Trade talks between Chinese suppliers and Wal-Mart at the Nanjing International Retailers' Global Sourcing Fair.	High quality, reasonable priced "Made in China" products represent Wal-Mart's largest supply source.	The Wal-Mart China base in Shenzhen.

“If Wal-Mart were an individual economy, it would rank as China’s eighth-biggest trading partner, ahead of Russia and U.K”-This was one media evaluation of the Wal-Mart-China relationship. China accounts for 80 percent of Wal-Mart’s source of supply to its 6,000 worldwide retail outlets. But Wal-Mart’s China purchase volume has recently dropped off.

Prices Cut-to-the-Quick Still Too Dear

JANE of Washington D.C. habitually does her family sock-shopping at Wal-Mart. Over the past five years she has made a point of buying the store’s “Made in China” cheap but quality hosiery, as produced by the Langsha Knitting Co. Ltd.

But as from next year she, and the millions of other patrons of Wal-Mart’s 6,000 stores worldwide, will be obliged to change their brand of household sock. The Langsha Knitting Co. Ltd. completed its final Walmart order in July this year.

Langsha deserves pioneer status within China’s foreign trade, having become trading partners with Wal-Mart -- the world largest retailer - in 2002. Langsha is a private enterprise in the coastal City of Yiwu in Zhejiang Province, Southeast China, famous producer of silk and cotton socks; hence its epithet “China’s Sock King.”

Wal-Mart is the US’s most ubiquitous retail giant. More than half of US residents live just a 10-minute drive away from any one of its 3,000 stores and outlets; more than 100 million shop there every week. At the outset, Langsha understandably envisaged its trading relationship with Wal-Mart as a port of entry into the international market, and was consequently willing to sell at rock-bottom prices. Five years later, however, profits from trade with this retail giant continue to elude China’s Sock King. Transparent production costs, inclusive of those of material, labor and management, taken into account in Wal-Mart’s quoted purchase prices, have pared Langsha’s profit margin to a measly two to five percent.

Langsha’s US$ 3 million worth of Walmart orders in 2005 dropped to US$ 2.5 million in 2006 and sank further to US$ 2.2 million in 2007. RMB appreciation, the 2 percent reduction in the export drawback rate since July 1st, 2007, in addition to the 5 percent rise in raw material quotations and 20 percent increase in labor costs, constitute a transparent industry price hike.

The only hypothetical possibility of Chinese manufacturers earning a reasonable profit margin is that of a 12 percent increase in export prices, according to Weng Rongdi, president of Langsha Holdings Ltd. Any attempt to even out this price hike by raising retail prices would amount to commercial suicide, but there is no other legal means of instituting any significant price-rise in the short term. The manufacturer, commercial and/or purchasing agent and retailer, therefore, have little other choice than to absorb the increase. But Wal-Mart refuses to budge from its tradition of “everyday low price,” and is certainly not willing to accept any increase in its Chinese suppliers’ wholesale price. This means zero profits - or even a small loss -- to Langsha. The strategy of first winning the big order and considering profits later has consequently turned out to be a damp squib. Yet Cao Guosheng, manager of the Langsha foreign trade department, believes that, under these circumstances, the absence of Wal-Mart orders will actually benefit Langsha. In the first half of 2007, Langsha’s exports to the EU soared by 80 percent, generating a far higher profit margin than Wal-Mart business. Orders from Wal-Mart over the same period accounted for just 5 percent of Langsha’s total business and 10 percent of its export volume, according to Cao Guosheng. The end of the trading relationship with Wal-mart is consequently of small detriment to company business, as Langsha can now assign a higher degree of its production capacity to a more profitable market. It was, therefore, without regret that Langsha accepted its last Wal-Mart order in April 2007.

Wal-Mart business was, from Cao’s point of view, an initial foot in the door to the US market. But having shifted its US business to small and medium-sized retailers that market its products at higher prices, thus promoting its brand name, Langsha’s major objective is now the EU market.

Surviving not Thriving

Wal-Mart’s persistence on bedrock prices in its China stores has exerted pressure on local enterprises to keep retail prices correspondingly low. This has triggered off cutthroat competition among domestic enterprises, to the extent that they must sacrifice profits and workers’ benefits merely to survive.

