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China, India confront the
Wal-Marts
By Jayanthi Iyengar
PUNA - Nothing reflects better the unity in
diversity shared by China and India, the world's largest
and second largest consumer markets, than the manner in
which both countries have approached the opening up of
their retail sectors to foreign investors, as well as
the significant problems and popular resistance they
face in the liberalization process.
"In terms of
sheer size, India and China have huge potential in the
retail sector," says N V Sivakumar, executive director
of PricewaterhouseCoopers (PwC), India. The global
consultancy firm recently completed a study on the
global retail potential and Sivakumar has been involved
with this project from the Indian end.
Though
both countries have been quick to partially open up
foreign direct investment (FDI) in their retail sectors,
they have faltered when it came to opening up fully.
They fear the public backlash that could follow, if
unchecked growth of the foreign retailers were to be
permitted. "Both countries have had relatively more
closed economies for decades. Hence the 'fear' of the
unknown is more, especially since the potential impact
will be on millions of existing employees and
hundred-thousands of existing small business," says
Arvind Singhal, chairman of KSA Technopak, a management
consulting organization focusing on consumer products
and retail sectors.
He summarizes some of the
reasons which could be at the root of these fears. These
include:
Existence of highly fragmented retailing.
Organized large retailing, especially from global
giants like Wal-Mart, Tesco, Carrefour, Makro and
others, could potentially cause major disruption to
small retailers.
Large international retailers might upset the import
balance, by preferring to source more globally rather
than use local production bases.
Large international retailers might also resort to
predatory pricing, thereby disrupting local small and
large retailers.
Predictably, having partially
opened up their retail sectors, both countries struggle
with regulating the often illegal and uncontrolled
growth of the foreign retailers, though the hesitation
is greater in the case of India than China. Both
countries were die-hard socialists prior to opening up
economically. Yet resistance to everything foreign
lingers more strongly in the Indian psyche than that of
the Chinese, possibly because of the promotion of
swadeshi meaning national self-sufficiency, and
swaraj, or self-rule. These have been propounded
as powerful and defining goals by national leaders, from
Mohandas K Gandhi, the Mahatma, to former prime minister
Indira Gandhi.
In spite of some regulatory
constraints, foreign retailers have found both these
markets highly attractive. "China has been voted as the
country with greatest positive outlook change in the
last year, as it has long-term growth prospects with
rising disposable incomes and an increasing qualified
labor pool," says Sivakumar.
Further, the race
to corner the retail space is so strong in these
emerging markets that foreign retailers have not
hesitated to cut a few corners. In China, the French
retail chain, Carrefour, was publicly castigated in 2000
for violating the Chinese federal government's norms for
regional expansion. As a fallout of that affair,
stricter entry norms now are being discussed with
foreign retailers, including minimum capital
requirements, compulsory land use and other clearances
at the time of approval. Fresh expansion would only be
approved after the cleared projects have gone on stream
and violators have been punished, according to the
proposed guidelines.
German retailer faces
charges in India
In India, allegations currently
abound against the world's fourth largest retailer,
Germany's Metro Cash & Carry GmbH, for violating
licensing conditions. One of the latest to enter the
Indian market, it was granted approval, along with
Shoprite Checkers of South Africa, in 2001 to carry on
cash and carry wholesale business. The Indian domestic
retail lobby, comprised of small and large traders, is
convinced that the company is selling directly to retail
customers, while Metro GmbH is taking the position that
it is selling only to retailers, which is permitted
under the law. This case is being fought in the Indian
legal system and the ball now is in the Indian courts to
decide whether the German retailer is guilty of
violating entry norms.
To understand the charged
atmosphere that surrounds the opening up of the retail
sector in India and China, one needs to understand how
public opinion has influenced the opening up process. To
start with, India permitted foreign retailers to sell
directly to retail customers. In 1997, it took a step
back. The Foreign Investment Promotion Board (FIPB)
decided that it would "encourage" foreign investors to
set up manufacturing facilities in the country, instead
of permitting entry merely to traders. The immediate
cause for this change in approach was manifold. At the
basic level was the fear voiced by the domestic trader
lobby that the millions of kirana shops - the
Indian equivalent of the mom and pop stores in the
United States - would be wiped out by the foreign
onslaught.
