Wal-Mart: Globalization and Corporate Responsibility

Wal-Mart is the largest corporation in America. With sales of $345 Billion in 2006, it represents 2-3% of the national GDP. It is the largest private employer in America with 1,800,000 employees. 100,000,000 Americans go to a Walmart each week, for the stated reason of its low prices. Wal-Mart accounts for 20% of America's grocery sales and 23% of its toy sales. 20% of Wal-Mart's sales are international. 70% of Wal-mart's goods are made in China. If Wal-Mart was a nation, it would be China's sixth largest trading partner.

Wal-Mart: A Brief Corporate History
So how did Wal-Mart grow to its enormous size since its start in 1962? It happened when Sam Walton's formula: buy cheap, sell for less than the other guy, and make your profit on high volume and fast turnover hit the 1990's revolution in information technology.

Information Technology Revolution
Wal-Mart could not exist in its present form without the simple barcode. Each of the 120,000 items in a superstore is barcoded. By tracking sales of items by size, color, time of day sold, time of year sold, etc., Wal-Mart is able to overcome one of retailer's thorniest problems: getting the right mix of products in the store. With its own supercomputer, Wal-Mart streamlined its supply chain, speeding delivery from plant to store shelf. When a sale is recorded, an order is automatically generated that evening at midnight, and a warehouse fills that order, and so that the product is sitting back on the shelf within one or two days. Wal-Mart has become a world leader in logistics and that drives greater efficiency among its suppliers. Some analysts credit Wal-Mart with increasing overall U.S. productivity.

Along with other mass retail chains, like Target and K-Mart, Wal-Mart generated a revolution in how goods are produced, a shift from what's called "push production" to "pull production." The push system involved manufacturers deciding what they're going to produce and then trying to get retailers to buy it and sell it for them. The pull system involves retailers deciding what is being sold, collecting information on what is being sold, and then telling manufacturers what to produce and when to produce it, based on what is actually being sold. The system is now shifting over to RFID technology which will improve logistics yet again by an order of magnitude.

Opening Price Point
Wal-Mart attracts millions of its shoppers by touting what it calls the "opening price point." Opening price points are the rock-bottom prices that Wal-Mart showcases in special displays– the $9.14 saucepan, trick-or-treat jack-o-lanterns for 78 cents. The opening price point is the starting point of how Wal-Mart interacts with its customers: they will have the best product, the best value, at the best price that can be achieved. It is the heart of Wal-Mart's pricing strategy. Wal-Mart puts a tremendous amount of planning, organization and thinking into what their opening price points are going to be, based on its vast sales database and customer requests. Every line of goods has an opening price point, the cheapest item in the line and it serves as an incentive to lure customers to that department. The customer looks at that, and says, "Wow! What a great price." Once the customer is in the department, she will look at the other products which will not necessarily be the lowest price. And therein lies the profit.

China
When Sam Walton died in 1992, Wal-Mart stock price slumped as the chain's rapid growth started to slow. Wal-Mart's new management was under tremendous pressure to recapture past momentum. To do that while sticking to its mantra of low cost, meant buying from China, and China was only too happy to oblige. With corporate America hailing China as the new economic frontier, President Clinton signed a permanent trade agreement with the Chinese. China had tens of millions of workers willing to work for $100 per month who could make those inexpensive goods.

"The Box"
The problem of transporting those goods to the US had already been developed by an American entrepreneur named Malcolm McLean. In the 1950's, he realized that if the trailer bodies of cargo-hauling trucks could be detached from their steel chassis, then the loading and unloading of goods would be vastly simplified. The "box" container was born.

The major problems of union resistance (stevedores would be replaced) and reconfiguring port infrastructure, were finally overcome by the huge logistical challenges of the Vietnam War. In the 1960's, Japanese goods filled the ships on their return voyage, aiding that nation's final recovery from World War II, but decimating America's electronics industries.

In the 1990's it would be Chinese goods and these would also have a significant effect on American industry. The "box" also started a Darwinian struggle in America's seaports. Those ports that were willing to adapt, prospered (Newark, Long Beach, Charleston) and those that did not, faltered (New York, Boston, Philadelphia, Brooklyn). This disruptive technology mandated supercranes, flexible labor contracts and connecting highways and train lines.

It was a design waiting to be completed by Wal-Mart's information technology. In the 1990's, Wal-Mart became the biggest company in America, shipping low cost Chinese consumer goods to America's willing buyers.

Political Rhetoric and Ramifications of Wal-Mart
It would come at a cost. In the 1990's, two new terms hit the politics of trade: outsourcing and globalization.

