The FP Memo

The FP Memo: Attention, Wal-Mart Executives

America's leading company must expand its operations abroad, help smooth relations with China, and convince skeptics that free trade creates jobs.

MEMORANDUM
TO: H. Lee Scott Jr.
President and CEO
Wal-Mart
FROM: Robert E. Litan
RE: Retail Diplomacy

You grew up in the 1950s, when Charlie Wilson, once head of General Motors and later secretary of defense, said "What’s good for General Motors is good for the country." Today, you are privileged to run a company that is as important to the U.S. economy — in terms of sales and employees — as GM was then.

But Wal-Mart is not only one of America’s largest companies, it is one of the world’s largest. You’ve come a long way to reach this point. In founding Wal-Mart, Sam Walton proudly advertised that the company would sell goods made in the United States. Now you sell products from all over the world and have operations in almost a dozen foreign countries, including Britain, China, and Japan, with plans to expand into Hungary, India, Poland, and Russia. You have become the quintessential multinational corporation, and with an incredible $285 billion in sales last year, your revenues exceed the gross domestic product of Austria, Greece, and Switzerland. All of which raises the question: What is Wal-Mart’s foreign policy?

Conquer Foreign Markets: Like all public companies, you must continue to increase your revenues, and more important, your earnings. Otherwise, your stock price will stagnate and eventually decline — to the detriment of the hundreds of thousands who own shares in the company. So far, most of your growth has come by adding stores in the United States, at the impressive rate of roughly 300 a year. You claim to have plenty of growth opportunities left in the United States by expanding into underserved regions and by adding stores near the ones you already have. But anti-Wal-Mart activists and tightening profit margins will probably hobble your growth at home.

Wal-Mart may be the proud creation of "red state" America, but its future is overseas. Your international operations already account for about 20 percent of overall sales, but with less than 3 percent of the global retail sales market, you have plenty of room to grow. Last year, you added 232 stores — almost as many as were opened in the United States — in such countries as Brazil, Britain, Canada, China, Mexico, and South Korea. Your recent tour of Europe to scout out competitors is a sign that you understand that Wal-Mart must become an even more global operation.

Advocate Free Trade: Your business hinges on saving consumers money by taking advantage of other countries’ efficiencies. Consumers simply aren’t willing to pay more for "made in America." Your critics conveniently ignore this fact — and the billions of dollars that your low prices put into the pockets of lower- and middle-income Americans. Don’t let the skeptics deter you from publicly touting the benefits of free trade. On your company’s Web site, for example, you defend against the false charge that you buy 70 percent of your goods from China by pointing to the billions you buy from American suppliers. But you miss the chance to remind readers that cheap goods from China save them money, too. There couldn’t be a better corporate spokesperson for telling Americans about the price savings they can get from free trade than Wal-Mart.

Extracting concessions from foreign governments will be critical, as well. You urgently need them to lift their restrictions on "big-box" retailers such as yourself. These barriers, often implemented through zoning laws, keep your trademark megastores out of important markets. Getting foreign countries to clear away regulatory obstacles, however, will require some hard bargaining. You therefore have a direct interest in jump-starting stalled multilateral trade talks. And you have influence on both sides of the divide. Because you are already heavily involved in several emerging markets — including Argentina, Brazil, China, and Mexico — you may be in a position to help persuade these governments to reach common ground with the United States and other rich countries at the Hong Kong trade summit in December. Meanwhile, tell U.S. Trade Representative Rob Portman that it’s worth making concessions, such as reducing agricultural subsidies, that are a waste of U.S. taxpayers’ money in any case. Opening Europe and Japan to efficient American retailers and other service providers will help consumers there, but it will also create jobs in the United States. Start making the case.

Build a Safety Net at Home: Unfortunately, support for liberal trade policies in the United States is crumbling fast. New concerns about "offshoring" have seriously eroded public support for trade. As you know, not everyone wins from freer trade: Some lose their jobs, though far fewer than popularly believed. Workers in import-competing industries may keep their jobs, but they often must accept stagnant wages, or even wage cuts. Wal-Mart can use its influence to help soften the blows of the free market — and shore up political support for free trade.

It is long past time, for example, that the U.S. government ease workers’ legitimate anxieties over job losses by strengthening the safety net. Specifically, you should urge federal lawmakers to provide "wage insurance" that, for a limited time, would replace some of the wage cuts imposed on displaced workers. Congress adopted a very narrow and complicated form of wage insurance in 2002 that was limited to workers older than 50 who could prove they lost their jobs due to trade. But workers don’t care whether the source of their job loss is trade or, as is more often the case, continuing advances in technology (think voice mail and word processing replacing secretaries) or shifts in consumer tastes (car buyers who want foreign brands instead of Ford).

