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March 04, 2006
Wal-mart and Dark Matter
Inadvertently, Brad Setser seems to have given me a very good example of dark matter. In a recent post, he wrote
Super-efficient big box retailing may increase overall US productivity, but big box retailers like Walmart are not exactly a big source of export revenues.
Maybe I am discounting Walmart's intangible exports from its non-US operations ... but I sort of suspect Walmart's intangible exports they are quite small relative to Walmart's tangible import bill.
A couple of points. First, Wal-mart is perhaps the single largest creator of intangibles or dark matter in the U.S. economy. Consider this 2002 study from the McKinsey management consulting firm:
retail-labor productivity growth more than tripled after 1995, contributing roughly one-quarter of the national productivity acceleration of 1995–99. The reason can be explained in just two syllables: Wal-Mart, whose operational innovations—including the "big-box" format, "everyday low prices," electronic data interchange with suppliers, and economies of scale in warehouses—forced competitors to adapt.
Wal-mart became one of the largest companies and feared competitors in the U.S., not because of its spending on plant and equipment, but because of its “operational innovations”—that is, its business know-how. These sorts of intangible investments are not counted in GDP, but they created a retail behemoth.
Now Wal-mart is buying up lots of stores overseas, as well as opening up new ones. . In December alone it bought up 545 stores in Japan and Brazil (in Japan it was Seiyu Ltd, a chain with 405 stores).
In 2005 its international sales came to $63 billion, making the international division by itself one of the largest retailers in the world. (Target, the second largest retailer in the U.S., had $53 billion in global sales in 2005).
Now, what is it going to do with all those new stores? Obviously—apply the business knowhow which made Wal-mart such a powerful and productive competitor in the U.S. This business know-how, altough intangible, is very real and very potent. Just ask all of the retailers that have run up against Wal-mart.
For the sake of argument, let’s suppose that adding the Wal-mart business know-how gives all of its overseas stores a faster productivity growth rate, indefinitely. Then it’s not just current profits which are increased, but future profits as well, as the result of transferring the Wal-mart “secret sauce” from the U.S. to Japan or Brazil, say.
How should we book this transfer of business knowhow from Bentonville, Arkansas, home of Wal-mart, to say Tokyo? Conventional statistics would say that we wouldn’t book it as exports, but rather just pick it up as increased profits overseas.
I don’t buy the conventional view, though. I reason this way. Let’s do a thought experiment. Suppose that in a parallel universe the secret reason for Wal-mart’s higher productivity was a special very expensive “thought-ray” machine, manufactured in a nondescript building in Bentonville, Arkansas. (picture below). Each machine costs $10 million to build.
Each Wal-mart store has one of these machines installed, which increases the productivity of Wal-mart’s workers by 20% as soon as it is turned on.
Now let’s suppose that Wal-mart buys a store in Tokyo, and ships one of its thought-ray machines from Arkansas. The productivity and profits of the store immediately go up by 20%.
Clearly the trade statistics would book the transfer of the thought-ray machine as an export of $10 million, followed by the increase in overseas profitability.
Why don’t we count the transfer of Wal-mart’s business knowhow the same way?
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Nicely done. But can you create a similar scenario in which the dark-matter exporting is done not to a foreign subsidiary of a US company, but rather to a foreign company?
Posted by: David Foster at March 4, 2006 10:43 PM
Ooh, boy, you're asking for it now, praising Wal*Mart. Throw open the doors to the mental ward and hold on tight.
Besides, don't you know that providing a huge selection of quality products at low prices, giving me an alternative choice to shop or work if I freely choose to do so, and having a store stay open after hours when I'm actually off work and available to SHOP just makes everyone POOR? What could be more obvious?
Wal-Mart be damned, me and all the rest of my rich white friends can just buy our overpriced organic edamame at Whole Foods -- I can't imagine any credible reason for Wal-Mart to exist.
'fact we should have state laws that just apply to Wal-Mart ... wait, no ... I guess that would be a bit moronic wouldn't it.
