U.S. stores.  “If we cooperate with Wal-Mart, we’ll set up a warehouse in the U.S. and set up a transportation group, or contract a third party to do this.  Our profit would definitely be small.”

In cooperating with big dealers, factories must sometimes pay high prices for air transport – the goods are then hard to sell.  And in case there is a problem with the product, not only must the product be returned, the factory must also compensate the dealer’s loss.  Yet, by selling through a trading company this risk can be shared.

On the other hand, Chinese factories and even trading companies cannot meet Wal-Mart’s demands…

This is Wal-Mart’s potential crisis.  Although Wal-Mart’s purchasing in China is huge, the purchasing volume of international trade groups is also increasing.  Future competition will be difficult to avoid.  The key lies in other trade groups giving Chinese factories larger profit margins than Wal-Mart.

Moreover, the large majority of small Chinese factories purchase raw materials, produce their products, and then ship them.  A short return is necessary to begin the next round of production.  Wal-Mart’s payment cycle is every 60 or 90 days, whereas trading companies pay cash on delivery.

One Zhejiang clothing company who had received Wal-Mart’s orders, told reports that they have ceased cooperation with Wal-Mart because there are many other choices.  The company now can use the internet to contact many trading companies and dealers.  There are many foreign trade groups that have set up offices in Guangzhou, Shanghai, etc.

As Wal-Mart has pushed forth its direct purchasing effort, the effect has been dismal.  Wal-Mart remains dependent on their Chinese, Hong Kong, Taiwanese, and South Korean trade groups.

Some factories have complained that Wal-Mart’s orders are generally long term – which make the entrance of newer, more lucrative products to their factories difficult.

….

“Many factories don’t want to fill Wal-Mart orders.  Their prices are too low.  The client relations are comparatively good – during the slow season the orders may be filled,” one trading company reported.  There is also an open secret:  many companies will accept low-priced Wal-Mart orders and outsource the project to smaller factories.

Langsha Group’s Wal-Mart orders were generally all outsourced.  This certainly increases the risk of Wal-Mart orders.

Additionally, factories are incapable of meeting Wal-Mart’s demands… Right now, factories have two systems:  one system they allow Wal-Mart purchasing staff to see, the other system is a private operating system.

Click here to see the original article in Chinese.

Posted by Michael Mignano on Tuesday, November 27, 2007