The FIPB was also receiving far too
many applications for trading, instead of fresh FDI
investment proposals. FDI in China was booming, despite
the mandatory capital and other requirements that the
country was placing on foreign investors seeking to do
business there. Last, a substantial number of the
applications for trading licenses were actually coming
in from the Chinese.
India was worried about the
Chinese, who were known both for dumping as well as
their ability to corner markets with their low-price
advantage. Given strains over the years in Sino-Indian
relations, there were also security dimensions to
allowing Chinese traders to enter India, especially when
the Foreign Investment Promotion Board lacked the
wherewithal to run security checks on the applicants.
The net result was the new norm, introduced in 1997,
which categorized foreign companies into three broad
types:
Companies that set up domestic manufacturing
facilities and sold products manufactured domestically.
Companies that came in to trade prior to the 1997
norms.
Companies that came in to trade after the 1997 norms
were adopted.
India favors those that
manufacture and sell domestically.
There were no
restrictions on the sale of products by the first set of
companies. Thus, India has consumer durable companies
like Sony, LG, Samsung and Phillips, which manufacture
and sell products in India. They also import and sell
some of their high-tech product lines such as laser
printers and photocopiers, on the certification that
current manufacturing techniques and costs do not yet
permit them to manufacture these items domestically.
They undertake to do so in the near future.
Under the second category, only two companies
have been granted permission to operate in India. They
are Nanz and Spencers, which hold permission to sell
their products directly to retail customers.
In
the third category - those entering the market after
1997 - foreign retailers can set up wholly owned
subsidiaries in India for the purpose of trade, but they
can sell only to wholesalers (who are essentially
domestic retailers) and not to retail customers. This
set of retailers can come in as franchisees and/or as
cash and carry wholesalers.
Bata India, India's
largest retailer is also a manufacturer. It has been in
India since 1931, entering India long before the wave of
nationalization in the mid-1970s. To rule out scope for
ambiguity, the Foreign Investment Promotion Board
approvals define a wholesale buyer to be one who holds a
sales tax registration number.
The charge
against Metro GmbH is that it is selling to retailers.
The campaign is led by the Federation of Associations of
Maharashtra state (FAM), a state-level organization of
small traders. Among others, FAM is supported by the
Karnataka and Tamil chambers of commerce at the state
levels and by the Confederation of India Industry at the
national industry chamber level.
FAM is also
being supported by parliamentarians, politicians,
political parties and even the Swadeshi Jagaran Manch.
The SJM is the nationalist wing of the ruling Bharatiya
Janata Party (BJP), whose traditional vote-bank has been
business. As People's Democracy, the mouthpiece of the
Communist Party of India (Marxist), points out in its
December 2003 issue, "It was primarily because of the
support from several parliamentarians and political
parties that the government of India was obliged to take
a decision not to permit FDI in retail trade."
Fears foreign retailers will swamp domestic
retail
The federation in Maharashtra has stated
in the Metro GmbH context that it had been reassured in
writing by Murasoli Maran, the late minister for
industry and commerce, that domestic retail trading
would be closed to foreign retailers. Maran is not
around to reiterate his statement, but the FAM seems to
be factually correct, since the industry ministry did
issue a press note in February 2001, soon after Metro
GmbH had been given a clearance to do business.
"The approval given to Metro Cash and Carry GmbH
recently, which have received extensive press coverage,
is for setting up of state-of-the-art cash and carry
wholesale complexes. The company is not permitted to
have retail outlets or sell products to consumers
directly. It may be added that approval for cash and
carry wholesale trading have been given in the past
also. Any violation of the approval terms renders the
company liable to action," the statement said.
The public furor had died down then, but the FAM
renewed its attack on Metro GmbH in 2003 after it came
to light that the German retailer was on a membership
drive, possibly recruiting retail members. FAM wrote its
complaints to opposition political parties as well as to
Minister for Commerce Arun Jaitley in November 2003.
The Federation of Associations of Maharashtra,
backed by similar organizations, contends that Metro
GmbH has issued 250,000 loyalty cards within nine months
of entering the market and is violating its license
conditions by selling directly to retailers. Loyalty
cards are incentive cards that grant a buyer bonus
points with every purchase from the same shop and/or
manufacturer. The trader lobby is arguing that the cards
have been issued to commercial organizations,
associations of professionals such as doctors, lawyers,
employees of information technology companies,
architects, chartered accountants - categories that do
not fit the description of allowed retailers.
