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I was listening to NPR and finally heard what I have been saying for years, repeated on the radio. If you want to look for the main reason US manufacturing is going to China, all you have to do is look over at the nearest intersection.
They have set up a cannibalistic system that is unsustainable, and no one can see it. They force manufactures to cut costs yearly. They demand concessions in the form of packaging, display, advertising. They wield the power to influence countries. This is getting very similar to many sci-fi books I read as a kid.
Here is the cycle:
1) Land a contract with Wal-Mart
2) Wal-Mart orders more than your current production
3) You ramp up to meet the order
4) Next year Wal-Mart demands a 10% price cut.
5) You manage to produce and reduce earnings
6) Next year Wal-Mart demands a 10% price cut.
7) You cut seasoned staff and hire cheaper labor
8) Next year Wal-Mart demands a 10% price cut.
9) You outsource labor to China (or you go out of business.)
Clancy gives her buyers a "Plus One" mandate every year: For each item they handle, they must either lower the cost or raise the quality.
On basic products that don't change, the price Wal-Mart will pay, and will charge shoppers, must drop year after year. But what almost no one outside the world of Wal-Mart and its 21,000 suppliers knows is the high cost of those low prices. Wal-Mart has the power to squeeze profit-killing concessions from vendors. To survive in the face of its pricing demands, makers of everything from bras to bicycles to blue jeans have had to lay off employees and close U.S. plants in favor of outsourcing products from overseas.
Why do I say it is cannibalistic? Wal-Mart is effectively killing competition in all fields, not just retail. All of Wal-Mart's suppliers are effectively doing exactly what Wal-Mart wants...colors, sizes, quantity, packaging, outsourcing, etc. We have seen many national brands leave our country...and many more make a 'Wal-Mart' version of their products. This means less and less variety, less and less options for the suppliers. Eventually Wal-Mart will squeeze to the point that they end up with one massive supplier. Then what will they have left to squeeze costs out of? Where will they show bigger profits from?
Well, they start to put the burden back on us. Our taxes are paying for more and more of their employees. So they are not only reducing the number of suppliers, they are also costing their customers more.
Researchers at the University of California at Berkeley's Labor Center looked into the number of Wal-Mart employees receiving public assistance because they weren't paid adequately. Their conclusion was, "In effect, Wal-Mart is shifting part of its labor costs onto the public." The public cost was estimated to be $86 million in Medicaid subsidies, food stamps and housing vouchers.
One 1999 study reported that 1.5 jobs had been lost for every job that Wal-Mart created. A recent projection by the University of Illinois at Chicago's Center for Urban Economic Development concluded that the proposed West-Side Chicago store likely would yield a net decrease of about 65 jobs after that Wal-Mart opens, as other retailers in the same shopping area lose business. A study cited in Business Week as showing modest retail gains after Wal-Marts open actually reported net job losses counting effects on warehousing and surrounding counties.
This consolidation is reaching the point that Wal-Mart is influencing countries. Here in the US the influence is that we are losing manufacturing...but hey, we get lower prices...yay! Look at where all the jobs are going. Look at where all the money we are spending is going. It is all going to China. And guess what? China likes it. They like it so much that Wal-Mart has just been given a blank check to open stores in China. This is a country that has denied Western influences for MILLENIA! They have give Wal-Mart the key to the country.
...[Wal-Mart]...has doubled its imports from China in the past five years alone, buying some $12 billion in merchandise in 2002. That's nearly 10% of all Chinese exports to the United States.
The company's iron-fisted price and performance demands on suppliers are changing the way China does business, and now that Wal-Mart is free to expand inside China, that impact will grow exponentially.
Finally if you want my crystal ball predictions, there are two things that will come of this. These are based on everything I have learned about business practices here at the Fool. By studying stocks you get to see which decisions businesses need to make to keep their profits climbing. But these things will have other side effects:
1) Wal-Mart will in effect modernize all of China because they will demand that distribution be effective and low cost. This means they will have the Chinese government on their side for better roads, better infrastructure, better communications, better, better, better. This will put China deep in Wal-Mart's debt.
(Read this to get a hint - http://www.chinabusinessreview.com/public/0309/wal-mart.html)
2) Wal-Mart will find that it can make more money in China and India than it can in America. I would not be surprised that Americans will start seeing less of the 'lowering prices everyday' as Wal-Mart puts its efforts into wooing the East. Also, do not be surprised when Wal-Mart goes off-shore and stops paying taxes to the US, the country it is still sucking dry.
Buffy (who is probably the last person that doesn't shop at Wal-Mart...)
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