How Did Wal-Mart Crack Open China?

By Peter Cohan

Wal-Mart Stores (WMT) entered China in 1996 and has billions of sales there. But how did it crack China? One big answer is a 65%-Wal-Mart-owned joint venture with a company run by the son of a former Chinese vice president who was tossed in 2009 out by Beijing after investigations into a multi-billion foreign exchange trading scandal.

Wal-Mart has operated in China for 16 years. According to its web site, Wal-Mart "opened its first Supercenter and Sam's Club in Shenzhen in 1996." By March 2012, it ran Supercenters, Sam's Clubs, and Neighborhood Markets in China. Its footprint then included "370 units in 140 cities in 21 provinces and four municipalities." And Bloomberg reported that as of October 2011, Wal-Mart's China sales totaled $7.5 billion.

That was when Wal-Mart got into some hot water with regulators. The Chongqing government fined Wal-Mart $423,000 â¿¿ accusing it of selling "63,547 kilograms of falsely labeled pork over the past two years." And Bloomberg reported that Wal-Mart claimed that it was "cooperating with the investigation,  sorry for inconveniencing customers,  set up a hotline to address customers' questions."

But that would be a small fine compared to what Wal-Mart would face if evidence emerged that it made payments to Chinese officials in order to gain access to its market. After all, Wal-Mart has allegedly demonstrated its willingness to make such payments to grow rapidly in Mexico.

That was when the New York Times reported on an estimated $24 million in bribes that Wal-Mart allegedly paid to Mexican officials through a "perfect" scheme.  Thursday, Wal-Mart announced along with its earnings that its audit committee was investigating possible violations of the "Foreign Corrupt Practices Act and other alleged crimes or misconduct in connection with foreign subsidiaries, including Wal-Mart de México."

Could these Wal-Mart foreign subsidiaries include those in China? There are certainly reports of large companies forming joint ventures with the families of powerful Chinese officials. In fact, there seem to be so many of these, that it would appear impossible for a company the size of Wal-Mart to gain access to the market without following this practice.