How Sincere is Wal-Mart’s Demand that Chinese Suppliers Meet Labor and Environmental Standards?

I imagine that many readers will react as I did to the Washington Post story, “In China, Wal-Mart presses suppliers on labor, environmental standards” (hat tip reader Paul S): that this story, yet another tidbit supporting the Bentonville giant’s supposed conversion to the true green camp, has to make sense on a cold-blooded P&L basis, even if it isn’t obvious how.

Given Wal-Mart’s history in the US, it is just about impossible to imagine that the company has concern about the impact of its policies on the greater community. Wal-Mart’s low prices depend on super-low wages effectively subsidized by the public (for instance, it pays workers so poorly that they cannnot afford health insurance, so that it is a given that some will wind up getting their health care via their local emergency room, which then winds up recovering those costs from paying customers). And the company is the antithesis of a good citizen. Over 40 states filed lawsuits against Wal-Mart for failing to pay overtime when mandated by law; the Bentonville giant settled a Federal lawsuit over similar issues in 2007 and agreed to pay as much as $640 million to settle 63 wage and hours class action suits. Wal-Mart also has the largest sex discrimination lawsuit in US history pending, and has settled other suits charging discrimination.

Wal-Mart is also famous for squeezing suppliers. One attorney I worked with who had a lot of early stage companies would recommend strongly against them taking orders from Wal-Mart, for the simple reason that the retailer (if satisfied with quality) would quickly become their dominant customer, know it controlled their business, and would start pushing for lower prices and improvements on other terms.

That’s a long winded way of saying that Wal-Mart is the antithesis of an altruistic organization. In particular, Wal-Mart has a history of funding anti-environmental candidates. So why should we trust that its seemingly civic-minded action is all that it appears to be?

One interpretation is that there is indeed less here than meets the eye. Wal-Mart, according to the Post, is making impressive declarations that are not fully met in practice:

In October 2008, Wal-Mart held a conference in Beijing for a thousand of its biggest suppliers to urge them to pay attention not only to price but also to “sustainability,” which has become a touchstone for many companies.

“For those who may still be on the sidelines, I want to be direct,” Wal-Mart chief executive Lee Scott said sternly. “Meeting social and environmental standards is not optional. I firmly believe that a company that cheats on overtime and on the age of its labor, that dumps its scraps and its chemicals in our rivers, that does not pay its taxes or honor its contracts will ultimately cheat on the quality of its products. And cheating on the quality of products is the same as cheating on customers. We will not tolerate that at Wal-Mart.”…

Many critics argue that WalMart’s longtime commitment to “everyday low prices” fosters a disregard for labor and environmental standards. China Labor Watch, a New York-based organization devoted to workers’ rights in China, said in a report last Thanksgiving that “the case of Wal-Mart . . . shows that corporate codes of conduct and factory auditing alone are not enough to strengthen workers’ rights if corporations are unwilling to pay the production costs associated with such codes.”

China Labor Watch pointed to five factories where it said workers lived in overcrowded and unsanitary conditions and were forced to work excessive overtime without adequate pay. Moreover, it said, two of the five had plotted to deceive Wal-Mart auditors and had coached workers to lie during the audits.

Yves here. Wal-Mart says it is trying to do a more through job of auditing.

But there are reasons to think this push is more that a PR ploy with a few more teeth than usual (Wal-Mart is sufficiently heavily scrutinized that a mere campaign of words would not be persuasive).

First, the odds of increased protectionism are high, particularly directed against China. The US and China are engaged in a phony war, with action so far limited to tit-for-tat tariffs and some designed-to-irritate gestures, like having Obama meet the Dalai Lama. But the theater is being ratcheted up for a reason: unemployment is painfully high, and China refuses to revalue its currency. If these stresses continue (likely), politicians may feel compelled to take measures that apply more pressure to China. An obvious one, that allows the US to maintain that it remains committed to free trade, is to demand that importers meet certain minimum environmental and labor standards. Given China’s particularly poor record on environmental protection, any such effort would hit it harder than other exporters (although how one would measure adherence to this sort of standard is an open question). Wal-Mart may regard this as a real risk (as in even if the odds are only 15%, the consequences would be so disruptive that it is prudent to go down this path). This “insurance policy” approach would also be consistent with taking some steps but not going full bore until new measures looked to be imminent. But Wal-Mart did suspend 126 Chinese suppliers in 2008 and stopped dealing with 35 permanently, so some serious steps are being taken.

