The Bully of Bentonville

by Anthony Bianco

  Yes, Wal-Mart reconceived its relationship with suppliers as a partnership, but it was hardly a partnership of equals. None of Wal-Mart’s 61,000 vendors is nearly as important to the company as Wal-Mart is to its major vendors. Procter & Gamble is Wal-Mart’s largest supplier, but its products generate only 2 percent of the retailer’s sales. By contrast, Wal-Mart, Procter’s largest customer, accounts for 18 percent of P & G’s revenues. Wal-Mart would hate to antagonize shoppers by pulling Tide or any of P & G’s other staples from its shelves. But the fact is that Bentonville could replace P & G products a lot easier than Cincinnati could replace the loss of Wal-Mart’s patronage.

  Wal-Mart had the whip hand, and there could be no doubting its willingness to use it after the company’s mid-1990s showdown with Rubbermaid. An old-line manufacturer of garbage cans, plastic pails, and containers of all kinds that was transformed in the 1980s into a growth company, Rubbermaid rose on the strength of inspired product innovation and rigorous attention to quality to become the most admired corporation in America as judged by its peers and affirmed by Fortune magazine in 1994. Based in the bucolic town of Wooster, Ohio, Rubbermaid was a great American success story with an abrupt, unhappy ending.

  Rubbermaid’s renaissance was largely the handiwork of Stanley Gault, a Wooster boy who went off to work for General Electric and returned in 1980 to run the hometown giant. A daring, egotistical sort of executive, Gault whipped Rubbermaid into fighting trim through sheer force of will. A reporter once told him that his subordinates thought him a tyrant. “Yes,” Gault replied, “but I’m a sincere tyrant.” 20

  Before Gault joined Rubbermaid, it did not deign to do business with Wal-Mart. Gault changed that in a hurry, positioning Rubbermaid on the right side of the coming big-box revolution. Rubbermaid supplied all the big discount chains, but found its greatest retail ally in Wal-Mart, which quickly became its single biggest customer. But even as Wal-Mart helped Rubbermaid post forty consecutive quarters of earnings gains, misgivings were growing among Gault’s lieutenants. “On the positive side, at first the big retailers created a great deal of efficiency,” recalled Fred Grunewald, who ran Rubbermaid’s home products division. “But they squeezed too hard…. We couldn’t recoup our product-development costs before they’d slash prices.” 21

  Gault was safely retired by 1994, when the price of resin started to soar, putting Rubbermaid’s back up against the wall. Every increase of a penny per pound cost the company $10 million, or about $250 million in total in 1995. Wolfgang Schmitt, the new CEO, flew to Bentonville to explain Rubbermaid’s desperate need to offset its exploding raw materials costs by raising the prices of many of its products. In one of the little meeting rooms off the lobby of Wal-Mart’s home office, Schmitt sat down with Bill Fields, a senior executive then considered a potential successor to Glass.

  Fields listened politely to Schmitt’s spiel and refused to pay a penny more for Rubbermaid wares. Schmitt, an imposing executive known for his forbidding manner, soon grew so frustrated that he stood up for emphasis. “You need to understand something,” he more or less shouted at Fields, “we have to do this.”

  “No, no, no,” replied Fields as he, too, rose from the table and, at six-foot-six, towered over Schmitt. “It’s you, Wolf, who needs to understand something.” Charge more for a product, Fields said, and we will stop carrying it.

  Other, less confrontational meetings followed, but the end result was that Rubbermaid did raise prices and Wal-Mart did pull many of its products. Bentonville also imposed strict new delivery demands, often requiring a turnaround of just forty-eight hours. When Rubbermaid missed a deadline, as it did about 20 percent of the time, Wal-Mart fined it for every dollar of lost sales. What most bothered executives of the Ohio company was that Bentonville dictated to Rubbermaid, an acclaimed innovator, on product design issues. “You’d have this meeting with Wal-Mart, and some twenty-five-year-old buyer would come in and pretty much tear apart something that professional, gifted designers had spent months developing,” complained one marketing executive. 22

  There is no question that Rubbermaid was complicit in its own collapse. In Good to Great, Jim Collins argued that the company was such a one-man show under Gault that it never developed the depth of management needed to sustain its success. “Gault did not leave behind a company that would be great without him,” Collins concluded. 23 Clearly, though, Wal-Mart’s bullying hurt the company badly. Wal-Mart elected Gault to its board of directors in 1996, but it was too late for Rubbermaid to repair its ruptured relationship with America’s largest retailer or, for that matter, to maintain its independence.

