Wal-Mart Sneezes, China Catches Cold
by Gordon Fairclough
    Several months ago, Chinese clothing executive Shao Zhuliang got bad news from his U.S. agent: Wal-Mart Stores Inc., his biggest customer, wouldn't be placing any orders for the spring 2008 season.
    Now, Mr. Shao says, he is scrambling to line up other buyers from Europe, Japan and South Korea to keep production lines running this summer at Boshan Linar Garments Co. in eastern China's Shandong province.
    Wal-Mart "said they had inventory piled up over there," says Mr. Shao, who heads Boshan's sales department. "It's always hard to make money from Wal-Mart orders, but without them, we are finished."
    A softer U.S. economy, rising gasoline prices and business miscues have left the world's largest retailer with a growing amount of unsold goods in its stores, including about $2 billion worth of clothes and home-decor products. With about 10% of Wal-Mart's revenue coming from apparel, the excess has several analysts trimming profit estimates for this year by as much as five cents a share.
    And as Wal-Mart struggles to pare down stocks and get sales growth back on track at its 4,000 U.S. stores, some of the company's suppliers in China are feeling pinch.
    "Wal-Mart is no different from any other retailer going through a tough time," says Marc Compagnon, an executive director at Li & Fung Ltd., one of the world's largest apparel-sourcing firms, which matches retailers with manufacturers." Anyone doing business with a retailer having trouble is going to suffer the consequences.
    Mr. Compagnon, who is based in Hong Kong, says that about 16% to 19% of the world's garments are made in China. Production of the remainder is scattered among countries in Asia, Latin America and elsewhere.
    It is difficult to tell how much of the cutbacks at Boshan and some other Chinese companies that supply War-Mart are related to the company's inventory pile-up and what orders are simply being shifted to firms with lower production costs or different capabilities. Wat-Mart did not respond to requests for comment.
    Boshan's challenges are a sign of the risks to China's companies and its economy if U.S. consumer spending slows sharply. About 20% of all Chinese exports go to the U.S., its biggest overseas market. Wal-Mart imported $18 billion in goods from China in 2004.
    And Chinese economic growth remains highly dependent on exports by labor-intensive manufacturing industries. But government officials are working to stimulate domestic demand to lessen reliance on sales abroad.
    China is likely to weather all but the most extreme of slowdowns, many economists say. But the fallout from Wal-Mart's problems shows how difficulties at one end of the global supply chain ripple through to the other with the potential for significant economic disruptions, at least locally.
    For Boshan, the warning signs started the end of last year, when Wal-Mart scaled back its order for the fall 2007 season, from 500,000 pieces to about 100,000, Mr. Shao says.
    Workers at Boshan's factory in Zibo, a city of four million, are now sewing denim women's shirts, the last of which will be delivered to Wal-Mart in September. And that's it.
    "They used to buy so much we had to devote nearly all of our capacity to them," says Mr. Shao. Last year, Wal-Mart accounted for 80% of the company's business. "It will be impossible to find substitutes easily or quickly," Mr. Shao says.
    So far, Mr. Shao says, he has received orders from British retailer Tesco PLC and conglomerates from South Korea and Japan. Boshan employs about 500 people in Zibo, roughly 7,000 miles from Wal-Mart's Bentonville, Ark., headquarters. Many, Mr. Shao says, could lose their jobs or see their pay fall if the company can't win enough other business.
    Lu Keqin, a seamstress and workshop supervisor, says seamstresses earn an average of $125 a month -- the result of a piece-work rate of about 38 cents for each garment they sew.
    "People want to work here because it's a big company.  There's not  much work to do at  the small  factories  nearby,"  Ms. Lu  says.  Ms.  Lu,  whose  daughter is due to start university this year, says:"I don't want my salary to be affected."
    Analysts have blamed much of the slowdown in Wal-Mart's apparel sales on the failure so far of the company's strategy to design and market more expensive and fashionable clothing. Wal-Mart last year sharply cut the number of U.S. stores carrying its Metro7 clothing line and recently pulled its first designer line, George M.E. by Mark Eisen, from several hundred stores that carried it, according to a person close to the situation.
    Susan Floyd, a Wal-Mart shopper in Chandler, Ariz., says she noticed earlier this year George M.E. wasn't selling, and "I just waited until they went on sale." Recently, she grabbed a George M.E., gold-foil embossed leather jacket originally priced at $70 for $30, and a pair of slacks for just $3.
    But evidence from Chinese manufacturers suggests the chain's problems may not be confined to higher-end clothing. One manufacturer of pajama pants, Zhejiang Furun Co., says it was selling about $3 million in clothing a year to Wal-Mart until this year, when order ceased.
    Chen Jiayong, a manager at Nanjing Yongxin Fashion Co., in Jiangsu province north of Shang-hai, says his company is finishing up the last order in its pipeline for Wal-Mart now -- 70,000 cotton coats that will sell for about $10.
    That's less than 25% of last year's order, and the company stands to lose about $780,000 in revenue this year, Mr. Chen says.
    Nanjing Yongxin is also feeling pressure from the appreciation of the Chinese currency, the yuan, whose value has risen by 8% since mid-2005. "Not only Wal-Mart but many other customers in Europe and America canceled orders this year." Mr. Chen says. The lost orders totaled about $2.6 million.
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