But to small and medium-sized coastal enterprises that assign half of their production capacity to Wal-Mart, low profits are superseded in disaster value by reduced orders or complete dissolution of the trading relationship. Few such enterprises can match Langsha’s considerable domestic reputation as pioneer of overseas markets to whom the end of Wal-Mart business is actually a blessing in disguise.

The Jiangsu Nanjing Yongxing Fashion Co., Ltd is reliant on Wal-Mart orders. But its 2007 volume is only a quarter that of 2006, which translates into a US$ 780,000 drop in income. The Zhejiang Furun Co., pajama pants manufacturer, recently received the bad news from its commercial agent that orders from Wal-Mart - its biggest client - had ceased. As, in the past, Zhejiang Furun’s Wal-Mart trade generated an annual US$3 million, this was a very bitter pill to swallow.

A number of Chinese suppliers, particularly knitting and clothing enterprises, in Shandong, Zhejiang and Jiangsu Provinces have also suffered either drastic reductions in, or complete curtailment of Wal-Mart orders.

“Collaborations between enterprises and international retailers like Wal-Mart are addictive. If, one day, the orders suddenly stop, the enterprises concerned face collapse,” was the comment of one insider.

Many suppliers proceed under the false assumption that the retail giant’s low volume of orders and the rock-bottom prices it demands are in order to assess product quality and selling potential on the foreign market. The naive expectation is that orders from Wal-Mart will increase in value from their initial tens of thousands to several million dollars annually. Suppliers consequently extend Wal-Mart production scale, correspondingly reducing their capacity for other client orders. When Wal-Mart reduces or simply stops its orders, therefore, enterprises often face bankruptcy.

Who Is Abandoning Whom?

Wal-Mart, with reduced costs in mind, shifted most of its product purchasing to Asia in the early 1990s. At that time, the chance to trade with Wal-Mart was considered a massive stroke of luck, and China became its biggest supplier. Domestic enterprises such as the Jiangsu Nanjing Yongxing Fashion Co. Ltd., along with many other export companies, jostled for orders from the world’s biggest retailer.

The Wal-Mart Global Procurement headquarters, located in Shenzhen, Guangdong Province, purchases a thousand or so varieties of goods, including garments, footwear, household appliances, toys, and articles of daily use from China every year. Last year, Wal-Mart purchased US$18 billion worth of commodities from China’s mainland.

The recent appreciation of the RMB, rising production costs and the trade barrier, however, has caused a falling-off of Wal-Mart’s China purchase volume. As one Wal-Mart insider remarked, the retail giant is already feeling the pinch from these phenomena, and its commercial agents are looking to Vietnam and India as cheaper alternatives. The now higher cost of goods that are “Made in China,” therefore, has invalidated the country’s niche as Wal-Mart’s cheapest and best supplier.

“There are many reasons why Wal-Mart Global Procurement terminated its cooperation with suppliers,” said one senior agent in the Wal-Mart China purchasing department. “They include product suitability for the target markets, enterprise scale and product prices, failure to meet required standards, and low enterprise environmental awareness.”

Also, as another senior operative remarked, “If Wal-Mart products do not sell well or decline in profitability, conventional procedure is to adjust stock intake, cut orders and cease trading with certain suppliers.” Whittling down on stock, therefore, is a Wal-Mart cost reduction measure.

In the China suppliers’ view, as represented by Cao Guosheng, it is the rise in costs of domestic labor and materials and appreciation of the RMB that has caused Wal-Mart to bargain prices dogmatically down to the last fen. Yet the overall reason for its decreased orders is, for the main part, China enterprises’ rejection of Wal-Mart. Weng Rongdi, president of Langsha, declares that if Wal-Mart wants to continue cooperating with Langsha, it must do so strictly on high-added-value product basis.

“Chinese enterprises need to reevaluate, transform their production structure and enter the international market,” states Jiang Hengjie, executive vice-chairman of China National Garment Association, concluding, “They can then break free from unilateral dependence and achieve mutual benefit.”