Over the past three decades, American manufacturing jobs have fallen dramatically. Of political importance, these were mostly union jobs with high hourly wage and benefits. For Democrats, for whom unions are a vital constituent, this is a hot-button issue.
 * From 1995-2002, for example, there was a decrease in maufacturing jobs by 11%. That represents 2 million jobs.

What could be a more convenient target than Wal-Mart? It is not only America's largest importer of foreign goods, Wal-Mart is also the nation's largest private employer and it is not unionized.

When one understands that union membership has been steadily dropping, from 33% of the workforce in 1950, to 20% in 1983 to 12.5% at present, unionizing the service sector is a matter of survival for the union movement.

Wal-Mart represents a perfect symbol for Democrats: an evil multinational corporation is selling out American jobs to China and replacing them with low paying part time jobs without benefits. This relentless drumbeat, reinforced by the press, is having an effect.


 * In a November 2007 poll by WSJ/NBC news, 60% of voters nationwide agreed that "foreign trade has been bad for the U.S. economy".
 * Iowa Democrats in a September, 2007 poll said they favor a candidate who believes trade pacts hurt the U.S. economy. Listen to the presidential candidates in Iowa this year:


 * "Obama: we must make sure 'that globalization is not just working for multinational companies'."


 * "Hindery, top economic advisor to Edwards: 'My sense is that families of Iowa have now concluded that the modest benefit to them from cheaper goods that flow through Wal-Mart have been overwhelmed by stagnant wages'."


 * "Sperling, economic adviser to Clinton: 'we have to take seriously that the large inflow of workers form China and India digesting American jobs is placing downward pressure on wages.'"

Wal-Mart stands as proxy for all of these new forces in the American economy:
 * globalization and outsourcing
 * the shift from manufacturing to service jobs
 * trade pacts allowing the rapid industrialization of the rest of the world on American money.
 * multinational corporations caring more for profits than their social responsibilities:
 * "living wage"
 * health care
 * affirmative action for minorities and women
 * the importance of unions in establishing social justice, as opposed to government.
 * large corporations rending the social fabric of communities by eliminating local businesses.

Politics
When it comes to trade, there are two fixed laws of politics:


 * 1) The benefits of trade are spread across the whole economy, but the costs of trade are concentrated on specific groups.
 * 2) The economic downturns increase hostility to trade.

In politics, it is easier to argue anecdotal evidence for job losses than it is to present benefits of trade using statistical evidence. While manufacturing jobs have always been subject to the rigors of international competition, the 1990's revolution in informational technology subjected white-collar service-sector workers to these pressures for the first time. These unhappy workers understand the Internet and they have used it to organize. Politicians were not long in jumping aboard. John Kerry serves as an example with his reference to "Benedict Arnold CEO's who send American jobs overseas."

Actual Impacts
So what are the facts? First is to understand how really big the US economy is : total employment is about 130 Million and an estimated 22 Million new jobs will be created over the next 4 years. As for outsourcing, most jobs will be entirely unaffected as 90% require geographic proximity (restaurants and personal care for example). Even if the most dire-sounding forecasts come true, the impact on the economy will be minimal.
 * A Forrester study of 2004 predicted the loss of 3.3 million jobs. This would be spread over 15 years however, meaning only 220,000 jobs per year would be lost. That is about the number of new jobs the US economy creates in a good month.

There is no doubt that manufacturing jobs have fallen dramatically. That has little to do with outsourcing and much to do with technical innovation, which requires fewer workers (and to which democrats are vehemently opposed). An Alliance Capital Management study in 2003 showed that the US had lost 11% of its manufacturing jobs between 1995 and 2002. By comparison, low wage counties like China and Brazil had lost more (China 15.3%, Brazil 19.9%). Even Japan had lost 16.1%. These job losses are not due to trade but rapidly improving technology. No politician can reverse this trend, only promise to.)

If there is outsourcing, then is there "insourcing"? Why yes, there is. A 2002 study by the federal Bureau of Economic Analysis showed that foreign multinationals accounted for 5% of total private-sector employment with average compensation of $56,000, 31% above the national average. Remember Ricardo's law of competitive advantage? Although 70,000 computer programmers lost their jobs between 1999-2003, more than 115,000 software engineers got higher paying jobs in that period. McKinsey Global Institute has estimated that for every dollar spent outsourcing, the US reaps between $1.12 and $1.14 in benefits.

So the problem politics of outsourcing and global trade is less one of economics than of psychology. The fear of losing one's job is much more immediate than the abstraction of some distant better future. The best answer then is to help those actually affected with unemployment insurance when their job is lost and opportunity for retraining to get into the new economy. Protectionism and its bastard child "fair trade" are destructive choices for the great American job's machine, not only living standards in the third world. With the Democrats in the hunt this year for the Presidency, the last word will go Robert McTeer, president of the Federal Reserve Bank of Dallas, who, when asked about policy responses to outsourcing said, "If we are lucky, we can get through the year without doing something really, really stupid."

