Who Stole the American Dream? (35 page)

When their moment comes, vendors are led one by one into tight little cubicles for tough bargaining with Wal-Mart buyers. Wal-Mart officials describe these sessions as normal business give-and-take, ignoring the vast power disparity between a $260 billion-a-year colossus like Wal-Mart and small producers who are dependent on Wal-Mart for survival. Wal-Mart’s incentive bonuses richly reward buyers for arm-twisting every last cent out of suppliers, according to former Rubbermaid CEO Wolfgang Schmitt. “In a large organization,” Schmitt said, “you’re going to have
buyers who overdrive that part and will step over the line.”

Former Wal-Mart managers concede that it played hardball. “
It’s very one-sided,” former Wal-Mart store manager Jon Lehman told me. “I’ve been in these little cubicles…. The manufacturer walks in … and the buyer says, ‘… We want you to sell it to us for 5 percent … lower this year than you did last year.’ … They know every fact and figure that these manufacturers have. They know their costs. They know their business practices—everything. So, what’s a manufacturer left to do? They sit naked in front of Wal-Mart. Wal-Mart calls the shots: ‘If you want to do business with us, if you want to
stay
in business, then you’re going to do it our way.’ It’s all about driving down the cost of goods.”

The key to Wal-Mart’s marketing strategy—and one big reason that its supply lines from China have become so all-important—is what Wal-Mart calls
its “opening price point.” That is the rock-bottom price that Wal-Mart showcases on each aisle, like the $29.97 microwave oven, the $19.14 saucepan, or the trick-or-treat jack-o’-lanterns for 78 cents. Every line of goods has an opening price point—the bait to lure customers to that line of goods.

“It’s
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 last year’s sales, based on customer requests …,” Jon Lehman explained. “[It’s] to get you in. You look at that, and you think, ‘Wow! What a great price!’ … Then they’ve got you, because you walk about ten more feet, and you see the item you really want in that same category. Then you buy that item. But it’s not going to be, probably, the lowest price in town…. Once you walk past that opening price point, they’ve got you, because you’ve already formed the perception that everything in that department is the lowest price in town.”

“And maybe it’s not?” I queried.

“No, it’s not—No.” Lehman flashed a knowing smile. “I can tell you from experience,
it’s not
.”

To hit those all-important opening price points, Wal-Mart reached increasingly for suppliers in Asia and especially China, where costs were practically subterranean. Soon, Wal-Mart was pressuring American suppliers to move production to China. In one meeting in Bentonville, I was told, a Wal-Mart vice president bluntly advised a group of two hundred suppliers that if they wanted a good chunk of Wal-Mart business, especially at the opening price point, they had to shift at least 25 percent of their productive capacity to China.

“Their message to us is, ‘There’s a broad market out there. If you want to focus on the lowest-cost part of the market, it’s obvious that you can’t do that in the United States,’ ” Bill Nichol, CEO of Kentucky Derby Hosiery, reported to me.

“So, if you want to play in that 25 percent of the Wal-Mart market, you’ve got to be in a very low-cost place—China or someplace like China?” I asked.

“That’s correct,” Nichol replied. “But
China, practically speaking, is
it
.”

To Kentucky Derby Hosiery, Wal-Mart was so vital a customer that Bill Nichol felt he had no choice. “
We will open those facilities and buy product or make product, or both, in China as soon as possible,” he told me.

Wal-Mart’s “Move offshore or die” message cropped up in my conversations with other suppliers, but they shied away from being quoted out of fear of angering Wal-Mart. But back in Circleville, Ohio, people said point-blank that Wal-Mart’s guillotine had killed the RCA-Thomson television tube plant where Pam Scholl and Mike Hughes had worked. The plant had been highly profitable through the 1990s, former plant manager Ray Strutz said. They were supplying not only RCA-Thomson television plants in Arkansas and Mexico, but also Sanyo, the big Japanese electronic firm, which was selling low-end television sets to Wal-Mart.

In 2003, the Thomson-RCA plant began to feel price competition on TV sets with low-cost Chinese components. “
They were selling at prices that most people couldn’t even manufacture out[side] of the U.S.,” Strutz told me.
That put a crunch on the Thomson plant, according to Roy Wunsch, the former mayor of Circleville. Wunsch said he was told that Sanyo, under pressure from Wal-Mart, demanded drastic cost cuts from Thomson.

