Sunday, July 1, 2007

Who's afraid of Wal-Mart?

Historically, MNCs have had high profit margins arising from quasi-monopolies in technology and finance, and political influence translating into protectionism. In the US, trade unions fought for a bigger share of the surpluses, and obtained the highest wages in the world. In effect, MNCs and the trade unions shared monopoly profits garnered at consumer expense.

Wal-Mart has defied this model. Far from seeking high margins, it has relentlessly cut prices and kept profit margins so low that competitors give up. Its profit margin is just 3% of sales. Prices at Wal-Mart can be half or less than at major department stores. Wal-Mart quality is often poor, though that is improving.
So, unlike historical Numero Unos, Wal-Mart has risen by cutting instead of raising prices, by reducing instead of increasing profit margins, by catering to the masses rather than the well-heeled, and by using the cheapest rather than the most expensive workers. Pankaj Ghemawat of Harvard University estimates that Wal-Mart's lower prices benefit US consumers directly by $18 billion a year. Besides, Wal-Mart obliges rivals to cut prices. The net benefit, according to consulting firm Global Insight, is a whopping $263 billion. This dwarfs anti-poverty programmes. The greatest beneficiaries of Wal-Mart are the poor.

Wal-Mart aims at scale economies of every sort. By buying massively, it pays least to suppliers. It has massive stores with acres of parking space to accommodate hordes who drive in. This strategy needs cheap land, so Wal-Mart stores are typically in urban peripheries, small towns and rural areas. Petrol is cheap in the US, so Americans happily drive an hour or more to a Wal-Mart store 30-40 miles away.

Conditions are totally different abroad, so Wal-Mart has often failed in other countries. Ghemawat says that the further Wal-Mart goes from the US the worse is its performance. It shut down in Germany after losing hundreds of millions of dollars, and sold out in Korea too. It now accepts the need to adapt to local conditions, but adaptation erodes the power of its US model.

Land prices have skyrocketed in India, so a US-style superstore would have to be situated miles outside a big city. I simply cannot see well-heeled Indians driving for hours to a big store on the outskirts of Delhi or Mumbai. Unlike in the US, the poor and lower middle-class in India do not have cars or cheap petrol to facilitate long-distance shopping.

So, small shopkeepers will easily compete. They typically evade sales tax. Many pay low rents because of rent control. They are located close to consumers, and provide home delivery at no extra cost. Some even provide credit. Even if Wal-Mart is cheaper, many consumers will opt for the convenience of local shopkeepers.

To succeed in India, the Wal-Mart model needs major surgery. It can procure imported goods cheaper than anyone else. But its Indian partner, Bharti, knows the local market much better. On balance, Wal-Mart needs Bharti more than the other way round.

Given Wal-Mart's limitations, why is the CPM so opposed to its entry? The party says it is worried that small shopkeepers will suffer. Yet, it seems hilarious that a party sworn to protect the poor from the bourgeoisie should suddenly pose as a defender of the bourgeoisie, and oppose lower prices for the poor.

What's happening? Well, ideology obliges the CPM to oppose the biggest MNC. More important, the Left is outraged by the company's anti-union policies. To keep prices low, Wal-Mart seeks only non-unionised labour, and has closed stores rather than accept unions. Some critics claim that Wal-Mart pays less than the minimum wage. In fact, it pays around $10 per hour, fractionally less than the average for all US retailers. Critics think Wal-Mart should pay much more than small companies, and offer higher health and other benefits - that is what Numero Unos have done in the past. But Wal-Mart says it is dedicated to the philosophy of everyday low prices, and gives priority to the consumer over the worker.

In theory, the Left represents the poor. In practice, it represents the labour aristocracy - the big trade unions. These unions provide CPM with cadres that are invaluable for fighting elections. The poor do not provide any such assistance. So, the CPM will always favour unions over the poor. This explains why it is so outraged by Wal-Mart.

Note that Wal-Mart has been welcomed in China, where it has supplemented rather than supplanted small shopkeepers. In the coming year, Wal-Mart will set up 20 new stores and remodel 65 existing ones in China. In keeping with the need to adapt to local conditions, Wal-Mart has even accepted unionisation in China.

The lesson is clear. The CPM should welcome Wal-Mart into India. Once it is here, India's labour laws will oblige it to accept a trade union. The CPM should seek to control that union. What a communist victory that will be!
Source: Swaminathan S Anklesaria Aiyar column in Sunday Times of India