From the beginning, Sam Walton and Wal-Mart

focused on buying goods as cheaply as possible, which

often meant buying imports. Here is an examination
of the history of Wal-Mart's procurement practices in
Asia and China - even through its own "Buy
American" promotional campaign in the 1980s and
1990s - and the prognosis for the future.

Give me a W!
Give me an A!
Give me an L!
Give me a Squiggly!
Give me an M!
Give me an A!
Give me an R!
Give me a T!
What's that spell?
Wal-Mart!
One of Sam Walton's earliest imports from Asia was team spirit. Enthused by
a factory cheer he witnessed in 1975 at a Korean tennis ball plant, Walton
instituted his own "Wal-Mart Cheer," still a staple of the company's
corporate culture. He liked the dramatic device for its "whistle while you
work philosophy."

Early in his company's spectacular expansion, "Mr. Sam," as everyone called

him, decided to reach across the Pacific and make imports a pillar of WalMart's business model. Forcing his American suppliers to cut costs, stressing
sales volume over high margins, and wowing customers by showcasing one
super low-priced item in each category -- all hinged on importing to find the
cheapest prices.
"Sam was an advocate of importing. It was his vision," said a retired senior
executive, who was a buyer in Wal-Mart's Hong Kong office in the 1980s, and
who asked to keep his identity private. "Our first office was in Hong Kong,
then Taiwan. Korea soon after. We'd visit factories, see how they store
goods. You would look at every step of the process very carefully."
"From the beginning, Walton had bought goods wherever he could get them
cheapest, with any other considerations secondary," writes Bob Ortega,
author of the Wal-Mart history, In Sam We Trust. By the early 1980s, Ortega
reports, Walton "increasingly looked to imports, which were usually cheaper
because factory workers were paid so much less in China and the other Asian
countries."
According to Ortega, Walton himself estimated that imports accounted for
nearly 6 percent of Wal-Mart's total sales in 1984. But another observer of
that period, Frank Yuan, a former Taiwan-based apparel middleman, who
dealt with Wal-Mart in the 1980s, puts the number, including indirect
imports, at around 40 percent from "day one." Either way, Walton's vision
was a harbinger of far vaster global sourcing today.
And it is a far cry from the picture that many Americans have of the
legendary founder of Wal-Mart: "Mr. Sam," the folk hero, who drove around
the Ozarks in a pickup truck buying cheap goods for his early discount stores
and who became the architect of Wal-Mart's highly publicized "Buy
American" campaign in the late 1980s and early '90s.
In truth, Walton's "Buy American" campaign did rescue some U.S.
manufacturers, but only those who followed his playbook. In a letter he
wrote to suppliers in 1985, he made clear he was committed to buying U.S.
goods only if they upgraded their operations and improved productivity to
"fill our requirements."

"We're not interested in charity here; we don't believe in subsidizing

substandard work or inefficiency," Walton wrote in his 1992 autobiography
Made in America. "So our primary goal became to work with American
manufacturers, and see if our formidable buying power could help them
deliver the goods, and in the process, save some American manufacturing
jobs."
As one retired senior Wal-Mart executive explained: "Sam wanted everything
possible [made] in the U. S., but he was not going to pay [extra] for it to stay.
The main thing he asked was: 'Is it good for our customers?' If not, we went
and made it overseas."
And so it is equally true -- and far less well known -- that Sam Walton was the
architect of Wal-Mart's unpublicized "Buy Asia" program.
In this strategy, Sam Walton was playing catch-up. Sears, Kmart, Target, and
JCPenney all had established procurement networks in Asia long before WalMart arrived. Wal-Mart's decision to arrive unfashionably late was deliberate,
according to the retired executive. "In going to Asia and then into China," he
said, "department stores always beat us. A lot of people were there long
before we were. But it was part of the strategy to let them go through the
initial tortures. [Wal-Mart would] step in when all the groundwork had been
laid."
So by the time Wal-Mart opened its first buying office in Hong Kong in 1981,
"manufacturers were already very competent in Taiwan," said Gary Hamilton,
a professor of sociology at the University of Washington. "There was already
a high level of confidence and responsiveness that allowed Wal-Mart to
rapidly expand."
Other retailers' investments in basic infrastructure and manufacturing
clusters primed the Pacific Rim for the eventual stream of Wal-Mart's
logistics wizards, hard-nosed buyers and product developers to cash in on
low-wage Asian labor. "All of the retailers in the world participated in it," said
the retired Wal-Mart buyer, recalling the mood in the old days. "We keep
moving around to chase lower wages. Or if there's a tariff, we'll move to a
country that does not have the tariff."