“Wal-Mart’s going to say, ‘If you want our space, you’re going to have to match our price or figure something else to do,’ ” Strutz confirmed. “And so it forces a supplier like Sanyo to go back upstream … in our case, to the glass manufacturer—to look for price concessions.” But if Sanyo can’t get a price cut from Thomson-RCA, what happens? I asked. Ruefully, Strutz replied: “Then they go to China.”

That’s exactly what happened. The Thomson plant, like Rubbermaid in its showdown with Wal-Mart, could not swallow the cost cutting that Wal-Mart was demanding through Sanyo. So Thomson lost its big Sanyo contract in 2003, and eighteen months later, the Thomson plant shut down. Eight hundred workers lost their jobs, and the work all wound up in China.

China was a gold mine for Wal-Mart. Like other U.S. multinationals, it set up shop in China big-time, with headquarters in Shenzhen, the miracle city that embodies China’s breathtaking explosion of economic growth since 1978. For centuries, Shenzhen had been a sleepy little fishing village just across Kowloon Bay from Hong Kong. Then in 1978, Chinese leader Deng Xiaoping proclaimed a new strategy of economic reform. He blessed private farming, free markets, and an “open door” to world trade. He named Shenzhen a customs-free zone for trade—a springboard for China’s export strategy to the West. Overnight,
Shenzhen shot up. Its economy grew at the rate of 50 percent a year.

When I first saw Shenzhen in 1996, it was already a raw city of half a million or more, a magnet for bright, adventurous young people from all over China. It exuded the coarse, cocky self-confidence of gold rush territory. It looked like a naked construction site—cranes dominating the skyline, the skeletons of buildings rising from the mud, concrete pylons and idled machinery littered everywhere, tiny figures of construction workers climbing like flies on the honeycombs of future skyscrapers. The mood was electric and the atmosphere permissive, epitomized by Deng’s famous dictum “Black cat, white cat—it’s a good cat if it catches mice.” Translation: It doesn’t matter whether the Chinese economy is Communist or capitalist, as long as it works.

Eight years later, in 2004, when I got back to Shenzhen, it had been transformed into a modern-looking city of
seven million people
. Along boulevards now neatly lined with low trees and hedges were ten- and twelve-story glass office buildings and towering twenty-five-story apartment houses. It was still a city of young people, now nicely dressed; not a single Mao suit or old padded peasant outfit in sight. Cellphones were ubiquitous. Unhappily, I didn’t see the Chinese
shopping for American products. Electronic goods were being hawked everywhere—laptops, boom boxes, and TV sets, almost all Chinese made. Even in the local Wal-Mart, the goods were overwhelmingly Chinese.

In Shenzhen, down a side street behind one of the thirty-five supercenter stores that Wal-Mart had opened in China, I found the epicenter of Wal-Mart’s China operations. What Wal-Mart calls its “global procurement center” opened in 2002. Two years later, more than five hundred people were working there. Their mission was to keep the import pipeline to America full. But Wal-Mart kept a low profile with the U.S. media; its deep dependence on China was at odds with its “Buy America” ad campaigns. Wal-Mart/Shenzhen didn’t talk to American correspondents. So I found a scholar, Gary Gereffi, a marketing sociologist from Duke University, who had talked to Wal-Mart’s Shenzhen managers.

What Wal-Mart told Gereffi was that China accounted for 80 percent of Wal-Mart’s six thousand suppliers worldwide. “China is the largest exporter to the U.S. economy in virtually all consumer goods categories,” Gereffi explained. “Wal-Mart is the largest retailer in the U.S. economy in virtually all consumer goods categories.”

“It sounds like a commercial marriage made in heaven,” I observed.

“Wal-Mart and China have
a joint venture. Both of them are geared to selling products in the United States at the lowest possible price,… and both are determined to dominate the U.S. economy as much as they can in a wide range of industries,” Gereffi replied.

He explained how Wal-Mart coaches Chinese producers how to capture the American consumer market. “Wal-Mart gives Chinese suppliers the specifications for Wal-Mart products and they teach those suppliers how to meet those specifications. They have to do with price. They have to do with quality. They have to do with delivery schedule,” Gereffi said. “So Chinese suppliers learn how to export to the U.S. market through large retailers like Wal-Mart.”

