VZCZCXRO3806
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0848/01 2080513
ZNR UUUUU ZZH
R 270513Z JUL 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6309
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC

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