A second reason may be that Wal-Mart is increasingly involved in food production in China. China has industrial pollution so severe that it has cadmium and heavy metals in the soil in some areas. Wal-Mart may correctly regard establishing itself as a company that supplies food with consistent attention to environmental issues (as well as cost saving measures to prevent waste and loss) could give it an unassailable position in the Chinese market. So visible concern about environmental practices, as evidenced in its pressure on suppliers of all sorts, could be part of a long-term branding strategy (it seems odd to think of Wal-Mart aspiring to be the Costco of China, but readers have commented that its prices, ex food, seem high relative to local market levels, so Wal-Mart in China may be a more upmarket discounter than in the US).

A third possibility is that evangelical Christians are increasingly see stewardship of the earth as an important duty. If Wal-Mart does not take at least some measures that look environmentally responsible, it might risk a backlash from its core customers.

Wal-Mart seems to be less of a target of ire than it was a few years ago; its pro-environment posture and other progressive-looking measures seem to have appeased many of its critics. But I have little faith that Wal-Mart has really turned over a new leaf.

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  1. Namazu

    I’d be very interested to know what you consider an example of an altruistic organization which is also a successful profit-making enterprise. Did you really never do a ‘squeeze-the-suppliers’ study at the Firm? China is a toxic hell-hole run on slave labor: how can you expect anything more than PR from companies that operate there? Having heard the same litany for decades, I’ve yet to be convinced that after adjusting for Walmart’s size (hence their attractiveness to class-action lawyers and other parasites), the existential threat they pose to the unions, and the nature of their business, that their blood is measurably hotter or colder than anyone else’s. What I AM convinced of is that they’re as unfashionable to elite opinion-makers as they are compelling to down-market shoppers. Having not seen any studies of the evangelical nature of the customer base, I fear your remark on the subject may be part of that fashion statement.

    Disclosures: no stake in Walmart of any kind, don’t shop at Walmart, don’t evangelize, don’t buy Made in China (a luxury I can afford).

    1. Yves Smith Post author

      No, I never did a “squeeze the suppliers” study, or any kind of cost cutting study.

      And I have to disagree with your characterization. I have worked with a lot of people who do work with distribution channels. The relationships are often cooperative rather than adversarial. I’ve also personally done a lot of JV work, and again JVs do depend on some basic principles being designed in (the most important, that the JV has exclusivity, the parent orgs cannot compete with the JV), but a JV is only as good as the trustworthiness of its owners.

    2. run75441


      You just do not know you are buying form China unless you are making it yourself and supplying your own raw materials.

  2. attempter

    I don’t get the part about a nascent “US” vs. China trade war causing Walmart to get tough with Chinese suppliers. If they’re worried about tariffs or something rocking the cheap import boat, wouldn’t they be lobbying this government against that rather than joining some alleged “national” front? Why would Walmart care about domestic unemployment or any other political problem the administration may face? (Espceially after they themselves did so much to create that problem in the first place, and render it so unsolvable.)

    As for wanting a much better brand image in China, and planning a different, higher-quality business model there, that make more sense. (Since they played such a major role in so starkly wealth-stratifying China itself; who can they sell to other than those who have some money and are looking for quality?)

    Wal-Mart seems to be less of a target of ire than it was a few years ago; its pro-environment posture and other progressive-looking measures seem to have appeased many of its critics. But I have little faith that Wal-Mart has really turned over a new leaf.