With Chinese suppliers, Wal-Mart can be even more brutal than with American companies. So said Kenneth Chan, an experienced Hong Kong entrepreneur in his early forties who had sold many low-cost items to Wal-Mart and other big-box U.S. retailers. “Wal-Mart is—they are very shrewd people. They know that they have the volume orders behind them and they can go into a factory and almost demand, ‘These are my list of demands. This is what I need,’ ” Chan reported. “
There’s always going to be somebody that will say, ‘Okay, I will take this order at whatever cost and I’ll find a way to do it,’ whether it’s using inferior materials or just finding a way to cut corners.”

Chan described the Wal-Mart squeeze. Its buyers would call three or four vendors into a bargaining booth and pit them against one another. “They just put the product in front of you and ask everybody to bid a cost on the product—it’s very high pressure,” Chan said. “The things that I was involved in were inexpensive, less than a dollar.”

“So they’re pounding you for a few pennies?” I asked.

“Yeah, they’re pounding, in a lot of cases, for
just one penny
,” he replied.

At the other end of the pipeline, in America, former store manager Jon Lehman saw the payoff for Wal-Mart in 1993, when the high command in Bentonville turned on the spigot of Chinese imports. Sam Walton had died a year earlier and the U.S. economy was slowing. Wal-Mart’s sales were sluggish and the company’s stock price fell sharply. In a panic, Wal-Mart’s new management cranked up the flow of cheap imports to recover.

“
I saw this as a store manager, a
giant
influx of imported merchandise …,” Lehman recalled. “The stores were
inundated
with inventory
—inundated
. I mean, we had so much of this cheap crap floatin’ around the store, we didn’t know what to do with it.” Overwhelmed, Lehman called a vice president at headquarters to ask what was going on. “He said, ‘Jon, we’ve got to bring our profit in for the quarter, for the month, for the year. You know our stock has been declining. You do understand, Jon, that these imports have a high margin and they’re going to help your profit and loss statement. They’re going to help the company’s profit-and-loss statement.’ ”

In fact, the flood of Chinese imports delivered exactly the kick start that the top brass wanted. The impact was dramatic. “The margins on the merchandise that were coming in from—the Wal-Mart import items—were
incredible …
,” Lehman told me. “Like 60 percent, 70 percent, 80 percent, you know—
incredible
!”

“Compared with what from American-made items?” I asked.

“Well, compare that to an electric razor that you might be makin’ 20 percent on, 18 percent on,” he said.

“We understand that Wal-Mart is delivering us lower prices,” I said. “But you’re saying not just lower prices, but much bigger profits for Wal-Mart?”

“Well, absolutely, yeah,…” Lehman asserted. “Wal-Mart pays billions—not millions, but billions of dollars to make you believe that as a consumer. That’s all you see on television: ‘Low prices every day.’ That is what Wal-Mart wants you to believe…. But what’s really goin’ on is Wal-Mart’s finding a cheaper way to get it, and Wal-Mart’s getting’ rich. They’re makin’ tons of profit.”

The sheer volume of goods streaming out of China to America through Shenzhen Port is staggering. A steady torrent of flatbed trucks converges seven days a week on Shenzhen Port, hauling containerized shipments from a beehive of factories all over the Pearl
River Valley of South China. The port is the funnel for a colossal profusion of plastics, footwear, appliances, jeans, bicycles, lawn mowers, lamps, cellphones, TV sets, laptops—roughly 80 percent of the 120,000 items carried in a typical Wal-Mart superstore.

At Shenzhen Port, I saw a veritable city of containers stacked ten and twelve stories high, sprawling over several square miles of territory, waiting to be loaded onto fleets of container ships bound for America’s West Coast ports. Shenzhen Port hummed with activity. As flatbed trucks raced up to dockside, tall, computerized cranes leaned down like giant mechanical giraffes to pluck up ten-ton containers and then set them down neatly on board the ship. The tempo was swift and steady—up, down, up, down, up, down.

Shenzhen was a natural deep-water port, but the rush of its development was astounding. In 1994, the modern port did not exist; it was nothing but a barren rocky outcrop. Ten years later, in 2004, the modern Port of Shenzhen was already the world’s fourth busiest, busier than Shanghai, Rotterdam, Hamburg, and Singapore and challenging Hong Kong as number three. It was handling nearly eleven million containers a year, more cargo than America’s two big West Coast ports—Los Angeles and Long Beach, California—combined. Two-thirds of its traffic was headed for America. No one spends on Chinese goods like American consumers. Western Europeans are less profligate.