"In some cases, these cards have been issued to
employees of certain organizations even without explicit
consent or knowledge of the concerned organizations,"
says the People's Democracy, the communist newspaper.
Further, it says, Metro's customers are buying
products not connected to their business, as stated to
be the case in its sales tax registration. Also, the
German retailer is selling even single units of a
product, without specifying minimum purchase
requirements, which clearly proves that "it is indulging
in nothing but retail trade", the publication says.
Foreign retailers now an election
issue
With announcements about the dissolution of
the Indian parliament next month and the general
elections scheduled to take place soon afterward, the
political stridency surrounding the retail issue is
self-explanatory.
Since Metro GmbH has started
operations at Yashwantpur and Kanakpura areas in
Bangalore, where it has opened stores of 17,600 square
meters in area, the Karantaka (state) government has
been rattled. Consequently, backed by the central
government, it has filed a writ petition in a Bangalore
court against Metro GmbH. The German retailer is being
represented by legal hawk and former commerce minister,
P Chidambaram.
The left-wing parties have been
supporting the trader lobby all along because of their
anti-multinational corporation (MNC) line but FAM, the
Maharastra traders association, also claims support from
former ministers, Dr Man Mohan Singh - the father of
India's liberalization under a Congress Party government
- Margaret Alva, and parliamentarian Priyaranjan Das
Munshi.
Not to be outdone, SJM national convener
Muralidhara Rao recently made a vehement anti-Metro
presentation to the Federation of Karnataka Chambers of
Commerce and Industry, saying: "Our market is an asset,"
which could not be "sold away to multinationals". SJM,
Swadeshi Jagaran Manch, is the nationalist wing of the
governing Bharatiya Janata Party.
While the
courts will ultimately decide on the merits of the
charges leveled against Metro GmbH, the cause of this
charged political atmosphere is easy to understand. By
the Maharastra trade federation's reckoning, India has
30 million domestic retail traders.
PricewaterhouseCooper's Sivakumar pegs current figures
at 20 million retailers, while Euromonitor had estimated
12 million retailers in 2001, apart from the millions of
low-cost kiosks and push-cart vendors who dot the Indian
retail landscape.
Each of them is a potential
voter in a country where 600 million persons are
registered on the polling lists, but the picture becomes
clearer when one looks at the rest of the statistics.
According to Euromonitor, the retail sector is
India's second largest employer after agriculture. It
employs about 10 percent of the labor force, estimated
at 39.3 million people in 2001. It was also one of the
fastest growing employers, averaging an annual growth of
37 percent between 1996 and 2001, until it was displaced
by Business Process Outsourcing (BPO). The BPO sector
provides back-office services to overseas client using
the Internet. In money power, the organized retail trade
in India was worth Rs11.2 trillion (US$247 billion)
during the same period.
India has 11 shops
for every 1,000 people
The Indian retail industry
was, and continues to be, highly fragmented. According
to global consultancy firm A C Neilson, India had the
highest shop densities in the world. In 2001, it was
estimated there were 11 outlets for every 1,000 people.
Further, a report prepared by McKinsey &
Company, global management consultants, and the
Confederation of Indian Industry (CII), predicted that
global retail giants such as Tesco, Kingfisher,
Carrefour and Ahold were waiting in the wings to enter
the retail arena. It further stated that the Indian
retail market holds the potential of becoming a $300
billion per year market by 2010, provided the sector is
opened up significantly.
All of this - the
strength of retailing in India and inroads by foreign
retailers - clearly explain the fears that fuel public
imagination and why the political leadership in
democratic India feels compelled to build consensus and
take the people along on its path to totally opening up
the retail sector.
"Incidentally, major concerns
are there even in developed markets (eg UK, US, France
and Germany) on allowing unrestrained growth of large
format big box discounters," says Singhal, the chairman
of KSA Technopak management consultants. "Most of them
are not allowed to operate in 'city centers' and have to
take local permissions from local counties and districts
before they can open new stores. In many cases, such new
store openings have met with strong protests from local
businesses," Singhal says.
In China, despite the
difference in ideologies and political systems - which
clearly permits autocratic decision-making in Beijing -
the picture is not dissimilar.
To understand the
dampening of enthusiasm - to opening up the retail
sector in China, one needs to look at two documents, the
World Trade Organization (WTO) accession agreement and
the recently circulated foreign investment norms for
foreign retailers - and juxtapose them against public
reactions.
