Cablegate: Wal-Mart Discusses Product Safety and Business in China

Published: Fri 27 Jul 2007 05:13 AM
DE RUEHGZ #0848/01 2080513
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SUBJECT: Wal-Mart Discusses Product Safety and Business in China
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
-- 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
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.
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