    That sure exemplifies how feckless, vapid, and deceitful most American liberal do-gooders are. Walmart has played and continues to play such a high-profile role in physically destroying communities (by enforcing the exurban/stripmall/car enslavement development pattern and ripping out the local middle class ownership heart of towns and regions) and socioeconomically gutting the country, that “Walmartization” is a common term for this havoc, just as bad as if a literal war tore across the countryside. (Is the destruction worse than that wrought by the Civil War? It’s certainly far more extensive.)

    Yet all you need to do to buy off most of these “progressives” are some empty words and picayune gestures. Especially if those gestures can be combined with yet more “shopping”. Because in the end the middle class “liberal” mostly wants a lifestyle ornament, and not to fight the enemy who oppresses and seeks to destroy all of us. (And how’s that “middle class” status working out for you these days?)

    They’re just a different kind of teabagger.

  3. craazyman

    I know a little bit about this issue, and I stress “a little”, because it is as huge and complex as human nature itself.

    For the past 7 years I’ve done consulting work — mostly content development and investment marketing consulting work — with a religious investor active in the push for better labor and environmental codes for global suppliers of large publicly held corporations. The client uses its share ownership as a leverage for activist approaches that try to strong arm the corporation into adopting more stringent and effective codes that eliminate the most egregious sweat shops and polluters from the supply chain. Or to better enforce the codes they currently have. Wal-Mart is one of the companies it confronts.

    The primary driving pyschological forces are the propagation of Christian religious values that elevate the worth of the individual soul and “American values” that derive both from Christianity and the Enlightenment thinkers whose work partly empowers our nation’s founding documents and which are redolent, in varying degrees of manifestation, throughout our nation’s history — both in the observance and in the breach.

    There are many problems with all this as it applies to global supply chains, as there are with any form of politics of large groups of people.

    It’s quite true that many vendors will attempt to disguise practices that run afoul of the rules that a well-meaning company will try to enforce, or at least put on paper. It takes rigorous monitoring by local groups, generally, to spot this. It’s easy to fake compliance. Workers are too intimdated to complain and many will lie to keep their jobs when investigators make the rounds. And in societies where that sort of thing can run up against entrenched local political interests — like powerful corrupt political bosses who profit from the state of affairs — it can be challenging indeed to spot it.

    I am not defending Wal-Mart as an institution. But it’s not inconceivable to me that someone like Mr. Scott can be perfectly sincere, animated at a semi-concious level by his American psyche and likely Christian disposition and the political pressures he faces from elements of his shareholder base and from elements of American culture, and that Wal-Mart can also, due to its size and the inevitable difficulty of 100% success at uncovering abuses, end up supporting low-cost vendors that break rules. Given the imperfections that attend to bureaucracies everywhere, this is inevitable.

    What is interesting and somewhat hopeful about all this is similar to the theory that Mr. Volcker’s ban of prop trading can be seen as a “Trojan Horse” that has the power to reshape the thinking, then the dialogue, then the reality of the way the investment business operates. That theory may be optimistic, or it may not be, given enough time for the forces at work to play out.

    The fact that Mr. Scott is talking like he is — and that others like him in other companies are — is itself a possible leading edge of a long-term restructuring of the basic ideas of trade and global business.

    If it is, it’s likely to take decades to come to fruition with many abuses pervasive as it slowly does. But that doesn’t mean it is inherently an empty rhetorical ploy. I believe it is far more complex than that. This is a huge topic.

    1. i on the ball patriot

      When its hard to make dough,
      The fox goes with the flow,
      But a fox is a fox,
      In sunshine or snow,

      If you want fair prices,
      In all of the boxes,
      You have to eliminate,
      All of the foxes …

      Deception is the strongest political force on the planet.

      1. craazyman

        that’s good!

        I really like the second and third lines of the top stanza. The imaginetic (that’s a word I just made up) opposition of sun and snow is very energetic, a dichotomy full of visual and tactile sensation.

