Why Chinese President Xi Should Visit Wal-Mart In Bentonville – Seeking Alpha

A light bulb exploded in my mind when I learned about the itinerary of Chinese President Xi Jinping. For his first visit to the U.S. as the president of the second biggest economy of the world, Xi has decided to visit just three cities:

• Seattle: September 22-23
• Washington D.C.: September 24-25
• New York City: September 26-28

Surprisingly, Xi has decided not to include Bentonville, headquarters of Wal-Mart (NYSE:WMT), the largest retailer in the world. This is a mistake because Wal-Mart is as important to China’s success as the technology hub of Seattle, the political power of Washington D.C., and the financial weight of New York.

Wal-Mart buys from China

It is a well-documented fact that Wal-Mart and China have a mutually beneficial business relationship. According to Duke Professor Gary Gereffi, “Wal-Mart and China are a joint venture.” Charles Fishman, the author of “The Wal-Mart Effect,” describes Wal-Mart as “a vast pipeline that gives non-U.S. companies direct access to the American market.” Princeton Professor Paul Krugman explained why Wal-Mart is such a great partner for companies in China trying to export to the U.S.:

“One of the things that limits or slows the growth of imports is the cost of establishing connections and networks, Wal-Mart is so big and so centralized that it can all at once hook Chinese and other suppliers into its digital system. So-wham!-you have a large switch to overseas sourcing in a period quicker than under the old rules of retailing.”

The motivation for Wal-Mart to import products is obvious. As a retailer offering low prices, sourcing from low-cost factories from China has been the sourcing strategy of Wal-Mart for many years. Sam Walton, founder of the company, made imports a cornerstone of the spectacular rise of Wal-Mart to become the biggest retailer on the planet. Even the famous Wal-Mart cheer, which millions of associates and thousands of suppliers had to learn grudgingly, was inspired by what Sam Walton witnessed in a Korean tennis ball factory.

Embedded in Wal-Mart’s history is the idea that the company’s mission is to help customers save money. From day one, Wal-Mart had purchased goods whenever and wherever it was cheapest, something the company termed Every Day Low Cost (EDLC). EDLC, explained corporate literature, was the foundation for the company’s ability to offer prices at Every Day Low Price (EDLP).

For a long time, critics have blamed Wal-Mart for causing the decline of the manufacturing sector in the U.S. by importing large quantities of merchandise from China. In response, Wal-Mart has recently launched a “Made in America” program. Opinions are divided about whether it is feasible to reshore manufacturing from China back to the U.S. Some have argued that rising costs in China makes it increasingly likely for manufacturing to return to the U.S. Others are not so sure.

This article takes the position that it is unlikely for the Chinese government to allow manufacturing jobs to decline in China. To do so would be to allow social unrest, which is tantamount to giving up power. If this is true, manufacturing jobs are unlikely to return to the U.S. in a big way.

What’s In It for China?

While it is well known why Wal-Mart buys substantial quantities from China, it is not as well known why the Chinese government is hell bent on exporting to the U.S. The answer lies in the unusual nature of China.

While China is politically still a communist country, it is economically a capitalistic country for the last 25 years. The strange combination of communism and capitalism means that the Chinese government is very concerned about weak GDP growth rates and rising unemployment that could trigger social unrest. Even college graduates in China are finding it hard to find suitable employment. Heightened concern about the possibility of social unrest is the primary driver of China’s intense focus on export and GDP growth.

To drive down unemployment and lower the threat of unrest, China has recently been subsidizing industry and lowering the value of the currency. Another important tool to quickly expand the labor-intensive export industry is to return to the old playbook and make it more compelling for Wal-Mart to buy more from factories in China. A visit to Bentonville would be beneficial for personally making the case to Wal-Mart’s top leaders.

Implications for Wal-Mart Investors

Perhaps President Xi has decided not to visit Wal-Mart in Bentonville because it would draw unnecessary political attention to the close relationship between Wal-Mart and China. It could be that a more tactful way to approach the situation is to have lower level talks with Wal-Mart representatives in its Shenzhen sourcing office.

Investors in Wal-Mart shares, which has recently declined from a 52-week high of $90.97 to the low 60s, would be watching for Wal-Mart to lower its cost of purchasing merchandise to offset the investments in fulfillment centers and IT to compete better in the online business and the investments in associate wages and training to compete better in the traditional brick and mortar segment. To the extent that China and Wal-Mart upgrade their joint-venture relationship, investors would have reason to celebrate the recent visit of President Xi to the U.S.