Lowering Wal-Mart's Profile in Asia

Even as Wal-Mart was pushing its U.S. suppliers to be more efficient and
promoting its "Buy American" program through the '80s, the company
bought more and more from Asia, according to Jay Moates, a former
accountant with Wal-Mart's overseas buying operation.
But to please American consumers concerned about the Asian threat, the
retailer played down its buying operations in Hong Kong, Taiwan, Korea, and
the rest of Asia. Following the brutal suppression of Chinese students in
Tiananmen Square in 1989 by the Chinese Communist leadership, Walton
feared a consumer backlash if Wal-Mart were seen as operating in China. He
was also disturbed by charges of human rights abuses in his Asian suppliers'
factories.
To continue growing in Asia, Wal-Mart needed a buffer -- a middleman or a
buying agency that would purchase Asian products without showing WalMart's hand. According to the retired Hong Kong senior executive, Walton
told Bill Fields, Wal-Mart's head buyer, that he wanted to "get out" of direct
involvement in Asia. "The decision was to go to an exclusive buying agency,"
the buyer said. "The main reason for going into [the deal] was not to be
exposed as going into Communist China."
Walton needed a trusted friend to act as his Asian middleman. He turned to a
close friend and tennis partner, George Billingsley, to serve as the titular
head of the operation. No matter that Billingsley, a former real estate
salesman, knew next to nothing about retail or procurement. To actually run
the operation, Walton found Charles Wong, a seasoned Wal-Mart vendor
who knew the U.S. retail business well and was at ease operating in Asia.
Billingsley would be a figurehead. Wong would run the day-to-day business
of procurement out of Hong Kong.
Within two years, Billingsley and Wong had set up Pacific Resources Export
Limited (PREL) as an exclusive buying agent for Wal-Mart. Wal-Mart sold its
own Asian buying offices to PREL. The links were so close between PREL and
Wal-Mart that "most of the people at Wal-Mart, referred to them as us," said
Jay Moates, the PREL accountant. "We hired all the old people from [WalMart's Asian buying] operation."

As PREL provided Wal-Mart cover for its Asian buying, Walton could both
continue promoting his "Buy American" campaign at home and expand his
overseas procurement out of PREL in Hong Kong.
But several months after Walton's death in April 1992, the "Buy American"
campaign backfired when Wal-Mart became the target of a Dateline NBC
expose that revealed "Buy American" signs adorning piles of imported goods
from Asia. Overnight, an embarrassed Wal-Mart de-emphasized the "Buy
American" campaign.
Catching the China Bug
China loomed large for Sam Walton's successors in the years following his
death. Deng Xiaoping had opened the country to investment, easing
restrictions on foreign businesses, and encouraging Chinese entrepreneurs to
enter joint ventures with Westerners. Deng declared the fishing village of
Shenzhen, just across the border from Hong Kong, a "special economic zone,"
with no taxes on foreign businesses for the first few years of operation.
Across South China, the government began building roads, ports, and other
infrastructure. In 1994, it devalued China's currency, from roughly 5 to 8 yuan
to the dollar, further fueling the country's explosive development.
China, suddenly the cheapest workshop in Asia, attracted vast capital
investment. Millions of migrant workers flooded industrial centers. Worldsavvy entrepreneurs migrated from Hong Kong and Taiwan, eager for a piece
of the action. Many shut down their plants at home in the rush to set up new
factories and hire mainland Chinese workers.
Shenzhen boomed. Growing at 20 percent a year, it became known as China's
"Miracle City." In two decades, a fishing village mushroomed into a city of 7
million people, with high rises, miles of factories, and modern electronics
headquarters. Here too, Wal-Mart sited its global sourcing headquarters.
Wal-Mart had caught the China bug. In a speech to business schools in the
early '90s, David Glass, who succeeded Sam Walton as CEO, advised students
to learn Mandarin Chinese. In regional meetings, Glass told Wal-Mart execs
that if they didn't think internationally, they were working for the wrong
company. "The only reason [manufacturing] moved from Taiwan was China's