  4. john bougearel

    One thing that is extremely important to comprehend about the Walmart culture is that not only do they embrace policies that exploit the public, they educate their workforce to do the same with respect to access to health care, subsidized lunch programs etc.

    It is also extremely important to grasp the enormous size of walmart in state and local economies. Ohio’s number one employer which used to be Ford and GM is now Walmart.

    The largest employer in Ohio is an economic culture that thrives on exploiting the public via various welfare programs. If the govt shuttered the funding to these various programs that subsidize low-income families who work at Walmart, Walmart would have to make up the difference.

    All told, Walmart is famous for squeezing not just suppliers, but their employees and state and federal govts. As a business model for societal good, everything about Walmart’s business practices and culture is wrong. Their best practices are the worst practices for a just and humane society.

    There stores should be avoided like the plague they are if at all possible.

    On another note, beyond the disingenousness of his entire statement at a conference in Beijing, where does Lee Scott get off claiming rivers in China as his own? Huh? When did he elect himself John Doe?

    But I do have to cede them some credit for suspending transactions with 126 suppliers, if and only if, and this is a big IF, if they did so for ethical and social considerations.

    However, I suspect the second reason that you hit ion, that they are heavily involved in food production in China and wanting to be more so, is incentive enough to encourage China to cut back industrial production practices that degrade soil with cadmium, and other heavy metals.

    But I would have to agree with the assessment that even if we credit WMT with embracing principles and best practices regarding stewardship of the earth, this is still inconsistent with their business model to squeeze all sectors of society, the public, their own employees, and their suppliers, for maximum profit. With their business model so badly flawed for what is just and humane in society makes it impossible for them to take the high ground on earth stewardship and pass the smell test of being a moral and ethical global citizen.

    Let’s just say its an encouraging step in the right direction, but maintaining one’s skepticism towards WMT’s business practices and negative impact in every community they inhabit is still warranted.

  5. Siggy

    From time to time we buy things at WalMart. Our purchases there are motivated by price. The items we buy are generally consumables that are generic in nature and not edible.

    My perception of WalMart is that as a retailer it holds its customers and employees in great disdain. The effect of this disdain is apparent in the attitude of its employees and that of the customers as well. Slovenly appearance and conduct is the order of the day.

    Over the course of the past two years we have been shifting what were our WalMart purchases to other retailers. The prices we have paid have been only marginally higher; however, the shopping experience has been comfortable.

    We also note the WalMart has been on a PR campaign to enhance its image as being a responsible corporate citizen. I question the validity of the campaign. We don’t see it in the appearance of the store nor in the conduct of the employees.

  6. plschwartz

    One would suppose that the Wal-Mart workers would be in favor of having a steady national health program. But they are more often those who espouse Teabagger viewpoints are are strongly agin the Obama health plan.So it would seem that the lumpenproletariat are alive and well in the US of A.

    Although I doubt that Obama will get support of the senators from the “right-to-work” states. Just as switching the burden of health costs from employer to government would make the US more competitive, tariffs based
    on labor and environmental issues are IIRC within WTO guidelines.

    Aside from that, it is difficult to image that long-term wages in the Industrialized West can maintain a wage scale much above that of China. Especially at the low-wage end which is exactly the realm of the lumpenproletariat.
    if I have mentioned this before excuse me but to understand this group one should read the chapter in DH Fischer “Albion’s Seed” on the poor borderland families of English, Scots, and Irish background who migrated to the then borderlands of the US. Although Fisher call their culture “folkways” to avoid controversy, they are in fact one of a number of embedded cultures`which was able to re-emerge when our national ethos changed from “melting pot” to the “multicultural” ethos enabled by affirmative action

  7. Ozark Hillbilly

    I live and work in NW Arkansas, and I have business and personal relationships with many Wal-Mart employees, as well as employees of vendors. Heck, I even worked for a vendor myself, several years ago when WMT was intensively upgrading its IT capabilities.

    WMT sunk a tremendous amount of money into its IT when management became convinced that it could leverage this investment into greater and greater profits. And indeed it has paid off extremely well. Unfortunately, the relationship to profits is not nearly as simple with the movement to go green.