  In 1999, Rubbermaid was acquired by Newell Co., an up-and-coming consumer products manufacturer almost slavishly eager to please Wal-Mart. The design of Newell Rubbermaid’s office in Bentonville was guided by the principle that imitation is not just the highest form of flattery but also of customer service. The budget carpeting and no-frills cubicles are Wal-Martesque. The first floor contains what the company bills as “an exact replica of a Wal-Mart store,” showing the placement of Newell Glassware, Sharpie pens, Levelor blinds, Graco strollers, Little Tikes toys, and other staples of the expanded Newell product line. On a wall upstairs hangs a photograph of Sam Walton, alongside his “Rules for Building a Business.” Said Steven Scheyer, who runs Newell’s Wal-Mart Division: “We live and breathe with these guys.” 24

  Huffy bicycles are not the only iconic American product now made exclusively in China. There are many others: Levi jeans, Black & Decker home appliances, Stanley tools, Fedders air conditioners, Sunbeam mixers, Radio Flyer wagons, and Etch-A-Sketch toys. Even many of the American flag lapel pins worn by members of Congress are stamped, plated, and enameled in a factory in Shenzhen, a boomtown of 10 million people that now rivals nearby Hong Kong as a hub of untrammeled capitalism.

  Shenzhen also is home to a factory owned by the Lakewood Engineering and Manufacturing Co., a Chicago-based company that makes room fans, space heaters, and humidifiers. When the time came in 2000 to expand to fill growing orders, the company saw no way to add the needed capacity and meet Wal-Mart’s price without moving some production to China. The price of one of its box fans already had fallen by half over the previous decade, and Lakewood had run out of options to cut costs further in America. It already had automated its factories on the west side of Chicago, reducing the number of people required to assemble an appliance to seven from as many as twenty-two. But those seven Americans still needed an American wage of about $13 an hour. Chinese workers in Shenzhen are paid about 25 cents an hour. 25

  No U.S. industry has been hit harder by China’s explosive emergence as a manufacturing powerhouse than textiles, which has lost more than 500,000 jobs—or half of its total employment—over the last three decades. One of the biggest recent failures in the textile business came in 2003, when the Pillowtex Corp., maker of Cannon and Fieldcrest towels, fired its last 6,450 employees. Pillowtex, which had emerged from bankruptcy protection a year earlier, struggled to find a way to make towels profitably at a price that its biggest customer, Wal-Mart, would be willing to pay. In the end, it could not. Entire families were thrown out of work, whole towns devastated. “That mill was the city of Kannapolis,” said Leann Harrington, a waitress at the Towel City Junction Cafe & Grill, a diner frequented by mill workers in the North Carolina city of 37,000. “We live in a ghost town now.” 26

  The truly scary thing for Wal-Mart’s American vendors and their employees is that Wal-Mart has just begun to concentrate on developing China as a source of merchandise for its U.S. stores. Wal-Mart has been buying Chinese goods since the early 1970s, first through American and Japanese importers and later through its own offices in Hong Kong (opened in 1981) and Taipei (1983). But it was not until 2002 that Wal-Mart moved onto the mainland by opening a buying office in Shenzhen. Within a year, Wal-Mart made the Shenzhen office its global purchasing headquarters, an emphatic declaration of China’s central importance to the company. Today, ab
out 80 percent of the 6,000 foreign factories in Wal-Mart’s supplier database are located in China.

  Wal-Mart’s Shenzhen quarters occupies three floors of a nondescript glass office tower. In the lobby, the only indication of its presence is a sign no bigger than a sheet of paper, reading “Wal-Mart Global Procurement.” An arrow points to an escalator. In China, as in the United States, Wal-Mart does not need to seek out suppliers because suppliers seek it out. Despite the low profile it keeps, the Shenzhen procurement office is swarmed daily by hundreds of entrepreneurs and sales agents hoping to get their wares onto Wal-Mart’s shelves in the United States and elsewhere. In 2003, the company opened a second office in the North China port of Tiajin, the first of what likely will be a score or more of regional procurement outposts throughout the country.