low level of wages," said one early Wal-Mart Hong Kong buyer. "We didn't
have any trouble in China, because the Taiwanese went into China and built
up the factories. We were dealing with the same people."
Working through PREL's Asian suppliers, Wal-Mart buyers became actively
involved in developing products, and educating the mainland Chinese on how
to make goods that would sell in America. "You'd go into a factory in Taiwan
that's making men's shirts. You see what works," the Wal-Mart buyer
recalled. "And then you go into China and tell a factory in China, 'This is why
we're not buying from you.' Chinese people are not dumb. They're tenacious.
They know they need to learn very quickly."
In 1992, with Wal-Mart clocking in at a 40 percent annual growth rate,
Goldman Sachs analyst George Strachan released a study concluding that
Wal-Mart was in the midst of "a major strategic merchandising revolution
breaking from a history of almost exclusive commitment to [U.S.] nationalbrand products, expanding and improving its private-label offerings and
marketing them more aggressively than ever before."
By lining its shelves with its own in-house brands, Wal-Mart began competing
directly, on its own shelves, with its national, household brand-name
suppliers. "It makes them more efficient," argues Ray Bracy, Wal-Mart's vice
president of international corporate affairs. "I suppose you could suggest
that they would like to not have that competition. But it makes them better."
The development of Wal-Mart's house brands proved to be a watershed.
Consumer surveys had established that Americans cared less and less about
buying national brands: Low price trumped brand loyalty. In the period
following Sam Walton's death, when Wal-Mart's sales slowed and its stock
price began to stagnate, this consumer trend freed the company to ramp up
the production of its house brands through unbranded suppliers in China,
who now had privileged access to Wal-Mart's 3,500 stores across America.
The result was that Wal-Mart became its own de facto manufacturer,
developing and designing products according to the taste of its customers, as
analyzed by Wal-Mart's supercomputer. Profits soared.
Privately, long-time U.S. suppliers expressed dismay. "They invaded our core
business model," said one apparel maker, requesting that his name be

withheld. "Wal-Mart seems intent on managing the total product life cycle."
If the competitive pressures of Wal-Mart's store brands continue, he said he
would close his American factories, abandon his own brand, and try to solicit
Wal-Mart's private label business in China. "We call it 'the race to the
bottom,'" he asserted. "It's sad because I see that productivity increases [in
America] are still possible through automation. There's room for improved
efficiency. But it's impossible [to stay here] with retailers going for cheap
Chinese labor."
By now, many American manufacturers, such as the apparel supplier, have
little choice but to redefine themselves as "branded distributors" for
overseas goods. In other words, instead of making their own products, they
use their own brand names to market Chinese-made goods to retailers. They
eke out profits by outsourcing production and marketing that production.
The process is virtually the final step in the surrender to what Duke University
Professor Gary Gereffi calls the Wal-Mart-China "joint venture."
For several years, Wal-Mart has been the single largest U.S. importer of
Chinese consumer goods, surpassing the trade volume of entire countries,
such as Germany and Russia. Global sourcing is now fully integrated into the
company's operations -- giving Wal-Mart enormous leverage worldwide.
Foreign products account for nearly all of Wal-Mart's trumpeted low opening
price point goods.
During regularly scheduled conference calls with Wall Street analysts, Lee
Scott, Wal-Mart CEO since 2000, touts global sourcing as the key to
increasing company profits and continuing its expansion.
"No one can compete with China. Such efficiency, such manpower," said
Frank Yuan, the former middleman who did business with Wal-Mart, and
who now heads an international apparel trade show. "If you look at [WalMart's] shoes or housewares, 80 or 90 percent is coming out of China. And
apparel is not as big as it should be." After U.S. quotas on textile imports
expire on Jan. 1, 2005, Yuan expects imports from China to rise to 80 percent
of the apparel market.