    I know some good people at WMT who are trying to implement sustainability models and energy efficiency standards for the company. Considering the corporate culture, as I have come to personally understand it over the years, leads me to believe they are fighting an uphill battle. But that doesn’t mean it isn’t possible to make worthwhile improvements until more people adjust their attitudes, from the consumer, store employee, mid-management, etc up to the Board of Directors. We’re talking about an organization that directly effects millions of stakeholders, in a more complex (I would argue) arrangement than we’ve ever quite seen before. It’s going to take time.

    My advice to my friends at HQ has been to focus on what makes sense in their arguments. Energy efficiency = greater profits perhaps being the best example, but obeying the law = less trouble runs a close second. And certainly even having some green projects will give them good PR. I think if they manage the size and scope of their projects properly, then positive outcomes should result.

    I don’t enjoy being in the position of defending Wal-Mart, but let me ask this: Where would WMT’s employees and customers be if the company wasn’t around? Some people honestly wouldn’t be able to get jobs anywhere else, much less have an opportunity to improve their lives.

    I certainly wouldn’t suggest that evangelical Christians are WMT’s core consumer, not any more than I would refer to most of the nation as “flyover country” or “red states.” The average WMT consumer is about as average as your typical American nowadays, which I find rather difficult to define.

  8. Steve Diamond

    Some of what WMT is doing makes good business sense as it raises productivity. Other aspects make good political sense in the Chinese context. In particular, China is edging towards pressuring the foreign investment sector to pay higher wages as a means of increasing domestic consumption as part of a slow shift to rebalance economic growth. They have passed a somewhat stronger labor law of late and are now using their government run labor organization, the ACFTU, as a kind of wedge against foreign investors. No one should think this move will, however, short circuit the massive social, economic and ecological pressures building up inside China.

  9. madmilker

    Having tis on their China web page under “About Us.”…

    “Wal-Mart China persists in local procurement which provides more job opportunities, supports local manufacture industry and promotes local economy. So far, 95% of merchandising sold at Wal-Mart China store are local products by which Wal-Mart has established business relations with nearly 20,000 suppliers. At Wal-Mart, we treat suppliers as partners and would like to develop with them. In 2008 Wal-Mart won the Supplier Satisfaction published by Business Information of Shanghai for five consecutive years.”

    Does tat support American export and American jobs?

    And think about the 60,000 ships tat are on the sea today….like those 15 largest cargo ships tat pollute as much as 760 million automobiles.

    Oh! and the $9 billion in hidden taxes tat all Americans pay to clean the fish from ballast tanks of ships each year.

    But most of all….think of the words tat George Washington wrote…

    “Observe good faith and justice toward all nations. Cultivate peace and harmony with all… The Nation which indulges toward another an habitual hatred or an habitual fondness is in some degree a slave. It is a slave to its animosity or to its affection, either of which is sufficient to lead it astray from its duty and its interest … Tis our true policy to steer clear of permanent alliances, with any portion of the foreign world.” – George Washington, Farewell Address, 17 Sept. 1796.

    OK…remember what Lance Winslow wrote in tat article “The Flow of Trade in a Global Economy”….dang! better yet…jus take the time and read tis ….”Now let us look at Wal-Mart again; you buy a product there, 6% goes to the employees, 10-18% is profit to the company, 25% goes to other costs and 50% goes to re-stock or the cost of goods sold. Of the 50% about 20-25% goes to China, a guess, but you get the point. Now then, how long will it take at 433 Billion dollars at year for China to have all of our money, leaving no money flow for us to circulate? At a 17 Trillion dollar economy less than 40-years minus the 1/6 they buy from us. Some say that if we keep putting money into our economy, it would take forever, but if we do not then eventually all the money flow will go. If China buys our debt then eventually they own us, no need to worry about a war, they are buying America, due in part to our own mismanaged trade, so whose fault is that? Not necessarily China, as they are doing what’s in the best interests, and we should make sure that trade is not only free, but fair too.”