WTO requires China to admit
foreign retailers
Under China's WTO commitments,
during the first year of the five-year transition period
ending December 2004, Beijing agreed to open up its
retail sector to foreign retailers in two phases. For
the first two years, foreign retailers had to come in as
joint ventures, while in the last two years they could
also enter as fully owned subsidiaries. In the first
phase, China agreed that to permit joint ventures to be
set up in the five special economic zones and six
cities. These are the zones in Shenzhen, Zhuhai,
Shantou, Xiamen and Hainan and the cities of Beijing,
Shanghai, Tianjin, Guangzhou, Dalian and Qingdao.
In the special economic zones, foreign suppliers
were permitted to provide comprehensive services for
their product distribution, including after-sales
services. In the case of Beijing and Shanghai, foreign
retailers were allowed to set up only four joint
ventures in each, while in the other four cities, the
number of joint ventures was capped at two per retailer.
The provincial capitals, including Chongqing in
Chongqing province and Ningbo in Zhejiang, were to be
opened to foreign investors in the second year. By
January 2003, all the regional, quantity and foreign
equity shared restrictions were to be lifted. This meant
that from 2003 onwards, a foreign company could own 100
percent retail subsidiaries in China, subject to some
exceptions. For department stores of over 20,000 square
meters, and chain stores with more than 30 outlets, the
foreign equity in the joint venture was to be capped at
50 percent.
Further, the WTO agreement also
allowed China to impose sector-specific restrictions on
foreign retail activity in some sectors. Only those that
had already been in business for more than a year were
to be allowed to sell books, newspapers and magazines.
The timetable permitted the foreign-funded retailers to
deal in pharmaceuticals, pesticides and petroleum
products in the fourth year and chemical fertilizer only
in the fifth year.
The Chinese central
leadership had agreed to this timetable with the WTO.
Problems, however, began when the French retail giant,
Carrefour, approached the provincial governments for
clearances to set up retail units in their respective
provinces. Lack of coordination as well as competition
among the provinces allowed Carrefour to obtain far more
clearances and set up far more joint ventures than was
permitted under the license agreement and the WTO
agreement. Before the central leadership realized what
was happening, Carrefour had dotted the Chinese
landscape with its outlets.
The Chinese
government reprimanded but did not seriously punish the
French retail giant, and seeing Carrefour get away with
the violation without major losses, other foreign
retailers followed suit. The net result is that today
several foreign retailers have circumvented the license
conditions. Apart from lack of political will, the
Chinese government has also been unable to act against
such violators, as it lacks specific legal mechanisms to
do so.
Foreign retailers rush to corner
market share
For their part, foreign retailers
largely ignore the consequences of violations. With over
300 foreign retailers, large and small, already jostling
for space, the race is on to corner as much of the
market share as possible before China is fully
integrated with the global trading community under the
WTO.
Meanwhile, public criticism of foreign
retailers has been growing in China. The Chinese media
is replete with stories of domestic retailers being
edged out of the market by mega foreign chains such as
Wal-Mart, the world's largest retailer. The China Daily,
for instance, quotes a Wall Street Journal report that
mentions a Chinese supplier being forced to lay off
staff because Wal-Mart, which sources about 95 percent
of its supplies from China, has been ruthlessly pressing
down on the supplier's margin. This report is also
quoted in India as proof of the evil intent of the
foreign retailers.
A common thread in the
Chinese media is the fear that the cost advantage
enjoyed by the Chinese exports would be eroded if the
foreign retailers were allowed to source supplies from
within the country.
The expression of public
distress and opposition has not ended there. Zhang
Hongwei, vice chairman of the All-China Federation of
Trade Unions (ACFTU), has been quoted by Chinese
newspapers as saying: "Domestic retail businesses are
facing complete annihilation. Major foreign retail
giants have completed the layouts of their sales outlets
through virtually illegal means, and other investors are
coming via the same routes."
Understandably, the
ACFTU, with a membership of 131 million, has taken aim
at Wal-Mart as the symbolic of foreign repression. The
national union has been urging "active" instead of
"passive" unionization by the Wal-Mart management in its
stores in China since 2000. At the Chinese Trade Unions
14th National Congress held in late September 2003, the
federation further intensified its attack by officially
announcing: "For companies depriving the rights of
employees to establish trade unions, we reserve the
right of resorting to lawsuits."
