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Years of Wal-Mart Violations Forced China Government Action, Official Says

Wal-Mart Stores Inc. (WMT)’s failure to fix problems at outlets in Chongqing over the past five years forced authorities to temporarily halt its operations in the Chinese city as a warning, an official said.

“Wal-Mart has been quick in admitting their wrongdoings, but slow in correcting them,” Tang Chuan, the director of law enforcement at the Bureau of Inspection and Enforcement in Chongqing, said in an interview yesterday. “Every time, it feels like we’re punching our fists into cotton.”

Tang’s bureau shuttered all of Wal-Mart’s 13 stores in the city for two weeks on Oct. 9 and detained 37 people after the retailer labeled ordinary pork as organic, the most severe punishment in China since the company entered the country in 1996. U.S. and European business groups have complained of unfair treatment of foreign companies in China, where Wal-Mart has grown to 353 stores from eight in a decade.

“I think it’s overreacting -- I suspect mislabeling cases like these in China are widespread,” said Jason Ding, a Beijing-based partner and vice president at management consultant Roland Berger AG. “Such severe punishment shows selective enforcement.”

Anthony Rose, a Hong Kong-based spokesman for Wal-Mart, declined to comment on Tang’s remarks in an e-mail yesterday and instead drew attention to Wal-Mart’s expansion, the money it has spent on local communities, and awards it has won in China. “Is there any other company in retail that can claim that? Likely not,” he said.

Kevin Gardner, a U.S.-based spokesman for the company’s international business, deferred several requests for comment to Rose.

3.65 Million Yuan Fine

Chongqing fined Wal-Mart 3.65 million yuan ($573,000) after 12 of 13 stores in Chongqing were found to have sold the mislabeled pork. Wal-Mart pledged to cooperate with the investigation, which saw two employees arrested and another 35 people detained. Tang would not comment on the status of those cases.

Wal-Mart will reopen its stores on Oct. 25 and “exceed customer expectations,” Rose said earlier this week. The retailer has promised to set up a food-safety testing system, host lectures by food-quality experts and establish a consumer- rights desk, Tang said. Rose would not detail the company’s efforts.

The world’s largest retailer was not being singled out for punishment, Tang said. Since 2006, Wal-Mart has been cited for 21 cases of selling expired or substandard food and false advertising in the city.

‘Warning to Them’

“Anyone who breaks the law, no matter foreign or domestic, big or small, will be punished,” Tang said. “It’s a warning to them.”

Wal-Mart announced earlier this week that the president of its China operations, Ed Chan, was resigning for personal reasons and that Asia chief Scott Price was taking interim control in the country. Clara Wong, senior vice president for human resources in China, also quit for personal reasons, Rose said.

China fined 19 Wal-Mart and Carrefour SA (CA) stores 9.5 million yuan for misleading pricing, the National Development and Reform Commission said on Feb. 22. In May, China fined Unilever, the world’s second-largest consumer-goods maker, 2 million yuan for telling the media about plans to raise prices, which the government said led to hoarding.

The southwestern Chinese city of Kunming imposed temporary price ceilings on “daily necessities” late last year, telling retailers such as Wal-Mart and Carrefour to report any planned price rises.

‘Unambiguously Discriminate’

Wal-Mart reported annual revenue of $7.5 billion in China last year, about 1.8 percent of the company’s total.

In September, the European Union Chamber of Commerce issued a report saying that discriminatory laws and regulations keep its members from participating in the Chinese economy. China has rules that “unambiguously discriminate against foreign companies” and implements them in a way that’s “biased and subjective,” it said.

The report cited the fact that carmakers must take a Chinese partner and are limited to a 50 percent stake in their ventures, while telecommunications companies are effectively shut out from the world’s biggest mobile-phone market. Foreign banks’ ownership of domestic financial firms is capped at 20 percent, it said.

“Ten years ago, local governments would have fought crazily for them to open stores,” said Ding at Roland Berger. “But the tides have turned against them this time. Their honeymoon period is over.”

China Catching Up

Customers in Chongqing, a municipality of at least 30 million people, said local competitors were catching up to Wal- Mart.

“Wal-Mart and other foreign supermarkets used to offer a bigger variety of goods at lower price points,” said Peng Xiaoyu, a 25-year-old clothing store owner, as she emerged from a Yonghui Superstores Co. outlet with milk, apples, cookies and shampoo. “What’s more important is they are known for not cheating on quality or price. Chinese supermarkets are catching up in recent years.”

In response to questions about the Wal-Mart closures yesterday, Chinese Foreign Ministry spokesman Liu Weimin suggested that foreign companies needed to recognize that their Chinese counterparts are more competitive than in the past.

“Foreign companies should also adapt to such changes instead of relying on preferential policies,” Liu said. “We hope foreign companies can also make efforts to enhance their own competitiveness.”

To contact the editor responsible for this story: Dave McCombs at dmccombs@bloomberg.net

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