In this morning's edition of Crain's New York Business,
Wal-Mart whines about not being welcomed with open arms into New York City even though Target is doing well there:
"It's curious that other retailers with similar business models have been able to come to New York and have been successful," says Mia Masten, Wal-Mart's community affairs director for the East Coast. "It begs the question as to why everyone is focusing on us."
In fact, other than both chains being discount retailers, I would argue that the two businesses are very different (and I'm not just talking about advertising).
What got me thinking this way is a small paragraph on p. 13 of Target's new annual report. It reads:
We continued to convert indirect imports to direct imports during 2004, which helped to remove sourcing inefficiencies and to drive higher merchandise margins and shorter product lead-times. While this multi-year effort increases our costs as we develop product design expertise and invest in supply chain infrastructure, it also yields tangible benefits for our guests and has a net positive impact on our business results.
I think this is extraordinary for two reasons. First, Target is driving up its own costs in the short term for futures benefits later. Of course, this isn't a novel thing in most businesses, but it is compared to Wal-Mart, a company that claims to be devoted entirely to cutting its own costs no matter what. Even when Wal-Mart does something visionary, like make its supply chain run on a Radio Frequency Identification system (RFID), they mandate that their suppliers bear the burden of installing the necessary chips. Target's move is also a sign of its emphasis on fashionability over cost (as I suspect that's the prime reason why shorter lead times would be important).
However, more importantly for this analysis is the distinction between direct and indirect imports. A direct import comes straight from the factory where a product was created. An indirect import comes through a middleman. Middlemen drive costs up, right? If Target is cutting out the middleman and it proves to be more expensive in the short-term, they must be going to a better class of factory.
I'm quite certain that Target, like any other retailer these days, sells goods made in what we here in the US would call sweatshops. However, much to their credit, you can find extensive rules on sourcing at the investor relations section of the company's web site. For example, you can see there that:
In our Conditions of Contract, we require our vendors to warrant that all goods are made in compliance with applicable laws - including the Fair Labor Standards Act of 1938, a law that governs how employers pay and treat their employees. Our Conditions of Contract also requires that the companies our vendors do business with will be in compliance with the law. In non-U.S. markets we establish similar basic minimum requirements. If a vendor violates our agreement, the penalties range from the loss of the contract or order to the loss of all future business with Target.
And that:
Since 1992, Target has required its non-U.S. direct vendors to state that the goods produced are not made by child or forced labor. This legal verification is required as a condition of receipt and payment of merchandise through legal letter of credit stipulations.
The key question though is whether these rules are enforced. I don't know, but it is obvious that as Target limits its use of middlemen it will be easier to trace goods in stores to particularly factories, thereby giving them added incentive to follow their own rules (assuming they aren't doing so already).
Now let's turn to Wal-Mart. Wal-Mart has its own Factory Certification Program. You can read the most recent report available about it by downloading a .pdf available here. In it, Wal-Mart writes:
During the period covered by this report, Wal-Mart inspected at least once each of the 5,700 factories from which we directly purchased merchandise. For merchandise sourced through suppliers, we required approved third-party firms to inspect some 2,000 factories in high risk categories -- apparel, shoes, sporting goods, accessories and toys.
If you look at Newsweek's recent cover story on the China trade, you'll see that Fareed Zakaria lists Wal-Mart as having 6,000 suppliers, 80% of them in China. That's suppliers; how many factories do these suppliers have?
This is where having an historian working on this is a good thing. Industrialization consists of the division of labor and mechanization. We tend to think of a factory as being a big building with lots of equipment in it. Some are, especially factories building sophisticated things. In his book China Inc., Ted C. Fishman makes it clear that China is trying to jump several levels of industrial development in a very short time. People like Tom Friedman want you to be worried about China because China is competing with the US on autoparts and computers, but they also have "19th Century American" style-factories that are only called factories because they have a lot of very poor people doing the same thing all day, sewing clothing or making toys. They resemble the apartment-sized factories of late-nineteenth century New York City more than they resemble the giant cathedrals of today.
Which are there more of, the holes in the wall or the cathedrals? According to Newsweek again, China has taken over the entire American toy manufacturing industry, but NPR tells us that Chinese auto parts are yet to appear outside of China in any great numbers. There's another hint in Target's report about factories in the lesser-developed sections of the world:
By its nature, the brand compliance registration process is fluid, as vendors register and un-register factories. As a result, the number and locations of factories that are registered to manufacture merchandise for Target change frequently.
In short, when you think of all the factories that must be out there, Wal-Mart's inspection program doesn't seem that impressive.
What happens during a Wal-Mart inspection? Here's Fishman:
Wal-Mart has a team of factory inspectors who tour facilities to ensure compliance with the local labor standards that require a minimum wage and restrict overtime. Its ability to police abuse is, however, limited by the ingenuity of plant managers, who often farm work out to subcontractors who are not subject to inspection.
Target's audits include subcontractors, and are always unnanounced.
I get the impression that while Target has been way out front on human rights issues related to globalization, Wal-Mart has simply put up a smokescreen. Consider the strike going on right now at a Japanese-owned Wal-Mart supplier in China:
MORE THAN 10,000 STRIKING WORKERS AT JAPANESE-INVESTED WAL-MART SUPPLIER FIRM IN SHENZHEN DEMAND RIGHT TO SET UP THEIR OWN TRADE UNION
Over 10,000 workers of the Japanese-invested Uniden Electronics factory in Fuyong Town, Shenzhen, have been staging a massive strike action since 17 April 2005 in an effort to win the right to set up their own trade union in the factory. To China Labour Bulletin's knowledge, this is the first time Chinese workers have ever staged a strike specifically in order to form a trade union...
In December 2004, following reports that a Japanese supervisor had beaten up several workers at the Uniden factory, several thousand workers there staged a similar strike protest. At that time, the workers sent a collective petition to the factory management listing a total of fifteen demands. Among them: 1) that workers should be allowed to set up a trade union at the factory, as agreed to by Uniden management in the year 2000; 2) that 60 percent of normal wages should be paid during sick leave and maternity leave (currently, the workers receive no pay at these times, indeed they reportedly have to pay the company "living allowance" fines); 3) in accordance with China's Labour Law, workers with ten or more years of seniority should be offered permanent contracts and no arbitrary dismissals should take place; and 4) that the quality of meals and the water supply in the workers' hostel should be improved.
After the December 2004 strike, Uniden management promised to raise the workers' salaries and said it would permit the workers to set up a trade union. But according to another message posted on the online bulletin board, a new Japanese manager was appointed at the factory shortly thereafter, and he proceeded to break all the company's promises.
And some so-called "globalization experts" think helping people like this is anti-Chinese. Ever heard of universal human rights?
As I've written before, the solution to the problems created by globalization is transparency. Wal-Mart is not transparent. As is the case with so many of their other problems, Wal-Mart wants to paper it over and keep on doing what they're doing, no matter who it hurts. That, in a nutshell, is why we pick on them.
JR