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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 contact content@atimes.com for information on our sales and syndication policies.)
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    Jan 31, 2004




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    Indian's tryst with economic reform (Nov 19, '03)

    India removes cap on FDI (Oct 16, '04)

     

     

     
       
             
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