  Already, China is Wal-Mart’s single largest source of merchandise outside the United States. In 2005, the company bought about $22 billion worth of Chinese-made goods, up from $18 billion the previous year and $12 billion in 2002. By itself, Wal-Mart now accounts for 30 percent of total foreign buying in China and 10 percent of U.S. imports from the country. Yet China represents only 11 percent of Wal-Mart’s overall purchase budget, quite a bit less than for many other big U.S. retailers. Because Wal-Mart “has been buying relatively little from Chinese suppliers…this amount is likely to increase substantially in the future,” predicted Misha Petrovic and Gary Hamilton, two University of Washington scholars who recently co-authored a study of Wal-Mart and its suppliers. 27 At a meeting with analysts in Shenzhen in early 2005, Wal-Mart executives said it was possible that the value of the company’s purchases in China would double by 2010. 28

  China’s low wages have created a “cost standard” for manufacturers around the world, the consulting firm Deloitte Touche Tohmatsu has concluded, 29 and Wal-Mart’s single-minded embrace of the standard makes it difficult for other employers to resist. BusinessWeek called this “the China price,” and few other places, even formerly booming low-wage manufacturing countries like Mexico, can match it. Often, these lower production costs result in the same problems that Wal-Mart is criticized for in the United States: penurious wages and benefits, cruelly long hours, and poor working conditions. “Wal-Mart has really been at the forefront in driving down wages and working conditions,” said Kent Wong, the director of the UCLA Labor Center. “They’re not only exporting the Wal-Mart name and the corporation and the identity. They’re also exporting that way of doing business.” 30

  Like most major U.S. consumer goods importers, Wal-Mart espouses the principles of “ethical sourcing.” Ever since 1992, the company has imposed a code of conduct on foreign suppliers that is intended to improve working conditions in factories making goods for its stores. Wal-Mart claims to have the world’s largest overseas monitoring program, employing some 200 full-time inspectors who visit 30 factories a day, or about 5,000 a year. “In 1996, I personally saw how important ethical sourcing would be to our company when I went to Bangladesh to investigate allegations of poor conditions at factories where garments were being produced for Wal-Mart…” Lee Scott wrote in the spring of 2005 in his introduction to the latest of the reports that the company compiles annually on its enforcement of supplier standards. “The Ethical Standards program is a vital part of our business.” 31

  Scott’s assertion drew heavy fire a few months later in a lawsuit accusing Wal-Mart of failing to effectively enforce its code of conduct not only in China, but in Bangladesh, Indonesia, Nicaragua, and Swaziland. The suit was brought by the International Labor Rights Fund in the United States because the sixteen workers who are party to it would have faced reprisal, perhaps even death, in their home countries. Their stories, as contained in the complaint, paint a picture of almost Dickensian deprivation: employees paid pennies an hour and regularly forced to work ten or twelve hours a day for six or seven days a week for weeks on end. To keep wages low and workers handy, companies have employees sleep in corporate dormitories and eat in factory-run canteens. Men who worked for Wal-Mart contractors in Shenzhen said in the lawsuit that management withheld the first three months’ pay of every new worker and threatened to withhold the money if they quit, a practice that effectively made them indentured servants. One woman said that because she was unable to meet her quota her boss slapped her face so hard that her nose began bleeding. 32

  Bentonville reacted scornfully to the International Labor Rights Fund’s lawsuit, saying that the group had “a history of presenting opinions as facts” and had brought the suit at the behest of the company’s sworn enemy, the United Food and Commercial Workers. “We are a global leader in monitoring supplier factory conditions,” Wal-Mart declared in a public statement, “and if we find that any of our suppliers’ factories are unwilling to correct problems, we end our relationship with them.” 33

  Accusations of worker abuse have long dogged Wal-Mart’s suppliers in China. Five years earlier, BusinessWeek documented similar abuses at Chun Si Enterprise Handbag Factory in Zhongshan, another industrial metropolis in the Pearl River Delta. 34 Chun Si’s 900 workers were locked in the walled factory compound for all but sixty minutes a day for meals, the magazine said. Guards regularly punched and hit workers for talking back to managers or even for walking too fast, and also fined them up to $1 for infractions such as taking too long in the bathroom.