    Also, think for a moment about George Washington….yes the man tat is on the US dollar bill…. “Washington had been reelected unanimously in 1792. His decision not to seek a third term established a tradition that is now embedded in the 22d Amendment of the Constitution.

    Take the time to read his farewell address after only eight years of serving his country and than ask yourself tis….How do you think George feels being sent overseas in return for all tat foreign so-call cheap items and being left in a foreign bank because the American worker doesn’t make anythig for the foreigners to buy. Cheap items didn’t make tis great union of 57…oops! 50 states the greatest place on the face of tis Earth…..the American worker (union and non-union) did.

    You can’t have a strong country without having a strong currency and you can’t have a strong currency unless you keep it floating around within your 50 states. Tis is why the store with the star in the name puts 95% China made items in their stores in China….to keep their “yuan” in their country helping the nice people there. And with only 5% left for all the other 182 country’s tat make stuff including the United States of America….tat doesn’t produce very many jobs outside of China.

    Being an old person myself and knowing how it wus back in the 40’s, 50’s and 60’s in tis union of 50 states….I look at George each time I pull him out of my billfold and make a promise to send him out for items made in America so after floating around helping each hand he touches jus maybe one day he will shake mine again.

    So…with the US manufacturing base declining by more than 60% in the past 50 years, total American debt over $57 trillion, government looking at over $13 trillion of National Debt and inflation over 2000% since 1910 tat makes the US dollar worth about 9 cents……if you young people don’t get off your @ss, away from all tat stuff tat no one in America made and start putting back in O’Glory tat everyone before you took away….Liberty, Freedom, Pride in Country as you know it will be buried with Lady Liberty in the Hudson Bay along side your Constitution.

    RETAIL MAKES NOTHING and the only thing the US Government makes is MORE DEBT…there has only been one 10 period from 1913 tat the US Debt has gone down…1920-1930…and don’t any of you “Clinton Balance the Budget” geeks say a dang word….cause each and every year while tat limp cigar stirred bloomer pudding the debt went UP.

    “It is the aim of good government to stimulate production, of bad government to encourage consumption.” – Jean Baptiste Say, French economist 1767-1832

    Now…read tat quote one more time and think about tis…

    “Not many today remember having to drive at 55mph on a Interstate highway and even less remember mandatory gas rationing “A, B, C, X” from December 1, 1942 to August 15, 1945 with a speed limit of 35mph.

    Chrysler made fuselages. General Motors made airplane engines, guns, trucks and tanks. Packard made Rolls-Royce engines for the British air force. And lets not leave out Ford turning out one B-24 Liberator long-range bomber that had 1,550,000 parts every 63 minutes.

    It really is amazing that the hydrogen-fueled internal combustion vehicle has been around since 1807 and Germany had a thousand running the streets doing World War II but after 200 years “oil” still rules.

    What if today… the United States of America sold “Save America Petroleum Bonds” to individuals and the GM,Chrysler and Ford’s of the World get off their lazy @ss…..oops!

    It takes bout $1000 to retro-fit automobiles to run on natural gas….and with America having enough of tis energy for another 100 years….and with the price cheaper than gasoline….if half the people in America put more of tis in their automobile tanks besides tat damn tiger from the Arabian sands….the price of Americans freedom would be worth a 1000 fold and a gallon of gas to those people skiing inside tat man made Aspen ski slope in Dubai worth bout 2 RED CENTS…..

    Have a gr8 weekend and God Bless!

  10. madmilker

    Oh, ask yourself…

    What wus Helen thinking about watching Sam listening to tat squiggly line song for the first time in tat factory East of Seoul in 1975….

    wusn’t tat bout 6 years before the “Made in America” promotion started in the Wal-Mart stores in America…..

    and if Sam didn’t take tat hyphen from the name and replace it with a big single star……who did?

    Come on Licker, lets go huntin’…

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