Unionization is
legal in China, but only officially approved trade
unions. Foreign companies could face legal action for
not permitting the workers to organize for better wages,
working conditions safety and other concerns.
The All-China Federation of Trade Unions has a
different, land-use focus in Shanghai. The Shanghai
Chain Enterprise Association (SCEA) recently pushed the
panic button when Wal-Mart was given permission to enter
Eastern China for the first time through a joint venture
with CITIC Trust & Invest Co Ltd. After it became
clear that Wal-Mart proposed to open three mega outlets,
including a 100,000 square-meter super-center at
Wujiaochang, a busy commercial area in west Shanghai,
the Shanghai association argued that little space was
available for such stores. Erecting this super shopping
mall would mean razing existing structures, which in
turn has set off fears of unplanned and indiscriminate
land use with adverse consequences for local residents,
retailers and others.
The Chinese central
leadership has been quick to appease Wal-Mart, which has
opened 26 units since it entered China in 1996 and
procured an estimated $15 billion worth of Chinese
products in 2003. Through the joint venture with CITIC
Trust & Invest Co Ltd, for instance, the huge
retailer proposes to bring in total investments
amounting to $18 million, on an equity base of $7.2
million.
Wal-Mart CEO receives warm Chinese
welcome
Understandably, when Wal-Mart Stores
Inc's president and CEO Lee Scott visited China in
October 2003, Vice Premier Wu Yi assured him of
continued commitment to the WTO terms for opening up
retailing. At the same time, such assurances have not
stopped the Chinese central leadership from circulating
the draft guidelines to regulate foreign retailers.
Under these proposed regulations, China would
compile a list of foreign retail violators and
non-violators. The law-abiding foreign retailers would
be permitted to expand, while a one-year curb on
expansion would be imposed on those who had violated the
norms. Chronic violators would be banned indefinitely
from expanding their operations.
Technically,
these provisions if implemented, should have addressed
and halted the Carrefour-type of expansion violations.
However, the Chinese government has gone a step further
by stating in the proposed guidelines that foreign
retailers seeking to set up outlets in areas of less
than 3,000 square meters would have to bring in 30
percent of the investments necessary up front. In the
case of larger units, the proposed minimum capital
requirement has been set at 5 million yuan (US$6.04
million) for 3,000-8,000 square-meter outlets and at 30
million yuan for outlets over 8,000 square meters.
Under the proposed guidelines, the large units
also would have to submit applications for building
approval at the time of FDI clearances. This appears to
be the introduction of WTO-compatible qualitative
restrictions in order to protect the domestic retail
sector on the eve of global integration.
Undoubtedly, like India, China's concern also is
dictated by the human dimension, the human price, of
opening up to massive foreign retailing that could
overwhelm domestic retailers.
Euromonitor's data
for 1996-2001 show that China had 20.3 million retail
units in 2001, growing at 32.6 percent over 1996-2001.
Total retail sales had reached 3.2 trillion yuan,
growing at the rate of 38.5 percent between 1996 and
2001. The sector employed 39.2 million people, up from
32 million in 1996, representing a 22.5 percent growth.
Part-time employment opportunities scarcely
exist in the Indian retail sector, but in China, this is
the fastest growing segment with 86 percent growth being
notched on this front between 1996-2001. Full-time
retail employment, however, grew at a more sedate 12.4
percent during this period.
So what are the
solutions?
Sivakumar, executive director of PwC
in India, is convinced that China is following
relatively orderly growth, but says India needs to
further open up its retail sector to foreign direct
investment. "As demonstrated by China, this will not
only lead to significant foreign investment but will
also help create a base for foreign retailers to step up
their sourcing from India," he says.
Political
compulsions and the need to build popular consensus,
however, are unlikely to permit swift evolution of
policy changes to permit this opening up. This is more
so in India, where democracy tempers the commercial
liberalization process, than in China, but Beijing, too,
is hearing calls for greater caution in its headlong
drive to modernize.
Jayanthi Iyengar
is a senior business journalist from India who writes on
a range of subjects for several publications in Asia,
Britain and the United States. She may be contacted at
jayanthiiyengar1@hotmail.com
(Copyright 2004
Asia Times Online Co, Ltd. All rights reserved. Please
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