Perfecting the Joint Venture

CEO Lee Scott would continue to improve the Wal-Mart-China joint venture
through better predictions of future sales, improved forecasting models of
coming fashion trends and the development of a new global sourcing group
to succeed PREL that became operational in 2002. Given the improved trade
relations with China under President Clinton, and a politically entrenched
free trade movement, Scott no longer saw any need to hide Wal-Mart's ties
to China.
Scott's vision was to expand global purchasing across the company and
aggregate its vast buying power. As one retired senior executive from WalMart's Global Sourcing group explained, the idea is to have "one huge buy"
from apparel to food to general merchandise manufacturers. By joining the
orders of every Wal-Mart division in every country, the company achieves
massive economies of scale in its purchases.
In the coming years, Wal-Mart's challenge is to further consolidate its list of
manufacturers in China. "Wal-Mart gets more control by keeping vendor list
short, because the small number of vendors becomes more and more
dependent on Wal-Mart as a customer," said Yuan. "They only use the top 1
percent of factories. Maybe top 50 factories in a given country. Wal-Mart has
60 percent of the largest factories in the world [working for them]."
But a more agile, transnational, "virtual" manufacturer is emerging to service
the American mass retailer. Larry Harmer, CEO of Petters International, has
never created a brand, run a research and development group, overseen the
assembly of a product, or sold it on a store shelf.
He is a "brand distributor," a general contractor of sorts for consumer
electronics, who develops a concept for a product -- a new kind of DVD
player, for instance -- by licensing other people's design and technological
innovations. When the prototype is ready, he licenses a familiar brand name,
such as Polaroid, under which he sells his product. He and his team of fluent
Mandarin speakers then head to China and turn to one of Wal-Mart's chosen
Chinese manufacturers for production. Harmer said that Wal-Mart deals with
only three or four DVD player factories worldwide -- all in China. Harmer's

situation is typical: To sell to Wal-Mart, most brand distributors will be forced

have their products made by Wal-Mart's anointed partners in China.
"The question is going to be whether the retailers and [Chinese]
manufacturers will come together to squeeze money from the traditional
brands," said Harmer. As long as he continues to bring Wal-Mart new
concepts that sell, Harmer expects to survive, one year at a time.
Some retail analysts said that Wal-Mart's dwindling number of vendors will
continue to abandon their factories in the American Midwest, as well as
transfer production from their factories in Mexico and Taiwan to China. As
this happens, massive Chinese conglomerates, such as the television
manufacturer TCL, will dominate more and more of the market. And WalMart will increasingly be forced to contend with muscle-flexing by its Chinese
partners.
And so, there's a new wrinkle in the global game: China may not settle for
second fiddle. Chinese manufacturers want to become equal partners with
Wal-Mart, playing a role in product development, not just filling assembly
orders. They, too, are becoming creative with the use of point-of-sale
analysis to respond instantly to the demands of consumers and develop
products they want.
"We are seeing an emerging shift in product development," said Tom Travis,
a trade lawyer at Miami's Sandler, Travis & Rosenberg, who counts Wal-Mart
among his clients. Chinese manufacturers "are assuming much more of the
functions, creating and designing the product."
This could lead to what up until now, many would have considered an
unthinkable scenario in which the manufacturing dominance of China
subverts Wal-Mart's control of the supply chain.