Posted by: Kevin at March 4, 2006 10:55 PM
We can certainly revamp all of accounting and econometrics; I'm the last person to argue against that. But if you're going to do so, you need to apply this all backward in time. You can't just say that it suddenly applies in the last 5 years, and when you do, everything looks hunkie-dorie. We should at least go back to the exporting of knowledge from Britain to the North American colonies. Without all that exporting of knowledge the United States would not be what it is, would never have become what it is. We should also include all the imports of knowledge from immigrants to the United States since the colonial times. Knowledge is knowledge. It didn't suddenly become valuable 5 years ago.
Posted by: Brandon at March 6, 2006 09:54 AM
Mike, suppose you were to book the dark matter transfer...what number would you book? In the case of the thought-ray machine, it's obvious: $10MM for each one. But in the case of the intangible knowledge, there's no variable cost going with each export. It cost WMT some number of dollars to acquire this knowledge: hypothesize that this could be measured and that it was $10 billion. Do you pro-rate this by number of stores and allocate the resulting amount as the export value as each store is opened? Or, alternatively, do you estimate the additional return that each store will generate because of the knowledge, capitalize it, and book that number? Neither alternative seems terribly satisfying.
Posted by: David Foster at March 6, 2006 11:49 AM
I agree that our statistics for exports of intangibles are far from perfect. But, I'm not sure what the "thought machine" thought exercise proves. The results of the utilization of know-how by Wal-Mart in their foreign stores are already captured in their earnings/income (just as it is in their domestic earnings). If the transfer of knowledge was a transaction between unaffiliated parties, the value of that transaction would be captured in the services trade statistics as either a royalty payment or a business service. Because it is within the company, we don't capture it that way, but subsume it in the overall income flow. If you wanted to book it the same as a machine, then you would require Wal-Mart to declare a royalty payment for the use of that knowledge between the foreign store and Bentonville HQ. The income of that foreign store would then be reduced by the amount of that royalty payment. Such an account method would be cleaner -- but it would not theoretically produce any higher level of income for the US. [Of course, it actuality it would increae our income inflow since it would be the same as automatic repatriation of that portion of foreign income].
Posted by: Ken Jarboe at March 6, 2006 12:57 PM
Not sure if I can express my thoughts clearly, but there is a problem with the Wal-Mart example. Where MM states that productivity and profits go up 20%, productivity goes up but profits do not. In general, Wal-Mart applies the productivity to lower prices.
Can we say that when there are not higher profits associated with an activity there is no increase in dark matter?
Effectively, all it does is drive competition out of the market.
Posted by: Cyberike at March 6, 2006 01:50 PM
It looks like I finally have the right example. These are all great comments, very substantive and thoughtful. I will try to address a lot of these points, perhaps in another post, or perhaps here.
Posted by: Mike Mandel at March 6, 2006 02:22 PM
walmart is killing every business man. thats a greed. years to come not educated people will be out of jobs.
first walmart appreciate employees work then they stab at the employees back when pay increase.
and every little things they do couching.
first verbal then written d-day[DEATH DAY] then fired.
Posted by: rita at March 20, 2006 06:31 PM
Use fancy whatever,all this B.S still sits righ on top of this stores abuse of its employees!!
Posted by: Ed at March 20, 2006 07:19 PM
Hi mike, my name is ashlee, I'm actually writing a 10 to 15 page paper about Wal-mart, and I'm having trouble developing my thesis. I'm struggling on which side to take, as a consumer I love Wal-mart, they have great prices and its conveinent because its one stop shopping, and from a business perspective I think they've done a great job, they are so big that they are a factor in the US economy. However, as great as they are, I do not agree with how they treat their employees and that they are killing the old fashion mom and pop stores. Also, in a way it is kind of scary how big they are getting. Do you have any advice for me about my thesis?? I've been researching a lot and I am still stuck!!!
Posted by: ashlee at April 25, 2006 01:09 PM
Hello Michael!I am Helena, an Erasmus student from Barcelona. I am doing a report for the university about the crisis that Wal-mart is having in that moment. I have found lots of information here in www.businessweek.com about some facts, but I have not found yet a diary or consecutive dates to see the development of the crisis, because I need to explain the beginning of the crisis, the following and the resolution. Do you know where I can find consecutives dates from the beginning until the resolution of that crisis?or at least important dates that form the crisis? I would appreciate a lot your help because as I can see, you are an expert in this crisis. Thank you very much!!
Posted by: Helena at January 8, 2007 01:41 PM