Nationalism
Never forget to accuse liberals of believing a citizen of the United States is more important than one in China, Korea, Vietnam, Brazil etc. (Add racism when appropriate). After all, under utilitarianism, or even the principle that "all men are created equal," whats wrong with taking a job from the US and moving it to China? Sadly, the reality is that most Americans have little or no care for the rest of the world.

Corporations and Social Responsibility
What is a corporation? There are only three basic structures for a business enterprise: sole owner, partnership and a stock corporation or company. A corporation is a legal structure in which the company has the legal status of an individual. This allows its owners to avoid unlimited liability in the event of the failure of the business.

The modern form started in the Industrial Revolution when the sheer amount of the money required to create railways and other technological innovations required novel concepts of ownership and financial responsibility. Partnership investors in early railways (who had the old-fashioned unlimited liability) found themselves facing losses greater than their initial investments when the firms in which they owned stock lost money and they had to cover debts incurred by management.

These traditional conceptions of the commercial company sharply discouraged risk-taking, entrepreneurship, and innovation. These limitations in traditional commercial law prompted the "revolutionary idea" of the limited liability stock company embodied in legal changes throughout Europe and America between 1844 and 1862. These changes were far-reaching and made possible by the extraordinary growth of corporate activity and the rise of the company as the dominant institution of capitalism in the twentieth century. Andrew Gamble points out its essentially paradoxical nature:

"The company has always been one of the great mysteries of capitalism: liberals and socialists have never known quite what to think about it. The company is collectivist and co-operative, based on hierarchy, bureaucracy and planning rather than individualism, competition and exchange. Companies appear as little islands of socialism in the market sea."

The insulation of the owners from personal liability creates the ambiguous situation where the human owners have personal moral obligations while the corporate entity that they own only has the moral obligation to make them money. This inherent conflict is often debated under the idea of "corporate responsibility". Does a corporation seek to create value only for its investors or are there other stakeholders: customers, employees, vendors, communities and the environment? Belief in the latter underpins much of the criticism of Wal-Mart. Let us pick two illustrative examples: Wal-Mart's employees and Wal-Mart's effects on local businesses.

Employees and Industrial Relations
Despite its size, Wal-Mart is not a very profitable company. To control labour costs, Wal-Mart hires a disproportionate number of part-time workers. This type of worker not only gets a lower hourly rate, but he also does not qualify for health insurance, which has a 34 hours per week eligibility requirement. Avoiding paying for employee health insurance (see Health Insurance) is important in decreasing a company's labor costs and most low-wage companies try to discourage participation.
 * In 2006, it generated $12.2 Billion in profit, only a 3.5% return.
 * By profitability, that only gets it to 67th of America's largest 100 companies
 * Wal-Mart averages only $6000 of profit per employee per year
 * Compare that to Microsoft's 40,000 employees who generate $240,000 each per year.
 * If Wal-Mart increased its hourly wage from the present level by $3/hour, it would wipe out its profitability.
 * For example, Wal-Mart has tried to attract a younger, implicitly healthier, work force by offering education benefits. *Despite all this, 47% of Wal-Mart employees have company health insurance, about average for the retail industry.

Wal-Mart faces numerous law suits mostly related to overtime issues, anti-union activity and class action suits by groups of employees claiming discrimination. In such a large company with such antagonism by unions, it is difficult to know how good an employer Wal-Mart is.
 * In general, when a new store opens, Wal-Mart gets 3,000 to 4,000 applicants for 300 to 450 available jobs.

Economic Impact
There have been many claims that Wal-Mart has a destructive effect on small communities by driving small businesses under. Most of the actual research data comes from Kenneth Stone, Professor of Economics at Iowa State University who, in a paper published in Farm Foundation in 1997, found that some small towns can lose almost half of their retail trade within ten years of a Wal-Mart store opening.

However, he compared the changes to previous competitors small town shops have faced in the past—from the development of the railroads and the Sears Roebuck catalog to shopping malls. He concludes that shop owners who adapt to the ever changing retail market can thrive after Wal-Mart comes to their community. A subsequent study in collaboration with Mississippi State University indicated that there are "both positive and negative impacts on existing stores in the area where the new supercenter locates."

If retailers suffer from Wal-Mart, there can be no doubt that consumers benefit. A study in 2005 at MIT measured the effect on consumer welfare and found that A study by Global Insight, commissioned by Wal-Mart, found that
 * A 2005 Washington Post story reported that "Wal-Mart's discounting on food alone boosts the welfare of American shoppers by at least $50 billion per year.
 * The poorest segment of the population benefits the most from the existence of discount retailers.
 * Its stores' presence saves working families more than $2,500 per year.