For a few billion dollars a year — which a small increase in the federal unemployment insurance premium could easily fund — the U.S. government can give wage insurance to all permanently displaced workers. Wal-Mart has clout on Capitol Hill and in the White House. Use it to help make effective employment insurance a reality. If yours and other big companies who support freer trade won’t do this, don’t be surprised if the trade agreements you want never see the light of day.

Convince the World That Wal-Mart Means Jobs: Europe and Japan are full of small shopkeepers, and they are deathly afraid of you. In Britain, for example, activist groups are working hard to restrict megastores that threaten small businesses. If you don’t successfully address their concerns, you may find that the doors to these lucrative markets remain barred. One strategy is to appeal directly to the pocketbooks of Japanese and European consumers and let them pressure their governments to relax the restrictions that are keeping you out. Don’t let the activists dominate the debate; there are plenty of quiet consumers who should be on your side. And whenever possible, challenge the activists on their own turf. You might, for example, tout Wal-Mart’s new "green" stores — complete with solar panels, windmills, and water-saving devices — to environmentally conscious Europeans.

You also need to emphasize that Wal-Mart helps create new firms — local suppliers — even as it may threaten smaller local businesses. As you expand into other countries, you’ll need more efficient and honest domestic suppliers, who understand local tastes and know their customers. To encourage their formation and growth, you need to build local support for entrepreneur-friendly policies: less red tape when applying for business licenses, easy registration of property titles (so entrepreneurs have legally recognized collateral), and bankruptcy laws that don’t condemn those whose first or second forays into business end in failure. Think about running public seminars on entrepreneurship out of foreign stores. And help understaffed U.S. embassies and aid missions know where corruption and inefficiency are still rife. The United States should give substantial weight to these factors in deciding how to distribute funds from the Millennium Challenge Account. Wal-Mart, with its growing understanding of foreign supplier networks, can be the government’s eyes and ears.

Lie Low on China: Wal-Mart has a special relationship with China. In 2004, your company accounted for almost 10 percent of the $197 billion in goods the United States imported from the mainland. So Wal-Mart has a keen interest in what happens in the increasingly turbulent U.S.-China relationship.

For the last decade, the United States and China have had an implicit bargain: China wants to keep its export prices low so it pegs the yuan to the dollar, and the United States needs China to use its export revenue to buy Treasury bonds and finance the huge U.S. federal deficit. The Bush administration, pressed by many on Capitol Hill, pounded the Chinese to revalue or "float" their currency. In July, China finally budged — but just an inch, allowing its exchange rate to move up or down by about 2 percent against a basket of foreign currencies.

China’s move — small as it is — probably will ease the China-bashing for a while. Truth be told, your interests are probably closer to Beijing’s than Washington’s when it comes to revaluing the yuan. You want low prices on the goods you buy from China, so a more significant revaluation of China’s currency may hurt your bottom line. So, in the meantime, lie low. But it wouldn’t hurt for you to diversify your supplier base a bit so that when the yuan does rise further, as it inevitably will, you’ll be able to quickly turn to other suppliers who are almost as competitive as the Chinese are now.

Franchise for Peace: Theorists have long speculated that commerce ties countries together and makes conflict less likely. The theory has its limitations, to be sure, but it’s also powerful. The more countries where you have stores, and the more foreign countries you buy from, the less interest they’ll have in fighting.

Here’s an idea: Why not make a concerted effort to expand your stores in the Arab countries of the Middle East, a region where you still lack a presence? You might worry about being a target for foreign terrorists, but you can reduce those chances by having nationals run, and perhaps jointly own, those stores. Or maybe the answer is finding foreign partners — rather than opening new Wal-Marts per se — that will follow the same business model but with a local feel. You already do that in Brazil, China, and Mexico. What better way to export your values — everyday low prices — than to build your stores overseas?

Long-term U.S. interests and the interests of Wal-Mart have a lot in common. Peace, free trade, and globalization are good for both the country and its premier company. But countries don’t always follow long-term interests, and it appears that a protectionist wave may be building in the United States that could damage free trade generally and your lucrative relationship with China in particular. Wal-Mart should throw its weight against that trend. Your company may no longer be about "buying American," but that doesn’t mean it can’t be good for America.

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