Wal-Mart seeks green in China

By Jonathan Birchall in New York
Published: October 21 2008 20:58

In the Darwinian struggle for global manufacturing orders, the “Wal-Mart price” has generally been short-hand for shaving production costs to the bare minimum.
But on Wednesday in Beijing, Lee Scott, Wal-Mart’s chief executive, will tell hundreds of the company’s top Chinese suppliers that the retailer intends to use its market power to get more than just low prices – at a “sustainability summit” devoted to raising standards in its vast supply chain.

Attending the gathering will be AG Lafley, chief executive of Procter & Gamble, Fred Smith, head of FedEx, and Yuanqing Yang, chairman of Lenovo, who are keen to adopt a similar approach. Executives from Kimberly-Clark, Coca-Cola and Newell Rubbermaid will also be on hand for the most ambitious private sector drive yet to reduce waste and pollution in China’s export-focused manufacturing industries.
Mr Scott will set out a range of objectives for the company’s supply chain and for its Chinese retail operations, which will include targets for the reduction of water and energy usage, reductions in packaging, and commitments to develop more sustainable products.
“Our environmental footprint is primarily through our supply chain as a company,” says Matt Kistler, head of Wal-Mart’s global sustainability efforts. “So we have the ability to really build a world-class, better quality, better value supply chain.”
In the US alone, Wal-Mart is estimated to sell about $30bn of goods annually that are made by about 30,000 factories in China, or about 10 per cent of all US imports. In categories such as clothing, footwear and toys – worth $64bn last year – Wal-Mart’s share is far higher.
The retailer will also be promoting a new “Green Supply Chain Initiative” being led by the Environmental Defense Fund (EDF), a non-profit group that has worked with Wal-Mart on sustainability issues in the US. The project is aimed at working with individual suppliers on energy saving and other issues, and is expected to extend to other US and European retailers, covering another 20,000 factories.
“We will leverage the market clout of global retailers to help create a green playing field for China’s exporters,” says EDF.
In the US the retailer has embraced a series of environmental initiatives over the past three years, including developing solar power systems and promoting more sustainable products such as low-enegy light bulbs. This year, it introduced a packaging scorecard that evaluates the efforts of suppliers to reduce packaging waste, which is now being translated into Mandarin.
Jennifer Turner, head of the China Environment Forum at the Wilson Center in Washington, says that in China similar pressure from international companies could help counter the problems of enforcement that continue to dog central government efforts to enforce existing environmental laws.
“Local governments are not interested in enforcing laws, sometimes because they own the factories . . . I think this initiative from international companies to be crucial because it is a new kind of pressure on local government,” says Ms Turner. But the initiative also represents a shift in Wal-Mart’s traditional focus on securing the lowest possible price, which has helped shape the current supply chain and is blamed by critics for its social and environmental shortcomings.
Mr Scott told Wal-Mart managers at their annual meeting in Kansas City this year that “we will favour – and in some cases even pay more – for suppliers that meet our standards”.
However, Conrad ­McCarron, head of supply chain programme at As You Sow, which co-ordinates pressure on companies from ethical investors, questions how the new approach would work in a world where brands and retailers have played suppliers off against each other on price.
“If you go to a supplier that is already feeling the squeeze financially, and you say that they need to reduce energy and stop waste water, how do they do that given that Wal-Mart’s business model is basically to pay less year after year?”
The focus on raising environmental standards in China’s supply chain comes against the background of broader concerns over regulation of factories there, with a new scandal over the contamination of Chinese milk-products with melamine. Last year saw a crisis over the safety of Chinese-made toys, which was preceded by a massive pet-food recall in the US because of melamine contamination of Chinese made ingredients.
Ed Chan, head of Wal-Mart China, says the central government is giving the initiative “very active support”. “Sustainability is a top priority, and they have been encouraging Chinese and multi-national companies to really rethink the business model.”
Jeff Macho, the China-based head of Wal-Mart’s global procurement division, insists the company wants to view its supply chain “holistically”, including both environmental and social factors such as labour conditions with product quality. He also said that in keeping with Mr Scott’s professed readiness to pay more the company had recently moved a home fashion contract to a more expensive supplier because of concerns over standards at the original factory.
“I would say we are seeing an evolution to a new business model,” he says. “I think we are developing that relationship with suppliers, to look not only at price, but at all of these other elements.”
Copyright The Financial Times Limited 2008