  One worker, Chun Sei, said that the company, which made Kathie Lee Gifford handbags for Wal-Mart, paid him $22 a month and then deducted $15 a month for food and lodging. The man, a farmer from the countryside who had come to Zhongshan in response to a Chun Si ad promising good work and fair pay, said he was afraid to just quit because the company made him surrender his identification card before he started work. In place of his ID, the company issued him an expired temporary-residence permit, a worthless document that effectively made him a captive of the factory complex. After three months of ninety-hour workweeks, he finally screwed up the courage to leave—with just $6 of savings in his pocket. “Workers there face a life of fines and beating,” he said.

  Long hours, low pay, and abysmal working conditions are commonplace at Wal-Mart’s Chinese contractors. At He Yi Electronics & Plastics Products in Dongguan, people who make small toy cars for Wal-Mart are paid as little as 16.5 cents an hour and are routinely required to work more than twelve hours a day, seven days a week, according to the National Labor Committee, an anti-sweatshop group in New York. “Conditions at this factory are as bad as you find anywhere in the world,” said Charles Kernaghan, executive director of the N.L.C. “They are illegal under Chinese law, and Americans would find them appalling.” 35

  In 2004, Wal-Mart suspended purchases from 1,200 contractors for at least ninety days for having failed to fix serious violations after being warned. It permanently banned more than 100 other factories, chiefly for breaking child-labor laws. Even so, Terry Collingsworth of the International Labor Rights Fund, an advocacy group based in Washington, dismissed Wal-Mart’s monitoring system, saying that more than 90 percent of its inspections were scheduled in advance, giving company managers time to conceal records, warn employees not to complain to inspectors, and fire anyone they think might tell the truth.

  Wal-Mart’s history of policing sweatshops is less than stellar. When the problems at Chun Si, the handbag maker, were first made public in 1997, Wal-Mart angrily shot back that allegations of worker abuse were “lies” and denied it had any relationship with Chun Si. But when BusinessWeek confronted it with damning business records that workers had smuggled out of the factory, Wal-Mart conceded that it had lied about using Chun Si. It continued to buy handbags from the company until 1999.

  Workers in Shenzhen and other industrial centers are beginning to discover that the Wal-Mart Way ultimately could make them as expendable as the Americans, Mexicans, and others whom they have replaced. Gladpeer Garment Factory, a sizable maker of underwear, pajamas, and children’s clothing, started in Hong Kong, but bowed to price pressure applied by Wal-Mart and moved 100
miles up the Pearl River Delta to Dongguan, where seamstresses were willing to work nine-hour days, five or six days a week, for about $55 a month. To cut costs further, the firm’s managing director, Simon Lee, soon began preparing to move Gladpeer much farther inland, to remote Guangxi Province. Lee said electricity, housing, taxes—and, of course, labor costs—are much cheaper there. “Competition is intense, and our biggest single issue is cost,” Lee said. “Many customers look at cost first, then they look at the workmanship. That’s why we’re going to Guangxi.” 36

  A number of Wal-Mart vendors have expressed concern about rising labor costs in China. Dorel Industries Inc., a Canadian company that designs and sells Safety 1st and Cosco infant car seats, strollers, and other baby products, announced in 2004 that it had begun looking to move production out of central Chinese cities. Dorel’s CEO, Martin Schwartz, said that 10 percent to 15 percent increases in wages would not do, even when matched by productivity gains. “These are increases we cannot pass along to our major customers,” Schwartz said. “Chinese manufacturers must become more efficient.” 37 The talk might just have been bluster, to keep Dorel’s suppliers in line. But if this was the case, it has been very effective. Amy Gu, an executive at one of Dorel’s suppliers, Goodbaby Corp., which makes strollers near Shanghai, said her company has filled orders at a loss, just to keep Wal-Mart’s business in hopes of a payoff down the road. “Dorel will tell us, ‘Well, Wal-Mart has given us this price. We need a factory cost of this much,’” she said. “And we have to find a way to deliver it.” 38